Time For Reckoning: Lights Finally On At The Consumer Loan Party

Nearly a year since the Reserve Bank of India gave lenders a rude shock on the unsecured loan business, the party seems to have ended. Major lenders like Axis Bank, Kotak Mahindra Bank and Bajaj Finance have all highlighted stress coming from the unsecured lending book in the September quarter.

In case of Axis Bank, for example, retail slippages accounted for Rs 4,073 crore of the Rs 4,443 crore reported during the second quarter.

"...it is largely unsecured retail where we have found slippages in the current quarter," Axis Bank CFO Puneet Sharma told analysts after announcing the bank's quarterly results.

Similarly, at Kotak Mahindra Bank, credit card defaults added 30-40% of the Rs 1,875 crore worth slippages in the July-September period, according to the bank's CFO Devang Gheewalla.

On Tuesday, Bajaj Finance Managing Director Rajeev Jain disclosed that the non-bank lender was raising its credit cost guidance to 2-2.05%, compared to 1.75-1.85% earlier. This was primarily due to the stress among rural borrowers and vehicle finance portfolio.

Over the last 12 months, RBI has issued multiple warnings, even tightening capital norms on unsecured retail credit, to bring some level of sobriety among lenders.

However, apart from the consumer credit business, lenders have also seen elevated slippages in their microfinance portfolios.

Private sector lender RBL Bank reported slippages worth Rs 549 crore in the microfinance book and Rs 474 crore in the credit card business. These added significant pressure on the asset quality for the lender, with gross non-performing asset ratio rising 19 basis points sequentially to 2.88%.

Indebtedness Rising

According to lenders, the main reason for the rise in stress was the increase in leverage for unsecured borrowers.

Ashok Vaswani, MD & CEO, Kotak Mahindra Bank, noted that there is a certain amount of overleverage in the system. And that overleverage in the system is starting to show up.

"The initial place where it showed up was in the microfinance business, and then it showed up to some extent in the credit card business. And so you see the lost costs and the credit cost kind of following through," Vaswani told analysts.

Kotak Mahindra Bank is likely to see an improvement in the credit costs, especially in its credit card portfolio over the next three quarters, Vaswani added.

Bajaj Finance's Jain also said that customers who have more than three live unsecured loans were showing higher propensity to default and in general have lower collection efficiencies. The company was tightening its underwriting toward such customers, Jain told analysts.

"If you had 13% of the clients who came in with three plus personal loans when we gave them, now it's only 8-9%. So that's the impact on volumes we've taken," Jain said.

According to the non-bank lender, default rates were still lower than the volume of loans being booked, which meant that the stress situation was manageable.

Axis Bank's Group Executive, Affluent Banking, NRI, Cards & Payments, Arjun Chowdhry, spoke about factors that the private bank is watching out for in its existing book and future acquisitions.

"Vintage, of course, is one of them. But there are many other things such as obligation to income ratios, degree of indebtedness, the number of inquiries, the nature of the loan, the nature of the geography, the nature of the occupation, multiple things," Chowdhry said.

While both Vaswani and Jain were hopeful of a turnaround in asset quality, Chowdhry of Axis Bank believes that it is too soon to decide.

"I don't think we would call out a peak or a trough either way," Chowdhry said.