Leveraged Financials - Emerging Long-Tail Risks In Unsecured Credit: HDFC Securities

HDFC Securities Institutional Equities

India’s heterogenous unsecured retail credit market ($160 billion; three-year compound annual growth rate at ~23%) has been in the headlines ever since the Reserve Bank of India clamped down on select categories of consumer credit.

Our discussions with experts suggest that the RBI note of caution is largely centred on small-ticket personal loans (ticket size less then Rs 100000), which account for a high incidence of systemic blind spots, dominant share of incremental disbursements, and elevated early-stage delinquencies, especially across static pools.

The RBI’s risk-weight measures are likely to increase the hurdle rate for banks and non-banking financial company towards unsecured consumer loans, resulting in a material growth deceleration.

We continue to hold our below-consensus growth forecasts (1-2% across our coverage universe) and remain conservative on incremental spreads (blended FY24 net interest margin at 15-20 basis points below FY23 levels), considering the impact on incremental asset mix.

Our top picks are ICICI Bank Ltd. (target price: Rs 1,200) and State Bank of India (target price: Rs 780) among large banks; and Bajaj Finance Ltd. (target price: Rs 8650) and SBI Cards and Payment Services Ltd. (target price: Rs 955) among NBFCs.

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