In the aftermath of the Reserve Bank of India(RBI) measures on unsecured consumer credit, banks and non-bank lenders are looking to reduce their personal loan portfolios. This will lead to a fall in the personal loan mix within the overall co-lending assets under management, say experts.
“Considering the increase in risk weight from the RBI and the nudge on unsecured credit, we may see some drop in the share of unsecured retail loans within the overall co-lending assets under management,” Ajit Velonie, Senior Director, CRISIL Ratings said, adding that it is more of a strategic recalibration by banks and non-banking financial companies(NBFC).
A recent report from CRISIL Ratings showed that the co-lending assets under management of NBFCs has touched Rs 1 trillion, with personal loans accounting for a third of overall assets. Home loans, MSME loans, gold loans, loan against property, and vehicle loans comprise the remaining 66% of the pie.
While co-lending books for all asset classes will grow in the medium term, the pace of growth for personal loans will be slower in light of the revision in risk weight on unsecured consumer credit to 125% from 100% earlier. The share of personal loans within the overall co-lending assets under management may fall by up to 10 percentage points at least in the next 12-18 months, say experts.
Yubi Group Founder and Chief Executive Officer Gaurav Kumar, which specialises in co-lending, felt that the mix in the co-lending business will continue to be led by secured loans.
A co-lending head at a leading NBFC said on condition of anonymity that there would be a drop in business.“If a bank was happy to give Rs 1000 crore (to co-lending partners) earlier, maybe they are looking at Rs 700 crores now. Internally they have probably been told to go easy on certain products,” he said.
The official added that if a bank or NBFC does not know your partner very well, secured loans are an easier option to do. “You begin with secured loans and business loans and then open up to other products eventually,” the official quoted above added.
Under a co-lending arrangement, banks and NBFCs partner with each other to disburse loans to the priority sector. According to the arrangement, banks and NBFCs share risk in the ratio of 80:20. Here, 80% of the loan is borne by the bank and the remaining 20% remains with the non-bank lender.
Such an arrangement can provide mid-sized and smaller NBFCs with access to bank funding as well as diversification in funding avenues. Here, it allows these lenders to grow in a capital-efficient manner. On the other hand, banks attain access to niche customers and geographies and also helps them in meeting their priority sector lending targets.
With the RBI tightening its vigil, lenders will become “choosier” about the kind of credit that they operate in, say experts. Here, banks will be more inclined to partner with NBFCs in business loan and secured loans instead of personal loans.
“The key problem (for RBI) is the pace of growth in the co-lending segment, and not the business per se. When loans are disbursed at such pace, there is an assumption that underwriting standards are diluted,” Vivek Iyer, Partner, Grant Thornton Bharat said.
He added that the increase in risk weights on unsecured consumer credit is a mechanism to control the pace of growth as it makes it more expensive to operate in that loan segment.
Typically, delinquencies in a collateral-backed product like home loans are lower than unsecured loans owing to the stringent lending criteria for these products. Experts note that while delinquencies for unsecured business loans is typically higher than secured loans, government sponsored schemes like Credit Guarantee Fund Trust for Micro and Small Enterprises help lenders cover a sizable portion of credit losses. However, the risks are far higher for personal loans.
“Given the explicit action of RBI of increasing risk weights, NBFCs will strive to increase the share of secured loans within the overall AUM,” Fali Hodiwalla, Partner, Financial Services Consulting, EY India said.
“Having said that, it is a relatively more difficult and longer process to scale secured lending relative to unsecured lending given that secured lending has greater process complexity in terms of evaluating, and managing collateral,” he added.
