Banking & Finance: Manifestation of second order impacts

7 Dec 2023 , 10:10 AM

As highlighted in: Regulatory tightening – time to turn selective, analysts of IIFL Capital Services are seeing signs of second order impact of RBI’s recent regulatory tightening manifesting in the form of growth slowdown and increasing delinquencies in pockets of unsecured consumer loans. Paytm has announced material scale down (40- 50% decline) of its BNPL loans that constitutes 56% of its total loans disbursed. Analysts of IIFL Capital Services believe this to be an outcome of lending partners taking cognizance of RBI’s direct and indirect directives. Paytm also announced foray into higher ticket PL where the take rates would be lower than on existing PL loans with no collection linked incentive. This would be in alignment with the intent of RBI’s digital lending guidelines with credit risk (and rewards) residing with the lending partners, in analysts of IIFL Capital Services view. While the AQ stress in small ticket PL (STPL) is well known, they are also seeing signs of rising delinquencies in other unsecured loans such as credit cards and MFI. Consequently, lenders have already started scaling back growth and tightened underwriting for both ETC and NTC customers. Analysts of IIFL Capital Services stay selective and prefer HDFC, IndusInd and Axis among banks, and BAF amongst the NBFCs. 

Paytm to substantially scale down its BNPL loans 

Paytm has announced a substantial scale down (40-50% decline) of disbursals of its Postpaid loan, which are small ticket, short tenure PL loans and in the nature of BNPL loans. Management attributed this decision to RBI’s risk weight increase and regulatory guidance of tempering irrational exuberance in pockets of unsecured consumer loans. Analysts of IIFL Capital Services believe that this step was an outcome of Paytm’s lending partners (AB Cap and SMFG for Postpaid loans) taking cognizance of RBI’s direct and indirect directives. 

Additionally, Paytm also announced its plans of offering higher ticket PL (Rs0.3-0.7mn ATS) in addition to its existing PL (Rs0.15-0.2mn ATS). The take rates on these higher ticket PL would not only be lower than on existing PL loans, but also there will be no collection linked incentive or commissions for Paytm on these loans. Analysts of IIFL Capital Services believe this decision would be in alignment with the intent of RBI’s digital lending guidelines where the credit risk (and rewards) resides with the lending partners with LSPs (such as Paytm) role limited to acting as distributors for the lenders. 

Expect unsecured consumer loan growth to slow down for the sector 

As highlighted in analysts of IIFL Capital Services recent note: Regulatory tightening – time to turn selective, RBI’s decision to increase risk weights on unsecured consumer loans, and rising delinquencies in some segments of unsecured loans (small ticket PL, credit cards and MFI) should result in growth moderating for unsecured consumer loans, in analysts of IIFL Capital Services view. Lenders having higher reliance on sourcing from Fintechs and small ticket PL should see their greater degree of growth and profitability slowdown, in analysts of IIFL Capital Services view. They note that lenders have already started scaling back growth in these segments and tightening underwriting for both ETC and NTC customers. This would also nudge lenders to broadbase their growth by focussing on other retail (secured loans) and corporate segments, where analysts of IIFL Capital Services are seeing green shoots (new project announcements by private corporates are at a decade high in India). 

Unsecured consumer loan delinquencies inching up 

While the AQ stress in small ticket PL (STPL) is well known, analysts of IIFL Capital Services are also seeing signs of rising delinquencies in other unsecured loans such as credit cards and MFI. Credit card delinquencies have increased 10-100bps QoQ in Q2FY24 (RBL, SBI cards). Whereas, MFI state level delinquencies have inched up by 10-90 bps QoQ in MP/RJ/PB/UK/HR (14.6% of industry AUM) in Q1FY24. Consequently, MFIs reported 50-60bps QoQ increase in slippages (ann.) in Q2FY24. Banks and NBFCs under analysts of IIFL Capital Services coverage have minimal exposure to STPL but MFI and credit cards constitute 1-35% of loans. Analysts of IIFL Capital Services expect delinquencies in unsecured consumer loans to further inch up as growth slows and book seasons. Consequently, analysts of IIFL Capital Services are forecasting 10-40bps increase in credit costs over FY23 across banks and NBFCs under their coverage.