Concerns around the asset quality of consumer loans on the books of non-banking financial companies (NBFCs) are rising amid a series of data points released by the Reserve Bank of India (RBI) and persistent weakness in the loans against property (LAP) segment. In the June 2019 edition of its Financial Stability Report (FSR), the central bank had said that NBFCs as a group have been found to be leading delinquency levels in almost all sub-segments of consumer credit when the uniform delinquency norm of 90 days past due (dpd) is applied.
In the auto-loan segment, NBFCs’ delinquency level stood at 4.6% in December 2018 against 2.9% for the industry as a whole. In home loans and LAP, NBFCs’ delinquency ratios were 3.9% and 5.1%, respectively. This is significantly higher than industry-wide delinquency rates of 1.7% and 3.5% for the two categories. In the personal-loans segment, too, NBFCs’ delinquency rate of 1% was well above the industry figure of 0.6%.
The FSR observed that the spike in delinquencies could be a fallout of the exponential growth seen in consumer credit over the last few years. Credit in all four segments grew at a compounded annual rate of above 20% between December 2016 and December 2018. “Given the substantial growth rate in exposure to these sectors, a possible concern is dilution in credit standards,” RBI said.
Further, data on housing asset prices released by the RBI last week showed that the affordability of housing has fallen over a four-year period. Analysts say that reduced affordability, coupled with slower growth in lending, could be signalling at a deterioration in mortgage credit quality.
In a recent note, Kotak Institutional Equities (KIE) said that a cyclical slowdown may be underway across retail products, especially in auto and personal loans. “Retail NPL (non-performing loan) ratios, as reported by credit information bureaus, are still stable or rising faster than loan growth. This slowdown in growth could result in a higher ratio, in our view, as lenders have progressively moved from super prime customers during this period,” KIE analysts said in the report.
As risk aversion in lending to NBFCs continues, delinquency levels may continue to inch up in the LAP segment. Experts at Nomura pointed out that stress may be spreading to mortgages as well. “On mortgages as well, CIBIL data indicate some inch-up in early overdue buckets, mainly from specific pockets where construction has been slow by builders,” analysts at the investment bank stated, adding: “overall, we believe the near-term asset quality for HFCs (housing finance companies) remains challenging.”