Handle credit with utmost caution

While NBFCS are willing to lend to below-prime borrowers, for the latter failure to repay can have dire consequences

The economic slowdown has taken a toll on the growth rates of secured loan segments, such as home loan, loan against property, and car loan. Credit card borrowings and personal loans are still growing at a robust pace as people turn to them increasingly for emergency credit, and sometimes even to fund discretionary purchases. An interesting trend that a recent report from Transunion CIBIL highlights is that lenders, especially non-banking financial companies (NBFCS), have started lending more aggressively to below-prime borrowers.

In the second quarter of 2019, credit card outstanding balance showed a robust 34.3 per cent y-oy growth. Personal loans grew 35 per cent. The corresponding numbers for auto loans (10.9 per cent), home loans (14.5 per cent) and loan against property (16.7 per cent), on the other hand, were much lower than their year-ago figures, according to data from Transunion CIBIL.

Pivoting towards below-prime borrowers: Both in credit cards and personal loans lenders displayed a marked shift towards below-prime (near-prime and subprime) customers. In Q2 2019, 32.1 per cent of card originations (giving out of new cards) were to higherrisk customers, compared to 26.4 per cent in Q2 2018.

The credit score ranges from 300-900. Those having a credit score of 651-700 are referred to as near-prime borrowers while those with scores in the range of 300-650 fall in the subprime category.

In the personal loan segment, the average ticket size of loans given out by NBFCS dropped from around ~1.1 lakh in Q2 2018 to ~41,000 in Q2 2019. “NBFCS are focusing on smaller-value loans to build the consumer base,” says Abhay Kelkar, vice president, research and consulting, Transunion CIBIL.

The pivot towards higher-risk customers was even more marked in the personal loan segment. About 44.8 per cent of total originations in Q2 2019 were to below-prime customers, compared to 36.4 per cent in Q2 2018. Almost 50 per cent of the personal loans originated by NBFCS in Q2 2019 were to below-prime borrowers, according to Transunion CIBIL data.

Thus lenders, especially NBFCS, are wooing below-prime customers aggressively. “Lenders have increased their exposure to these borrowers to probably make up for the slowdown in secured lending segments like home loan and auto loan,” says Naveen Kukreja, chief executive officer and co-founder, Paisabazaar.com. Adds Arun Ramamurthy, an expert at repairing borrowers’ credit scores and author of the book, Unlock the power of your credit score: “Many NBFCS have collaborated with fintech companies. The latter have built alternative scoring models based on which they lend to those who don’t have a credit score or have poor scores. The analytics is handled by the fintech company while lending happens through the NBFC’S books.”

Over-leveraging is risky: This shift means that personal loans and credit cards have become more easily to borrowers in the below-prime categories. These borrowers need to ensure that they do not over-leverage just because credit is available. “The sum total of a person’s equated monthly instalments (EMIS) should not exceed 50 per cent of your takehome salary,” says Hrushikesh Mehta, country manager-india, Clear-score.

Failure to pay personal loan EMIS on time can result in hefty penal interest rates of up to 2 per cent per month. “Borrowers should automate the deduction of their EMIS by setting up standing instruction in their savings account to ensure timely repayment,” advises Kukreja. Credit card holders should only spend what they can repay by the next bill due date. Failing to repay attracts hefty finance charges of up to 47 per cent per annum on the unpaid amount. If the borrower fails to pay even the minimum amount due, he may have to pay an additional late payment fee of up to ~1,000.

A payment default by a below-prime borrower will cause his credit score to plummet. “A poor credit score means the customer will not be able to access any form of formal credit in future,” says Ramamurthy.

He adds that today one’s credit score matters beyond loans. Companies look up a prospect’s score when considering him for a key role or directorship.

Reduce debt burden: A person whose debt burden has crossed the prudential limit should take immediate steps to bring it down. One option is to dispose of liquid assets to obtain cash. The other is to reduce discretionary expenses, such as expensive holidays, eating out, and replacement of one’s car.

Those overburdened by debt could also take the debt consolidation route. The best way to do so is to avail of a fresh loan with lower interest rate and longer tenure and use its proceeds to pay off loans that carry higher rates. A lower interest rate along with longer tenure will reduce the monthly repayment burden and help avoid penal charges. Those who have availed of personal loans at high interest rates can transfer their outstanding loan amount to another bank at a lower interest rate and longer tenure by opting for personal loan balance transfer. Similarly, credit card holders who are having difficulty in repaying their entire bill by the due date can convert their dues into EMIS at lower interest rates and for longer tenure.

Existing home loan borrowers who have multiple loans or large credit card dues can avail of a topup home loan. This loan has among the lowest rates (8.55-11.95 per cent) and the longest tenures (7-30 years) among all credit options.