Most new loans are unsecured credit

Unsecured credit has grown faster than secured products between 2017 and

2020. This could be a cause of worry for lenders in the aftermath of moratoriums.

Increasing consumerism and entry of large number of non-banking finance companies (NBFCs) in the segment have increased the share of unsecured credit among newly sanctioned loans to 85 per cent in 2020-21 till end February.

Overall, the share of unsecured credit in the loan book increased from

15 per cent in March 2017 to

24 per cent as of February

2021. During the first wave of the pandemic, the share went up from 22 per cent to

24 per cent, as per a report by Experian India and Invest India.

In terms of number of loans, the unsecured category has increased its share to 71 per cent by February 2021 from 62 per cent in March 2017, indicating that consumers are looking to fund small purchases, including consumer durables and holidays through credit, and the lending institutions have increased confidence in their borrowers’ ability to repay and are thus willing to take more risk.

Unsecured products have seen an increase in loan book at a CAGR of 38 per cent compared to secured products that grew at a CAGR of 17 per cent over

2017-2020. An unsecured loan is supported only by the borrower’s creditworthiness, rather than by any collateral, such as property or other assets.

Rising share of unsecured loans is a cause of worry, especially during the pandemic-induced financial crisis.

According to Icra, the delinquencies for the retail loan pools that had seen a gradual reduction in Q4

FY2021 are now again expected to reach elevated levels.

Emkay Global Financial Services says, “Given the two rounds of moratoriums, we believe that the visibility of the asset quality pain in NBFCs had largely remain suppressed until Q2FY21.”