The affordable housing segment, with home loans below Rs 25 lakh, experienced a decline in the quarter ending June 2023. During this period, credit card payment defaults also saw an increase. Additionally, the approval rate for loans to new-to-credit consumers, whom lenders usually approach cautiously, was lower.
As per the recent TransUnion CIBIL Credit Market Indicator (CMI) report, credit demand remained robust in the quarter ending March 2023, witnessing growth across almost all product categories except for home loans.
Moreover, the report highlights that unsecured credit portfolios continue to expand, driven by small-ticket loans. Rajesh Kumar, MD and CEO of TransUnion CIBIL, stated that the growth of retail credit, particularly in unsecured consumption-led products, has been significantly fueled by digital and information-oriented lending. These unsecured products experienced a compound annual growth rate (CAGR) of 47 percent from the quarter ending March 2021 to March 2023.
The demand for home loans experienced a decline, particularly in the affordable housing segment.
According to the provided insights, all credit products, except for mortgage loans, saw double-digit growth (refer to the graphic). However, the slump in home loans specifically affected the affordable housing segment, which comprises home loans with a sanctioned amount below Rs 25 lakh. This segment witnessed a year-on-year decrease of 16 percent in the number of newly opened loan accounts and a 15 percent decline in the sanctioned amount. In contrast, home loans with amounts sanctioned above Rs 25 lakh showed growth of 1 percent in volume and 6 percent in value.
MD and CEO of TransUnion CIBIL, Rajesh Kumar, explained that the approval rates for home loans were lower compared to the previous year's figures. Lenders exercised caution due to concerns about potential defaults on home loans, with rising interest rates being a contributing factor to this situation.
Approval rates for credit to new-to-credit (NTC) consumers have decreased.
Sachet sized financial products, which consist of smaller loans of less than Rs 50,000, are gaining popularity due to their affordability and ease of access. These products have played a vital role in driving credit adoption among new-to-credit (NTC) consumers and underserved individuals in semi-urban and rural areas.
However, there is a decline in the approval rate for NTC consumers, whom lenders typically approach with caution. The approval rates for these consumers decreased from 34 percent in March 2020 and 28 percent in March 2021 to 23 percent in the quarter ending March 2023.
Rajesh Kumar emphasized the significant opportunity in accelerating financial inclusion, considering India's low credit penetration and its large young population. Providing access to credit for deserving young consumers can create pathways for long-term and sustainable credit growth.
"In today's landscape, technology plays a pivotal role in mitigating risks associated with the NTC segment," emphasized Anand Agrawal, Co-Founder & CPTO of Credgenics, a loan collections and debt resolution technology platform. He highlighted that innovative use cases are being explored to identify patterns of risky behavior and proactively intervene to prevent defaults. According to him, early identification and personalized strategies are key to resolving default cases at an early stage.
In recent times, advanced data-backed systems with machine learning capabilities have revolutionized the loan collection approach for many banks, non-banking finance companies (NBFCs), and fintechs. These systems enable holistic segmentation, provide actionable insights, assess borrower behavioral indicators, and offer personalized strategies for effective debt resolution.
"Lenders must empower their NTC consumers with personalized financial guidance to prevent defaults and amicably resolve cases," added Agrawal.
Credit card defaults have seen an increase.
During the quarter ending June 2023, credit card payment defaults for accounts over 90 days past due (dpd) rose by 66 basis points compared to the previous year, reaching 2.94 percent (where 100 basis points equal 1 percentage point).
On the other hand, delinquencies in other credit products have shown signs of improvement. Delinquency refers to the nonpayment of debt when due. This improvement indicates that consumers are managing their credit repayments responsibly. For example, the delinquency level in consumer durable loans remained relatively unchanged, with the rate increasing by only 1 basis point to 1.46 percent.
"Retail credit continues to experience strong and steady growth. Although the performance across credit products is stable, certain segments require close monitoring to ensure sustained and long-term growth," added Kumar.
One possible explanation for the increase in credit card defaults could be the rapidly changing economic scenario, influenced by global challenges in certain sectors and evolving consumer behavior. According to Agrawal, the Co-Founder & CPTO of Credgenics, the growing popularity of e-commerce and the rapid expansion of online transactions have made it exceptionally convenient for consumers to make purchases and access finance. However, this convenience also brings a higher risk of impulsive buying using credit cards and potential lapses in financial discipline when it comes to repayments.
In the personal loans segment, the number of unsecured loan payment defaulters in India rose to 32.9 percent as of April 21, 2023, compared to 31.4 percent over the previous year. According to Manavjeet Singh, MD & CEO of CLXNS, a digital-first debt resolution platform, this increase can be attributed to various factors, including the rising cost of living, job losses, and the economic slowdown. Singh emphasized that the debt collection industry can play a vital role in mitigating this situation by providing solutions to help defaulters repay their debts. These solutions may involve offering flexible payment plans and working closely with defaulters to help them regain financial stability.
Agrawal emphasized that credit card and loan issuers should give paramount importance to responsible lending practices. They must ensure that credit limits are granted based on borrowers' repayment capacity and regularly reviewed in accordance with the prevailing economic conditions. To promote responsible credit card usage and maintain a healthy financial profile, he stressed the significance of implementing financial literacy programs that educate consumers on the responsible use of credit cards.
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