Small-loan defaults may throw risk into India’s broader economy

By Alex Gabriel Simon

A rise in retail-loan defaults in India due to aggressive lending practices is reverberating in the stock market, with analysts worrying about possible spillover into the broader economy.

Concerns are mounting after lenders including Kotak Mahindra Bank Ltd. and IndusInd Bank Ltd. reported elevated stress in unsecured loans during second-quarter earnings, sending shares sliding. The pain is more acute in firms like Ujjivan Small Finance Bank Ltd. that focus on smaller-ticket loans, with the stock down more than 30 per cent this year.

Personal-loan growth is moderating as the central bank last year clamped down on risky lending practices following a post-pandemic surge in credit. The impact is trickling into the market and company earnings, signaling more pain ahead for the world’s fastest-growing major economy.

“The issue will continue for at least the next two quarters and slippages and credit costs will remain high,” said Yuvraj Choudhary, an analyst at Anand Rathi Securities. “If the demand for these loans doesn’t pick up in the festive season, the stress can last much longer.” Choudhary is underweight on the space.

Credit: Bloomberg

Last November, the Reserve Bank of India asked banks to set aside more capital for unsecured consumer credit, including small loans, as regulators grew concerned about borrowers buying items they could not afford. The increased cost of loans coupled with collection disruptions during the federal elections between April and June spurred a string of delinquencies.

In August, personal loan growth slowed to 14 per cent from over 30 per cent in the year-ago period. Ujjivan Small Finance Bank Ltd. and IIFL Finance Ltd. warned in earnings calls last month they expect the challenging situation to continue in the coming quarters.

Traders have already headed for the exit. Shares of microfinance lenders such as Fusion Finance Ltd. and Spandana Sphoorty Financial Ltd. are down more than 60 per cent so far this year, in contrast to a 15 per cent gain in the BSE 500 over the period.

Credit: Bloomberg

Private players have seen an impact too. Arohan Financial Services Pvt., which provides loans primarily to financially underserved women, is delaying an initial public offering. This followed an RBI order last month asking a group of shadow lenders to stop sanctioning new loans because of the high interest rates they charge customers.

A slowdown in loans also translates to waning demand from consumers for large ticket purchases like cars. Disappointing earnings at several automakers put the sector among the worst-performing in October. Shares of consumer bellwether Hindustan Unilever and retail-chain Avenue Supermarts also plunged on similar concerns following the second-quarter results.

“Consumption has suffered from a clear policy tilt toward infra-led growth,” said Madhavi Arora, chief economist at Emkay Global Financial Services. The defaults are gaining pace amid slowing wage growth in urban areas, while rural wages haven’t picked up meaningfully, she added. “Discretionary spending will definitely be affected.”