Concerns over contagion risk in retail loans have surfaced, with multiple unsecured loan defaults affecting other segments. Borrowers with personal loans (PL) and credit cards (CC) often hold other retail loans, and defaults in these unsecured segments frequently precede delinquencies in higher-ticket loans such as housing, auto, and two-wheelers, according to an Elara Securities India report.
Over 25% of overdue PL and CC customers also have other retail loans. Additionally, 85% of defaults in auto and two-wheeler loans are linked to earlier defaults in unsecured loans. Borrowers in the lower-income bracket (sub-Rs 0.5 million annual income) account for 18% of retail loans, of which more than 40% are unsecured, amounting to Rs 5 trillion or 25% of the unsecured retail portfolio.
The exposure of low-income borrowers to unsecured loans is a major challenge. Among these borrowers, unsecured personal loans dominate, while higher-income borrowers tend to opt for secured loans. Microfinance (MFI) borrowers with overlapping retail loans also face higher delinquencies. The portfolio-at-risk (PAR) for retail loans to MFI borrowers in the 31-180 days past due (dpd) category is 10.9%, compared to 5.3% for those with only MFI loans.
Geographic and segment-specific trends
States such as Uttar Pradesh, Kerala, Odisha, and Maharashtra exhibit higher overdue retail portfolios. Within retail loans availed by MFI borrowers, segments like gold, housing, and auto loans show elevated delinquency rates. Notably, the ticket size for gold loans—constituting 19.5% of the portfolio—has risen, warranting closer monitoring.
The report warns that the contagion risk is more pronounced for non-banking financial companies (NBFCs) compared to frontline private banks. Roll-forward rates in retail portfolios are increasing while roll-backs decline, indicating rising stress. Delinquencies are also higher for borrowers with two or fewer lenders, contradicting the perception that stress is concentrated among borrowers with multiple lenders.
Elara Securities suggests that the interplay of rising ticket sizes, concentrated exposure in unsecured loans, and restricted credit flow could exacerbate risks in retail lending. The continued growth in the NBFC segment in Q2FY25 underscores the need for vigilance as debt consolidation trends may lead to future challenges.
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