Lenders Increase Focus On Below-Prime Borrowers, Shows TransUnion CIBIL Report

Banks and non-bank lenders are increasing their focus on higher-risk borrowers as they try and maintain growth rates amid a slowing economy and weakening consumption.

A study by credit bureau TransUnion CIBIL of trends in consumer credit showed an increase in the proportion of personal loans and credit cards given to customers with lower credit scores. This shift, partly, helped to keep growth rates in the credit card and personal loan segment high even as growth in secured retail loan categories such as auto loans and home loans fell.

Outstanding consumer loans across all major credit products grew 17.1 percent year-on-year in the quarter ended June compared with 23.5 percent a year earlier. “Growth in credit cards and personal loans significantly outpaced increases in auto loans, home loans and loans against property,” the report said.

Rise In Below-Prime Borrowers Across Unsecured Loans

Outstanding personal loans rose by 35 percent in the quarter ended June 2019, led by NBFC lending which saw a 51 percent increase. New personal loans increased by 30.8 percent, with NBFCs reporting a growth of 33.7 percent.

The data showed a marked shift in new loans towards ‘near-prime’ and ‘sub-prime’ borrowers. Near prime borrowers are those with credit scores between 650 and 700, while sub-prime borrowers are those with scores between 300 and 650.

According to the report, 44.8 percent of new borrowers during the quarter ended June 2019 were those categorised as sub-prime and near prime, compared with 36.4 percent in the same quarter last year. In the case of personal loans originated by NBFCs, almost 50 percent were to borrowers in below-prime segments ⁠— an increase of 8.5 percentage points over the quarter ended June 2018, said the report.

Delinquencies across personal loans, however, remained in check for banks but rose for NBFCs.

Non-bank lenders saw a marginal increase of 6 basis points in delinquencies to 0.63 percent. “An increase in delinquency was seen for NBFC loans smaller than Rs 50,000 — a segment which constitutes almost 80 percent of NBFC personal loan originations,” the report said.

A similar trend was seen across credit cards.

In the second quarter, 32.1 percent of new credit cards issued were to consumers in the near-prime and sub-prime categories, compared with 26.4 percent a year ago.

Overall, the number of new credit cards issued rose by 30.2 percent, pulling up the total number of active credit card customers to 27.7 million for the quarter ended June 2019. Outstanding credit card balances came close to the Rs 1 lakh crore mark, led by strong origination volumes.

Delinquencies as a percentage of credit card balances improved by 27 basis points to 1.62 percent, while delinquencies as a percentage of accounts were better by 14 basis points at 0.76 percent.

Secured Lending Dragged Down Credit Growth

While unsecured lending continued to grow, sluggish passenger vehicle sales and affordability constraints in the housing market limited credit growth in secured lending.

New auto loans originated during the quarter increased 7.7 percent over the same period last year. Banks saw a decline in new auto loans, while NBFCs saw a 9.4 percent increase — much lower than the 24.5 percent growth last year.

In the auto segment, too, new loans to borrowers in sub-prime and near prime increased to 37.4 percent from 33.1 percent for the same duration. This shift is seen in originations by private banks and NBFCs, the report said.

An increase in delinquencies was seen for NBFCs, with smaller ticket loans seeing a sharper deterioration. Loans lower than Rs 2.5 lakh — a segment that contributes 55 percent of NBFC auto loans —saw a 164 basis point increase in delinquencies, the report said.

In the home loans segment, new loans contracted by 6.3 percent. NBFCs saw a 18 percent decline in new home loans given out, in sharp contrast to 16.3 percent growth in the second quarter last year.

Loans against property declined 20.9 percent over last year. Such loans originated by PSU and NBFC lenders declined 31.1 percent and 36 percent, respectively.