Unsecured Loans May See Pressure On Asset Quality In Q3FY25: Report

After a marginal decline in collections registered in the first half of the current financial year (H1FY25), unsecured loans may witness pressure on asset quality during the third quarter of FY25, according to a report by Icra. However, the recovery is likely to commence in the fourth quarter of the current fiscal.

In terms of asset quality and collection efficiency, the secured small and medium enterprise (SME) pools have outperformed the unsecured ones in H1FY25. The Icra-rated securitised secured pools witnessed healthy performance as the collection efficiency ranged from 89 per cent to 107 per cent across all asset classes in H1FY25.

Due to the critical nature of the underlying collateral for the borrowers, the housing loans (HL) and loans against property (Lap) pools registered steady collections in H1FY25. This can also be attributed to the advances in online collection methods. On account of general elections, field-level attrition and the impact of heat waves, the MFI industry marked lower collection efficiencies and higher delinquencies in Q2FY25.

According to the report, asset quality stress in this sector might increase due to concerns of overleveraging caused by unchecked credit growth and the issuance of multiple loans to unverified borrowers. The report highlighted that the vehicle pools are likely to register strong performance in the medium term, given the strong domestic economic cycle, financiers would ramp up collection efforts in H2FY25.

There has been a downward trend in the collections in the personal loan (PL) segment in the last two quarters due to the relatively low priority of personal loan repayment and potential overleveraging. Icra expects the collections to remain strong for secured asset classes. Moreover, the rating of securitised instruments is expected to remain stable given the presence of adequate credit enhancements.