Higher delinquencies in Indian unsecured personal loans

Fitch Ratings has said it expects delinquencies in the Indian unsecured personal loan sector to continue to increase, as detailed in a recently published report, "Indian Unsecured Personal Loan Transactions", which provides an insight into the deterioration in the business environment surrounding retail finance and its effect on personal loan transactions.

In July 2007, Fitch noted that delinquencies in the personal loan sector were higher than those seen in other asset classes. Since then, loan performance has continued to deteriorate and recent events have seen some lenders criticised for their recovery strategies, which in some cases may have led to other borrowers wilfully becoming delinquent. In response to the publicity surrounding the engagement of recovery agents, the Reserve Bank of India issued draft guidelines to all scheduled commercial banks in its medium-term review of the annual policy for 2007-2008, published in November 2007.

The report summarises Fitch's view on the impact of rising delinquencies in unsecured consumer loans on banks' recovery processes and credit growth. The immediate impact is in declining collection efficiencies in personal loan transactions largely due to banks resorting to a softer recovery approach in the form of legal notices and increased phone calls. In the long run, the regulator is looking at making banks more accountable for their third-party recovery agents. In light of recent controversies surrounding retail finance in India, Fitch believes its report will help market participants understand the effect of the deterioration of credit cycles on personal loan transactions.

Personal loans are usually fixed rate loans, and are unsecured in nature. They are not backed by any security, collateral or guarantor. Given their unsecured nature, personal loans are not amenable to the same recovery efforts that are seen in other asset classes where underlying security interests improve recovery prospects. In addition to this, personal loan financing in India is a very competitive business and this may have pushed many institutions to originate loans in riskier segments.

(This is press release of Fitch Ratings)


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