India’s non-banking financial companies have remained relatively shielded from global economic challenges arising from factors such as geopolitical tensions, inflation, interest rate fluctuations, trade disruptions, and financial market volatility. Despite these uncertainties, the sector has continued to experience strong double-digit credit growth, supported by adequate capital levels and stable delinquency trends. However, unsecured personal loans have been an area of concern, with rising delinquencies in the past year leading to increased risk weights and tighter liquidity conditions for lenders. Regulatory intervention has played a role in curbing excessive risk-taking, prompting financial institutions to adopt more stringent underwriting practices.
With the central bank implementing a 25-basis-point rate cut in February and injecting liquidity into the system, borrowing costs are expected to decline, allowing financial institutions to price loans more effectively. The combination of an improving borrower profile, fiscal stimulus, a more accommodating monetary policy stance, and a disciplined lending approach is anticipated to create an environment conducive to sustainable growth in the unsecured lending segment. Although risk weights for unsecured loans have not yet been reduced, positive trends within the sector could pave the way for regulatory easing in the future.
Recent data reflecting trends in the third quarter of the financial year highlights the performance of major financial institutions managing unsecured personal, consumer, and digital loans. Growth in unsecured personal loans has moderated, with year-on-year expansion slowing to approximately 16 percent in the third quarter, compared to higher growth rates in previous years. Despite this moderation, non-banking financial institutions continue to outpace traditional banks in loan expansion. While overall loan growth for financial institutions was around 6 percent quarter-on-quarter, banks recorded a lower growth rate of 4 percent, leading to further gains in market share for non-banking financial companies within the personal loan segment.
Over the past few years, these financial institutions have experienced significant growth in unsecured loans, far exceeding system-wide averages. Between the financial year 2022 and the third quarter of the current financial year, the unsecured loan portfolios of these lenders expanded at a rate that significantly outpaced the broader lending ecosystem. Their share of the overall personal loan portfolio has increased consistently, demonstrating their growing role in consumer lending.
Disbursement trends indicate that the value of new personal loans issued declined in the first half of the financial year, reversing the strong compound annual growth observed between 2022 and 2024. However, financial institutions continued to record the highest disbursement growth, with their market share in loan originations increasing. The absolute market share of these lenders in disbursements rose further during the first half of the financial year, reinforcing their dominant position in the segment.
A trend of issuing small-ticket loans in large volumes continues, with the average loan size for the overall system declining in the first half of the financial year. Non-banking financial institutions, in particular, disbursed significantly smaller loan sizes compared to public and private sector banks, with a considerable proportion of loans being issued for amounts below a defined threshold. This shift indicates a growing reliance on small-value lending, particularly among borrowers seeking quick access to credit.
Certain financial institutions have seen notable growth in their unsecured loan portfolios, with some recording substantial increases over the past few years. Various lenders specializing in personal, consumer, and digital loans have expanded their books significantly, further reinforcing their presence in the market. While this growth has been widespread, some financial institutions have demonstrated particularly strong expansion in their lending activities, outpacing the broader sector.
The share of unsecured personal loans in the loan mix of these institutions has increased further, with some lenders holding unsecured personal loans exceeding their net worth. The overall assets under management for major lenders grew at a healthy pace in the third quarter, with personal loans growing even faster, leading to a greater share of such loans within their total portfolios.
Delinquencies in personal loans saw a slight increase during the first half of the financial year, with late payments rising marginally. Some financial institutions witnessed a rise in stressed assets within their personal loan books, while fintech lenders exhibited similar patterns of increased delinquencies. However, the pace of deterioration in asset quality has slowed significantly. With improving economic conditions, the sector is expected to show early signs of recovery. Credit costs for lenders, particularly those heavily involved in unsecured lending, microfinance, and credit cards, remain a crucial factor to monitor in the upcoming financial results.
