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There seems to be a lot of narrative around on business loans stress, essentially on unsecured business loans in the backdrop of high growth and likely contagion from the general slowdown in the economy. In this context, we deep-dive into unsecured business loans and look at government guarantee schemes to evaluate the effects.

Our analysis shows: 1) Growth in business loans, and essentially in unsecured business loans, was driven by NBFC and public sector banks (PSB), 2) PSB dominate unsecured business loans, forming 47% by value and grew at a rapid pace. Interestingly, ticket size of PSB was also 2.0x of private banks or NBFC, 3) Low ticket size segments saw faster growth coming from rural & semi-urban areas, 4) Asset quality needs to be monitored – rise in PAR 31-180, a drop in collection efficiency, a rise in the ever 90+dpd in the past 12 months & a lower cure rate, and 5) within NBFC, small firms seem to report a higher rise in stress. Overall, coming off high growth and emerging red flags, we see pressure on asset quality trends for unsecured business loans and in small players with higher unsecured business loans proportion.

Increased growth in business loans: The business loans segment reported a 15% loan CAGR during FY20-24; however, growth in unsecured business loans was higher at ~17%. A drill down of unsecured business loans reveals key aspects: 1) Most growth came in from NBFC, which posted a  >20% CAGR during FY19-Q1FY25 compared to PSB’s 19% while private banks lagged at 16%, 2) Importantly, growth essentially came from lower ticket sizes of sub-INR 0.1mn, which reported >30% CAGR, 3) Within geographies, rural & semi-urban areas both saw >20% CAGR, and 4) among States, Bihar posted >35% CAGR, Andhra Pradesh >28% & Uttar Pradesh at >23% were the fastest-growing areas. Bank-wise data shows State Bank of India has posted the fastest growth in unsecured business loans among PSB, while private banks, such as Kotak Mahindra, saw soft growth. NBFC that reported data saw higher growth. The definition change announced for MSME in the recent Union Budget would further push the growth metrics.

Visible asset quality headwinds: Asset quality headwinds seem to be rising, as follows: 1) Balance level 30+ DPD is rising – 6.3% as on Q2FY25 from 5.6% as on Q4FY24, even account level 30+ DPD went up from 10% in Q4FY24 to 11.4% in Q2FY25, 2) ever 30+ DPD and 90+ DPD  has increased, and the rise is the highest for PSB, followed by NBFC, 3) for NBFC, collection efficiency for SME loans in the ICRA-rated pool has fallen to 93% in September 2024 vs >98% in June 2022), 4) the impact has been higher on unsecured business loans while LAP has held up, and 5) the impact is higher on smaller NBFC & write-offs, which are in the range of 4-5%. Reported data shows that MSME NPL has risen: Kinara Capital 0+ DPD increases to 15%, LendingKart gross stage 3 is up 4.2% and NeoGrowth Credit rises to 5%. Even for larger NBFC which report data, we have seen a rise for the likes of ABCAP , CIFC, and BAF.

Would a higher government guarantee make a difference? While the rise in scope of government guarantee schemes (CGTMSE & CGFMU) does help, there are impediments: such as 1) fee applicability which makes economic sense if the pool loss is higher, and 2) other borrowing cost (namely, administrative charges) which would make it expensive for borrowers. Past trends show the entire corpus has never been claimed; hence, the doubling of government guarantee may have limited effects. The CGTMSE Scheme data-points indicates HDFC Bank and State Bank of India have highest claims; among NBFC, Bajaj Finance has claimed the highest. Among States, it is the highest for Maharashtra and Uttar Pradesh.

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