Borrowers delay credit card payments as credit-binge starts to bite

The volume of credit card dues where repayments are delayed by over 90 days has increased 17 basis points (bps) year-on-year to 1.8% in June, showed data from credit bureau TransUnion Cibil. While Mint reported in August how in the first quarter of FY25, several lenders saw a sharp spike in bad loans in both personal loans and credit card portfolios, TransUnion Cibil has now given an industry-wide estimate.

Analysts said one of the reasons for the rise in credit card delinquencies is because a section of borrowers are exhausting their credit limits but are unable to repay.

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“The young millennials are using the entire limit and directly fully defaulting and turning into non-performing asset (NPA) without even revolving the loan…So that’s the nature of defaults that we are seeing here," Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital, wrote in an email accompanying his note to clients on Wednesday.

Credit card customers can be classified into two groups, based on repayment schedules. One group comprises transactors, or those who pay the outstanding amount by the due date. The other is revolvers—customers who pay only a part of their dues on the repayment date, to avoid a default.

Personal loan repayments improve

For personal loans, there was some improvement as the percentage of delinquent loans was down 2 bps in June over the same period last year. However, personal loans saw some deterioration in quality when it comes to vintage delinquency or the percentage of accounts which have delayed repayments by over 30 days during the first 60 days of its origination. The number of such personal loans has increased from 8.8% in December 2022 to 9% in December 2023, the latest data showed.

Bankers acknowledged the rise in small-personal-loan delinquencies but said these are yet to reach alarming levels. “There are some issues on small-value loans but it has not reached a proportion where we need to really worry," C.S. Setty, chairman, State Bank of India (SBI), said at an 18 September event.

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Setty said that since SBI is one of the largest lenders to non-bank lenders and to microfinance institutions where most of the unsecured lending happens, it has seen some problems with small value loans of ₹50,000 to ₹1 lakh. He said that a recent RBI circular would go a long way in curbing some of the overleveraging seen among customers who are borrowing for the first time. In August, RBI increased the frequency of borrower information to credit information companies or credit bureaux to every fortnight, from every month at present. This will be effective from 1 January 2025.

“Someone makes an attempt to lend to him (first time borrower) and even before his credit history is established, he is already borrowing from multiple lenders," said Setty, pointing to how some borrowers take multiple loans even before credit history data has been updated.

Small-ticket loans

That said, banks are not the primary source of these small loans. Experts said personal loans are typically small-ticket in nature and are primarily being disbursed to younger borrowers, with a significant portion under 35 years.

“The surge in personal loans is being driven largely by NBFCs, with 31% of all personal loans by value, and a staggering 82% by volume, in the last quarter coming from non-bank lenders. Many of these are consumption loans, or loans taken out for loan stacking—that is, taking a new loan to repay an existing one," said Ritesh Srivastava, chief executive and founder of Freed.

The company helps defaulting borrowers find resolution to their debt issues, providing them credit counselling and an opportunity to settle the loan.

“Where we once saw an average loan burden of ₹5 lakh spread across four credit accounts, we are now seeing that debt load increase to ₹5.6-5.7 lakh, and the number of accounts per borrower rising to seven. This is a clear indicator of credit deepening and the resulting over-leveraging of borrowers," he said.

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According to Srivastava, much of this borrowing is driven by impulse, particularly among Gen Z and millennials, who are riding a wave of aspirational spending.

Experts also said that a series of regulatory measures by the Reserve Bank of India (RBI) has managed to slow down credit growth. Analysts at Sanford C. Bernstein (India) had discussions with bank managements and combined those insights with industry trends in a note to clients on Wednesday.

It said that credit growth for the banking sector has slowed down meaningfully in the last few months and is at 13.7% as against the recent peak of over 16% in April. “In line with this trend, we heard most private banks talking about how they continue to tighten underwriting standards and expect further slowdown in higher-yielding retail loan segments," the analyst said in the note.