The rise in small loan defaults is becoming a worrying trend in India’s financial sector that might have further implications on the economy. Analysts caution that many of the recent delinquencies in repayments which are majorly noted in the unsecured lending may cause damaging effects to the economy encompassing consumer demand and the stability of the financial markets.  

Some of the large banks such as Kotak Mahindra along with others and IndusInd Bank have indicated increased pressure on their unsecured lending unit while Ujjivan Small Finance Bank has seen more aggressive down slides. Over 30% of the shares belonging to Ujjivan have shed value within the year which indicates a growing concern amongst investors. The situation became dire after the RBI implemented the measures it announced last year to rein in aggressive lending after the economy rebounded from the pandemic.  

With the slowdown in the expansion of personal loans growth August recorded a drop to 14% from the previous year’s 30% and the entire economic system is under pressure. Market experts such as Yuvraj Choudhary from Anand Rathi Securities, however, believe that the pressure out of small loans will remain for at least two more quarters.  If the upcoming festive season fails to boost demand substantially, the financial pressure could last longer. 

Last November, the RBI requested banks to raise their capital reserves for unsecured loans, due to threats posed by increasing levels of consumer debt. All these, and the interruptions in collection during the federal elections, have caused a surge in defaults.  Most of the micro finance institutions have depressed share prices, with Spandana Sphoorty and Fusion Finance recording above 60% decline this year.  

The ramifications of this crisis go beyond the financial space as there is a decline in consumer spending and reduced appetite for premium goods like cars has started to adversely affect the automobile and retail industries. Analysts have predicted, including Emkay Global’s Madhavi Arora who argued that attractive or discretionary spending will be expected to remain in check and this will also worsen the economic situation that India is likely to face in other coming months.