Covid Second Wave: Lenders To The ‘Self-Employed’ May Be First To Face The Heat

Bankers have sought another restructuring window should asset quality troubles re-emerge but the Reserve Bank of India is yet to extend forbearance.

“This time around, in the absence of any regulatory forbearance, there could be spikes in softer delinquencies if the situation persists, and the asset quality risk could rise for lenders catering to the self-employed segment,” said Jinay Gala, senior analyst at India Ratings & Research. It’s likely that if the situation worsens, and in absence of any further restructuring exercises, the “self-employed” category will be more severely impacted than in the past, Gala said, while acknowledging that the situation is still fluid.

Anand Dama, senior research analyst at brokerage firm Emkay Global, sees banks and non-banks with large exposures to the “self-employed” category being at greater risk than others.

“We expect banks such as IndusInd Bank Ltd., RBL Bank Ltd., AU Small Finance Bank Ltd., and the likes of it, along with non-bank lenders such as Bajaj Finance Ltd., micro-finance institutions, and fintech firms that have large exposures to the self-employed segment to be the worst-affected in terms of their asset quality and growth,” he said.

In an April 16 note, Emkay highlighted that, “lenders would once again turn cautious, particularly in PL and BL (personal loan and business loan) segments with the self-employed segment in pressure”.

Some of these lenders have seen the stock prices fall more than the benchmark Bank Nifty over the past month.

“In our view, banks such as City Union Bank Ltd., IndusInd Bank, AU Small Finance Bank, Bandhan Bank Ltd., along with non-bank lenders such as Bajaj Finance have seen and will continue to see the most impact due to higher income losses of their customers in personal and business loan segments, as a large portion of their loan portfolios are concentrated in the self-employed category,” said Kajal Gandhi, banking analyst at brokerage firm ICICI Securities.

Emails sent to the IndusInd Bank, RBL Bank, AU Small Finance Bank, Bandhan Bank and Bajaj Finance on Friday were not answered.

Self-Employed: Worse Off Than The Salaried?

Data on exposure of banks and non-bank lenders to the self-employed category isn’t available in public domain. The difference in delinquencies between salaried and self-categories is also not available. Credit bureaus CIBIL, CRIF Highmark declined to share information. Experian did not respond to an email query.

However, a consumer survey by Paisabazaar, a digital marketplace for loans and other financial products, had shown the higher stress faced by the self-employed during the first wave of the Covid crisis.

The survey, conducted in September last year, which covered 8,616 customers showed:

• 86% of the self-employed customers reported a loss in income vs 56% for the salaried class.
• ~68% of the self-employed customers took moratorium and of that 98% of them had a negative impact on their income due to the lockdown.

Sub-segments within the self-employed category, according to Anil Gupta, vice president and co-group head at rating agency ICRA, such as unsecured personal loans, credit cards, vehicle finance, microfinance loans, small business loans, and affordable housing finance, will be more affected if the situation worsens, as was seen in the previous cycle.

“Though there is no nationwide lockdown and the restrictions are not as stringent, the situation is gradually worsening,” he said. “As economic activity slows and mobility remains restricted, the self-employed segment will be relatively higher impacted in terms of credit availability as lenders would turn more cautious.”

Agreed Parijat Garg, an independent credit-scoring consultant and a former executive at CRIF High Mark, one of the four credit information agencies approved by the Reserve Bank of India. “Even if the situation improves, lenders will be more circumspect towards lending to certain segments within the ‘self-employed’ category.”

Beyond The Listed Lenders

The impact may be felt beyond the listed lenders as well. A number of new non-bank fintech lenders focused on the self-employed segment as salaried customers are well catered to by banks.

NeoGrowth Credit Pvt., a fintech NBFC catering to only self-employed customers with small businesses, said while the company is closely watching how lockdowns take shape, it expects a nearly 3%-5% drop in collections in April for loans extended to certain segments such as restaurants, beauty salons, retailers that operate in shopping complexes and malls.

“We see only certain segments of borrowers getting impacted this time, with small borrowers who have loans of Rs 1 lakh or below, or the ones working on rented premises, getting affected the most,” said Arun Nayyar, chief executive of NeoGrowth.

Another lender, Paisalo Digital Ltd., which also co-lends with the country’s largest lender State Bank of India, has all its borrowers in the 'self-employed' segment with loans of up to Rs 1 lakh.

“We granted a moratorium to all our borrowers during the first wave, while just 20% of them actually availed it. But for now, our disbursements are growing and the demand for a moratorium has not come from most of our borrowers,” said Shantanu Agarwal, deputy chief executive at Paisalo Digital. “That’s also because most of them are into essential services and products such as grocery, vegetables, pharmacies and dairy that weren’t impacted much.”

Even within the self-employed segment, those businesses and individuals operating in the non-essential services and product categories will be hit harder.

“Those operating in segments such as travel, tourism, cab drivers, restaurants, textiles, gems and jewellery, footwear, etc have seen their incomes fall significantly during the pandemic as non-essential shops remained shut for the most part of the year,” said Garg. “They will be doubly hit because even lenders are not willing to extend credit to them, almost choking the credit flow to the segment.”