ICRA flags rising risks in unsecured securitised pools; collections of microfinance dropped to 90% in Q3 FY25

The collection efficiency trend for unsecured asset classes, such as microfinance loans, personal loans and unsecured SME loans, has seen weakening performance in the last few months, rating agency ICRA said on Thursday.

The weak collections in the unsecured space, as per ICRA, are due to a slowdown in economic activities coupled with the overleveraging of borrowers.

The microfinance pools' collections dropped to 90 percent in Q3 2024-25 from their previous high of 97 percent at the beginning of the financial year.

Collections in the SME segment also weakened in 2024-25, especially in the unsecured asset class, where efficiency ranged between 85-92 percent in the first nine months of 2024-25.

Secured asset classes have shown healthy performance, with collection efficiencies ranging from 91 percent to 104 percent in the first nine months of 2024-25, rating agency ICRA asserted.

The rating agency said rigorous efforts and the adoption of digitised processes aided the robust performance.

Whereas the secured SME pools continue to report robust asset quality with collection efficiency above 95 percent. For personal loans, collections have seen a slight downward trend in the past two quarters due to customers' higher spending during the festive season and the relatively low priority of personal loan repayment, being unsecured.

ICRA said, citing the rating agency-rated pools, that collection efficiency had reduced to 88 percent in December 2024 from 92 percent in March 2024.

"Post the Covid19 pandemic, the country witnessed a period of high economic growth and healthy performance in lenders' loan books. This led to securitised pools also showing increased collections and low delinquencies. However, the current fiscal year has seen headwinds across all asset classes, but primarily in the unsecured asset classes, which are facing more pressure in terms of asset quality," said Abhishek Dafria, Senior Vice President and Group Head - Structured Finance Ratings at ICRA.

ICRA further asserted that the recent reduction in the RBI policy repo rate by 25 basis points in February 2025 will also ease the cash flow burden for borrowers and support healthy collection efficiencies.

For vehicle loan pools, it said there has been a marginal decrease in the collection efficiency in Q3 2024-25- a trend usually seen every year as lenders typically increase collection efforts in the last quarter of the financial year.