New Delhi [India]: The overall credit costs in the credit card segment are expected to peak in the next one to two quarters, according to a report by Phillip Capital.
The report highlighted that the sector has been under financial stress for the past three to four quarters, primarily due to rising delinquencies and credit costs.
“The performance of new cohorts is satisfactory and we expect overall credit costs to peak out in 1-2 quarters,” the report stated.
Rising Credit Costs and Financial Strain
The report noted that most financial institutions have seen a sharp increase in credit costs, except for top private banks. Some lenders recorded credit costs as high as 10% during the quarter, compared to the usual 5-6% range, signaling significant financial strain due to higher defaults.
Industry experts indicated that banks began implementing corrective measures a few quarters ago in response to regulatory actions aimed at reducing risk in unsecured lending.
“Banks took corrective action a few quarters ago, when the regulator increased the risk weights on unsecured businesses,” the report added.
Despite recent challenges, the performance of new customer groups (cohorts) has been satisfactory, suggesting that these corrective measures are yielding positive results. The report anticipates that once credit costs peak, financial pressure on banks may stabilize, improving the outlook for the credit card segment.
Microfinance Sector Faces Slow Growth
The report also discussed the Microfinance (MFI) sector, noting that its growth is expected to remain slow and will depend on regulatory policies.
Financial stress in the MFI sector has resurfaced within two years of reaching its highest level during COVID-19. Changes in lending rules led to over-borrowing by customers, causing a rise in loan repayment delays.