Hello everyone,

Welcome to the 127th edition of The Pattern, a weekly where we dive into the latest from the world of technology, finance and economy. Let’s get started.

Once upon a time, the world of financial services revolved around serving millennials. Be it attracting them through snazzy apps or serving cashbacks that keeps them hooked, financial services companies pulled all stops to ensure that the younger generation doesn’t leave the hood.

The draw was immense too. Educated millennials making six-to-seven figure salaries in Tier 1 and 2 cities with minimal or no responsibilities seemed to be perfect borrowers. Millennials and GenZ have emerged as the prime targets for lenders looking to sell credit cards, personal loans and other unsecured loans which are primarily driven for consumption or lifestyle expenditure. It seemed like nothing could go wrong.

Now, things seem to have changed. The same millennials that banks once rushed to give credit to, are now being seen as something of an eyesore. So, what exactly went wrong? First, the fears of the regulator and many of the banking system watchers have come true. There’s a wave of delinquencies in credit card repayments across the system which has got lenders worried.

For instance, ICICI Bank recorded gross credit losses at 4.4% of portfolio in credit card segment. This number was only 3.2% at the end of FY23 and at 4.5% the year before that.

However, ICICI Bank data is not an outlier. SBI Cards, too, reported gross credit losses of 7.2% in FY24 for its credit cards portfolio. SBI Cards, too, reported a credit loss of 6.2% in FY23. This is concerning.

The biggest problem with credit card delinquencies as of now seems to be that people aren’t revolving credit – they're simply defaulting.

Research agency Macquarie suggests that young people are perhaps over-leveraged and hence, when the credit card debt becomes too much, they stop paying even the minimum amount and thus resulting in the account becoming an NPA for lenders.

“Our conversations with bankers indicate that net credit losses in credit cards are running currently at closer to 5-6% levels,” Suresh Ganapathy, head of financial services research at Macquarie Capital told Economic Times.

“The young millennials are using the entire limit and directly fully defaulting and turning into NPA without even revolving the loan. That’s the nature of defaults that we are seeing here.”

This ties in with what the regulator has been cautioning against for a while now. RBI had raced risk weights on unsecured lending a few months back in the hope that it’ll cool down some of the steam of unchecked credit growth. Governor Shaktikanta Das had advised that banks must be careful of over-leverage and ensure that loans are monitored even post-disbursement.

"However, certain segments of personal loans continue to witness high growth. Excess leverage through retail loans mostly for consumption purposes needs careful monitoring from a macro-prudential point of view. It calls for careful assessment and calibration of underwriting standards as well as post sanction monitoring of such loans,” Das had said in August.

The problems for lenders, however, do not stop at just credit cards. Even personal and other unsecured categories are also starting to showcase a slowdown.

Growth in personal loans reduced to a paltry 3% in June’24 quarter compared to 36% growth in June’23, according to data released by the RBI. Meanwhile, a similar slowdown is being observed in credit card spending.

"The borrower's default journey begins with making a large purchase with the idea that they will repay it in instalments. But this outstanding gets amortised at a rate as high as 48% annually, and the borrower reaches a stage where he can make only the minimum payment," Ritesh Srivastava, founder and CEO at debt relief platform Freed, told TOI. "What we have seen is that the borrower, to make the minimum card payment, gets into loan-stacking by taking small-ticket personal loans," he added.

The signs are there for us to see. Lenders are starting to tread cautiously on doling out new loans in view of the stress being observed in various segments. At the same time, experts suggest that the problem of over-leverage doesn’t have an easy solution since existing underwriting methods like bureau scores don’t capture the full picture of a borrower’s financial health.

Hence, constant vigilance and extreme caution is what the doctor orders for Indian financial services players. Quite some remedy for an industry that’s been on steroids for a while.

This is all for this week. I will see you next week. As always, leaving some reading recommendations below.

Reading list

1. Credit card spends and loan growth slow as lenders get cautious about asset quality: Nomura

2. India's credit card losses spike for millennials’ swipe-spend-default habit

3. Three out of 5 consumers think it's normal to exaggerate income on loan applications: Survey

4. Share of borrowers rated Prime+ on rise, shows TransUnion CIBIL data

5. Indian fincos face balancing act of regulation and high credit growth, says S&P Global ratings

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates.

Cheers, Mayank