New Delhi [India], February 25 : 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 facing stress for the last three to four quarters due to a rise in delinquencies and credit costs.
It said, "The performance of new cohorts is satisfactory and we expect overall credit costs to peak out in 1-2 quarters"
The report added that most players in the industry have seen a sharp increase in credit costs, except for top private banks. Some lenders recorded credit costs as high as 10 per cent during the quarter, which is significantly higher than their usual range of 5-6 per cent. This indicates the financial strain faced by several institutions due to higher defaults.
It also mentioned that the industry experts pointed out that banks had already started taking corrective measures a few quarters ago. These steps were taken after the regulator increased risk weights on unsecured businesses, including credit cards.
The move was aimed at controlling the risks associated with unsecured lending and improving financial stability.
The report said, "banks took corrective action few quarters ago, when the regulator increased the risk weights on unsecured businesses."
Despite the recent stress in the sector, the performance of new customer groups, or cohorts, has been satisfactory. This suggests that the measures taken by banks are showing positive results.
The report expects the overall pressure on credit costs to ease after reaching its peak in the next one to two quarters. If this happens, the financial burden on banks may start to stabilize, improving the outlook for the credit card segment.
For MFI sector the report stated that growth in the microfinance sector is expected to remain slow and will depend on regulations. It noted that financial stress in Microfinance Institutions (MFIs) has returned within just two years after reaching its highest level during COVID-19.
The report explained that changes in MFI lending rules led to customers borrowing more than they could handle, which resulted in an increase in loan repayment delays.
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