MSME borrowers taking multiple loans may become a headache for lenders

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Those taking multiple loans, often termed as loan stackers, especially in the micro, small and medium enterprises (MSME) space, might become a major headache for lenders in India. The default rates for borrowers who take a number of loans from multiple lenders within 60 days jumped from 2.5 per cent to 4.4 per cent in September 2018, according to “MSME Pulse” by TransUnion CIBIL and SIDBI.

The stacked loans by borrowers have a higher potential of turning into non-performing assets (NPAs). This phenomenon is predominantly observed in loans sanctioned by finance companies like NBFCs. The study shows that 45 per cent of the sanctions showing loan stacking behaviour belong to loans sanctioned by NBFCs and 23 per cent of the borrowers who have taken loans from NBFCs fall in this category, TransUnion CIBIL noted.

Cautioning MSME lenders on loan stacking behaviour, Satish Pillai, Managing Director and CEO of TransUnion CIBIL, said “MSME Lenders must keep track and closely monitor borrowers seeking and availing loans from multiple lenders within a period of 60 days. The direct correlation was observed between loan stacking behaviour and the probability of default by such borrowers".

Borrowers apply to multiple banks simultaneously or within a few days in order to get access to more funds. This may result in borrowers taking higher leverage than prudent risk norms may permit and lead to adverse credit behaviour in the future.

The risk of default on loans taken by borrowers who have stacked their loans has increased in the last three years. Therefore, lenders must establish prudent processes and policies to detect and mitigate risks arising from loan stacking behaviour. Regular monitoring of portfolios can alert the lender and enable timely intervention to deter defaults and losses, Pillai added.

TransUnion-CIBIL and SIDBI studied the MSME segment with borrowers having aggregate exposure of Rs 10 lakh-Rs 10 crore.

Multiple samples from various months have been studied as the observation window and subsequently, the behaviour of borrowers is observed in the following 12 months to determine whether these borrowers exhibit higher risk. The study excluded some loan types like "commercial vehicle loans" from the sample where it may be common business practice to avail multiple loans within 60 days period from different lenders. 

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