Many of India’s smaller non-banks are gently closing the door on unsecured loans

These lenders serving small businesses sold unsecured loans, sought out such sales or securitized them, the people cited above said on condition of anonymity. Potential buyers include banks and non-bank lenders. The development, which comes after the central bank curbed runaway growth in personal, credit card and small business loans, marks a turning point for lenders and their backers who invest in such loans without collateral for growth.

Kinara Capital started the sales process ₹Three people aware of the matter said there was a book of unsecured loans worth Rs 2,200 crore.

“We remain open to different liquidity options that may further our commitment to meet our obligations to our customers, lenders and partners,” a spokesperson for the Bengaluru-based company said in response to a question.

crash time

Kinara, which has raised around $117 million in equity capital from investors such as British International Investment and US asset manager Nuveen, is facing a liquidity crunch after some lenders seized fixed deposits and recalled loans, according to an August report by rating agency Icra. In August, Kinara said it was pausing repayments until October as part of a resolution plan agreed with lenders. One of the people cited above said portfolio sale talks are still in their early stages.

Unsecured loans, which are not backed by collateral, are seen as inherently riskier than mortgages or auto loans, for example. The extreme growth in unsecured loans has led the Reserve Bank of India (RBI) to increase risk weights on consumer loans and bank loans to NBFCs in 2023 and tighten regulations on peer-to-peer platforms in 2023 and 2024. The crackdown has squeezed funding flows to the sector, which has since turned to secured loans to maintain profitability and sustain growth.

Lendingkart, backed by Temasek-owned Fullerton Financial, is securitizing its unsecured loans where the loans are pooled in a special purpose vehicle (SPV). The SPV issues pass-through certificates (PTCs) to large investors who then receive payments from loan repayments.

A company spokesman denied any distress sales but said it continued to securitize the loans. “Lendingkart is not selling its unsecured loan portfolio to raise cash. Lendingkart has sufficient liquidity to meet all its obligations… In the ordinary course of business, Lendingkart continues to undertake securitization transactions,” the spokesperson said.

Lendingkart’s annual report for fiscal 2025 (FY25) mentioned a renewed focus on quality, profitability and capital adequacy, along with a push towards secure lending. Fullerton Financial is investing ₹2,000 crore in Lendingkart to grow its secured loan book, Economic Times It was reported in September. The company’s assets fell by 31 percent ₹5,000 crore by the end of March and beyond ₹4,141 crore as of June 30 as it exited co-lending and moved towards higher-ticket secured loans, Crisil said in its note on October 9.

Towards safety

Aye Finance, backed by Google, A91 Partners and British International Investments, also reduces exposure to unsecured loans. It increased its focus on mortgage lending and increased its contribution to about 15% of its assets in FY25, compared to about 7% a year ago, according to CareEdge Global Ratings’ report in May. Aye plans to grow its mortgage lending business in line with its planned strategy and gradually transition from a largely unsecured loan book to a diversified portfolio, the report said.

The lender has also seen a deterioration in asset quality in the last financial year; gross non-performing assets (NPAs) ₹217 crore due to significant losses on mortgage loans, CareEdge said. The company raised too much ₹770 crore since FY20.

According to India Ratings, Ashv Finance discontinued new unsecured business loan originations in December 2024 and sold most of its assets to Protium Finance, using the proceeds to repay loans.

While larger lenders such as Navi, Moneyview and KreditBee have managed to scale profitably ₹With ₹10,000 crore in assets under management (AUM), smaller fintechs are left struggling.

delays

Fintech lenders continue to face higher defaults, particularly on ultra-low-cost loans, according to CRIF Highmark data through June 2025 ₹10,000. 4.1% of loans in this segment are 31-90 days delinquent and 4.8% are 91-180 days delinquent; this is much higher than 1.7% and 1.8% respectively for other NBFCs.

The move away from unsecured loans has improved credit quality. Between June 2023 and June 2025, the share of very low-risk borrowers in NBFC-fintechs increased from 20% to 28.9%, while the high and very high-risk segments showed a sharp decline from 38.4% to 28.9%, reflecting tighter underwriting and better risk controls.

Experts say the rise in portfolio deals is driven by financing constraints, rising bad debts and the need to optimize capital.

“Bank credit growth to NBFCs has slowed to 3.4% by August 2025, compared to 11.9% in August 2024. But NBFCs continue to grow, which means they need alternative pools of capital to sustain the momentum,” said Ashish Mehrotra, managing director (MD) and chief executive officer (CEO) of non-bank lender Northern Arc.

Share inflows also dried up. Total funding to India’s online personal loans segment reached $464 million in 2022, following $426 million in 2021, but fell to $152 million in 2023 and $89.2 million in 2024, Tracxn data showed. So far in 2025, the category has seen just $26.4 million in funding. This marks a sharp decline in investor interest since the high growth phase in 2021 and 2022. The segment saw cumulative financing totaling $1.47 billion across 166 rounds over the five-year period.

Unlocking capital

“Slower equity inflow and limited bank financing have pushed NBFCs to securitize loans through PTCs, unlock capital to meet their financial obligations and extend fresh loans without raising additional equity capital,” said Bhavin Shah, partner and deal leader at PwC India.

Manish Aggarwal, partner at Deloitte India, said rising capital costs are making “build to sell” models more common among smaller fintechs.

“Demonstrating portfolio quality through successful sales helps attract institutional investors and increase credibility in future financing rounds,” he said.

Shah also added that rising defaults, especially in consumer finance and microfinance, have led NBFCs to sell stressed or troubled assets to clean up balance sheets and meet financial commitments.

In the case of distressed sales, deals are made at discounts of up to 30% to book value, depending on the borrower mix and recovery history, one of the people previously cited said. “There are always buyers at the right price,” said one of the sources cited above.

However, Aggarwal warned that investors’ appetite for unsecured portfolios remains weak.

“Investors’ appetite for securitization pools of unsecured loans remains limited due to high credit risk and lack of collateral, increasing the severity of loss in the event of defaults. Current yield requirements and credit enhancement needs often make transactions uneconomic,” he said.

Cleaning

As NBFCs and fintech lenders look to clear their books ahead of quarterly results and potential listings, many are selling their unsecured loan portfolios. “There is a rise in selling of unsecured loan portfolios. One of the main reasons for this is that there has been a significant growth in unsecured loans in the last few years and in the process there has been some dilution in the quality of loan underwriting,” said Hari Hara Mishra, CEO of Association of ARCs in India.

The association’s data shows ARCs paid approx. ₹770 crore to take out collateral-free personal loans in the June quarter, more than double that figure ₹263 crore was recorded in the same period last year.

Mishra said the pricing paid for unsecured personal loans is around 20% of total loans. “Loans with higher past maturity, say loans with maturity over three years, still tend to yield lower recoveries as they are riskier and do not have underlying security. Unsecured loans are generally written down to zero after being in the doubtful category, i.e. NPA for a year. If a lender can recover 20% now, this is usually projected cash from underlying assets after waiting two or three years for similar or lower recoveries.” “It’s better than streams,” he added.

This trend will continue as lenders prepare for the expected credit loss (ECL) provisioning framework, which is likely to come into effect from April 1, 2027, Mishra said. “Under ECL, lenders must proactively provision proactively proactively proactively proactively proactively proactively proactively proactively proactively proactively proactively proactively proactively proactively proactively proactively pro-actively pro-actively pro-actively proactively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-actively pro-active rather than waiting for an actual loss. Selling to ARC at an early date helps maintain healthier balance sheets,” he said. As margins on unsecured assets weaken, Mishra added that “volume is becoming attractive for ARCs” as they continue to expand in this segment.