When you buy a phone, you have the option to pay for it then or pay later. You have this option even when you are buying grocery or paying bills. Credit these days can be available relatively easily, even for amounts as low as Rs1,000. In fact, in a country where you need to have a good credit history and credit score to get loans from banks, you can now get loans on your phone—even if a bank would not lend to you.
One glance at the retail credit books these days will tell you that large banks and small financial technology (fintech) companies alike are increasingly getting into the unsecured lending space. To get a perspective, let’s look at the data of unsecured loans. According to data from the Centre for Monitoring Indian Economy Pvt. Ltd (CMIE), personal loans (incremental numbers) increased 179% and credit card outstanding rose 34.63% in value during April to October period in FY 2017-18. In comparison, incremental numbers during the same period for housing loans showed negative 32.7%. As existing borrowers increase their credit usage and companies look to cater to new-to-credit borrowers, unsecured lending looks set to grow further. Let’s see how this segment is panning out and if it is a cause for worry.
According to a Macquarie report, unsecured loans have been growing much faster than secured loans over the past 2 years, with this divergence particularly stark in the past 9 months. Number of loans per customer and average personal-loan balance are on an uptrend—the Indian household is leveraging up, the report noted. A quick look at the unsecured-lending loan books of the top banks will tell you that these loans have been surging. For instance, in the retail segment, HDFC Bank Ltd saw a 35.75% growth in personal loans and 44.50% growth in credit card business in the second quarter (on a year-on-year basis). ICICI Bank, in its second quarter results this financial year said that its personal loan book saw a 40.1% year-on-year growth and the credit card business grew by 36.5%. And this is true for the non-banking finance companies (NBFCs) as well. Bajaj Finance Ltd saw a 42% growth in consumer lending in the same period.
Taking the trend ahead, in November, ICICI Bank Ltd, the country’s largest private sector bank, entered the small credit business—lending amounts as low as Rs3,000. With this, large banks are now officially catering to small credit segment and new-to-credit customers.
It is not just the banks and larger NBFCs that are focusing on unsecured lending and first time borrowers. When e-wallet companies and payment gateways realized that their core business was giving them low margins, they had to look for better options. Margins are higher in the credit business, and thus many e-wallet companies have entered the small credit segment in the past 2 years. For instance, Paytm and ICICI Bank recently tied up to offer small credit schemes. Similarly, Mobikwik has tied up with Bajaj Finserv for small-credit loans; and The Mobile Wallet has tied up with ZestMoney to provide small-ticket loans. “We are providing loans in the range of Rs1,000 and Rs10,000. We are able to do instant KYC (Know Your Customer) checks through Aadhaar and OTP. We use Cibil data to check creditworthiness. If there is no credit data, we use social media profile and transaction history," said Vinay Kalantri, founder and managing director of The Mobile Wallet. To this end, payment gateways such as PayU launched LazyPay in April. “Our product is a 15-day credit product for which we don’t charge an interest. We charge a late fee of Rs10. You can use it to spend on food, movie tickets and bill payments," said Jitendra Gupta, managing director of PayU Payments India. The loan amount can be as low as Rs300. According to experts, e-commerce companies are also considering moving towards a pre-approved credit model for shopping.
Many loan comparison platforms—which included only formal lenders till now—have now started including fintech companies that do small unsecured credit for shorter tenures. For instance, Paisabazaar.com recently announced the inclusion of lending fintech companies on its platform. “There are new digital lenders that have come out with smaller-ticket and smaller-tenure loans. Customers are now getting credit easily...we want to give as many options to our customers as possible," said Naveen Kukreja, co-founder and chief executive officer, Paisabazaar.com. The revenue model is acquisition fee since the ticket size is lower and typically the average fee amount would be Rs1,000-1,200, said Kukreja. This means, a lender pays the platform this one-time fee to acquire a customer.
The interest in unsecured loans seems to be due to the good credit cycle and the fact that banks have become comfortable. “Banks have become positive about credit cards. In the last 18 months or so, new companies have come in. It was a tough credit period between 2008 and 2012 when banks were cleaning their books. From 2012, people started coming in slowly to unsecured loans. Digital platforms have helped banks and NBFCs to expand their reach," said Kukreja. Fintech lending companies such as EarlySalary, KrazyBee and StashFin offer loans to salaried individuals and college students. At the same time, person-to-person (P2P) lending companies, which only give unsecured loans, are seeing traction, though minuscule. “Our total loan disbursal amount is around Rs30 crore with a monthly disbursal amount of Rs2.5 crore at a 4% default rate," said Vinay Mathews, founder and chief operating officer of Faircent.com. These loans are taken for purposes ranging from home renovation and family functions to debt repayment.
Though these unsecured loans are growing fast, experts don’t see a red flag yet. “Digital lending constitutes less than 10% of the overall unsecured lending book. We have not even scratched the surface as far as credit is concerned. If you compare the loans disbursed by fintech companies compared with traditional banks and NBFCs, it is less than 10%," said Abhishek Agarwal, co-founder and director, CreditVidya, which is working on alternate data to assess risks and fraud. He added that when the bust happened, bureaus were not that evolved. "Traditional companies have good risk assessment frameworks. Out of the 350 million people who are underserved and un-served, we are just scratching the surface. We are not giving them Rs3-lakh loans. We are giving short-term credit so that people who pay back will be eligible for an education loan or a home loan in the future," said Agarwal.
The new loan products target people who are not able to get a credit card. Taking credit for lifestyle expenses is not recommended. However, if you still plan to take a loan, repay it on time and don’t get into a debt trap.