The changing face of Indian retail borrowing
The agile consumer has forced lenders to compete fiercely—from attractive rates to instant loan approvals
People borrow money for different reasons—to acquire homes, businesses, jewellery, education, for a wedding, to travel or to have a certain lifestyle. However, there is a striking difference in consumer preferences across the globe. Indian borrowing patterns vary greatly from the rest of the world.
While we primarily apply for home, education and business loans, credit usage is far more pervasive in developed countries. Sample data sourced from various reports: our household-to-debt ratio is 11% as compared to a staggering 60-120% in many developed and emerging economies. Out of 220 million eligible Indians, only 70 million are credit-active despite a valid credit score. Mortgage penetration (housing credit as a percentage to GDP) is relatively low in India. While one out of 31 Indians maintains a credit card; in the US, every individual has three credit cards on average. Historically, we have borrowed for real estate, gold and daughters’ wedding rather than for lifestyle enhancement. But Indian retail borrowing has also evolved in many ways.
Also read: What a personal loan costs you
Younger borrowers: Thirty years ago, there was dearth of credit products, and the average age of a borrower was in the 40s. A credit card was only for the super rich. Home and car loans were unheard of. In fact, when our elders talked about home loans, the discussion revolved around how to access Provident Fund. People could think of buying or constructing a house only in their 40s or 50s. Today’s striking contrast: multiple credit cards, home loans, business loans, personal loans and auto loans comprise a typical debt portfolio of any individual between 21 and 35 years.
Changing preferences: Earlier, the concept of loans itself was frowned upon: we saved for decades before moving homes or altering our business line. However, the “save first” ideology has morphed into an aspirational ideology wherein we “buy first, and pay over time”. As you land your first job, you could be eligible for a credit card or for a pre-approved personal loan within a few months. There is a paradigm psychological shift in consumer borrowing behaviour resulting in significant rise in demand for personal credit.
Digital banking: The rise of digital banking coupled with widespread smartphone usage has transformed the loan application process into an easy experience. One can now apply for a loan and e-submit the required documents. One can also expect doorstep pick-up of documents and possibly, same day disbursal.
Swifter evaluation: The launch of credit scores in 2007 enabled banks to make better and swifter underwriting decisions. With GST, organised businesses have expanded. Income tax and other statutory returns are now more accurate and filed in greater numbers, creating a larger universe eligible to apply for credit.
Informed borrowers: The internet has empowered customers to access accurate and updated information about products. Using online loan comparison sites and EMI calculators, a borrower can assess his eligibility. The agile consumer has compelled lenders to compete fiercely for his business—from offering attractive rates to zero-per-cent financing, to instant approvals, nil processing fee to nil pre-payment charges, among others.
With mass usage of smartphones in sync with central policies like e-KYC and UPI-enabled digital payments, consumers have verily disrupted the financial services landscape in India. Banks equipped with more reliable data (banking history, credit reports, and more) are able to provide credit to the “under-banked” Indian. The access to low-cost and fast credit is an overall win-win for the consumer and for the economy as a whole.
Deeper credit penetration does, however, call for more responsible lending. Similarly, responsible borrowing is a must. The use of financial leverage helps acquire assets and services you can’t immediately afford. This is known as “good debt”. The traditional 50/30/20 rule comes handy. Divide your income into three parts: 50% for needs, 30% for wants and 20% for aspirations. Reckless use of credit can be truly devastating. The key is to develop a robust budget and an affordable repayment plan.
Raj Khosla is founder and managing director, MyMoneyMantra
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