India is at the helm of economic affairs, riding its new status as the fastest growing economy in the world. It clocked a GDP growth rate of 8.2% for the April-July quarter of 2018-19, which was more than that of China (6.8%) and Vietnam (6.8%). The World Bank, among others, is expecting that India will remain the fastest growing economy for at least the next three years. Rising domestic demand, backed by a huge domestic market, is expected to be a major driver of India’s economic growth.
Positive demographics are boosting disposable income of Indian households as an increasing number of the younger population joins the workforce. By 2030, India is expected to have the largest working-age population in the world of about 962 million. Rising disposable income along with improved access to credit, in turn, is driving private consumption—the main pillar of our economy.
One of the biggest catalysts for rise in consumption has been technology. With the availability of consumer data, technology has also helped in easing the lending process for banks and financial institutions. Owing to the digitisation initiatives of the Centre, there is greater use of technology in the credit evaluation process. Banks and financial institutions, with their increased access to consumer credit data (approximately 700 million accounts), facilitated by the credit bureaus, can make informed decisions faster after studying a customer’s credit history. The loan sanction process has, thus, been reduced to minutes from days once a customer’s creditworthiness is evaluated. Additionally, with the availability of alternate data, bureaus can pass on intelligence on new-to-credit customers, thereby gauging their propensity to payback a loan within a stipulated time frame.
In keeping with the boost from positive demographics and digitisation-assisted lending channels, customers are increasingly displaying an openness for unsecured borrowings. This has propelled the growth of unsecured loans to exceed that of secured loans. Unsecured loans are loans given without collaterals and comprise consumer loans, personal loans and credit card borrowings that one can see in a typical retail portfolio. Secured loans, in contrast, are backed by collaterals and include home loans, auto loans and loans against property. Between September 2017 and September 2018, the portfolio for unsecured loans was up 35% as against 21% for secured loans. The quantum of portfolio showed a similar trend with unsecured loans growing by 29% compared to a growth of 22% in secured loans. To keep their portfolio in check, banks and non-banking finance companies (NBFCs) have enlisted the services of bureaus and fraud detection CUGs (closed user groups). These CUGs prevent application fraud by matching credit application data against multiple data sources including the shared fraud data which helps in early detection and prevention of fraud.
NBFCs have been spearheading the growth of unsecured loans in the country, especially since August 2017. The share of NBFCs in unsecured loans has gone up from 13% in September 2017 to 18% in September 2018.
The tremendous growth in unsecured loans has been equitably contributed from its different product categories. Personal loan sanctions (by count) grew the fastest at 59% followed by consumer loans (51%) and credit cards (28%) in the September 2018 quarter vis-a-vis the September 2017 quarter. NBFCs have been growing rapidly in the segments of personal loans and consumer loans, while banks dominated the credit card space.
Lastly, with the continuous focus by successive governments on financial inclusion and digitisation, the unsecured loan segment is expected to grow further. With new start-ups and e-commerce brands offering credit on one’s finger tips and within a matter of seconds, credit bureaus have a greater role to play to ensure credit is offered to the right customer for the right amount.
Mohan Jayaraman is managing director, decision analytics at Experian Asia Pacific
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