Credit Needs

For the first time in April this year, credit card dues in India crossed the Rs 2 lakh mark, growing 29.7 per cent compared to April 2022. Interestingly, this rise in dues has been at twice the rate of overall bank loans in a year.

The milestone has resulted in commentary from various experts and analysts, with some describing it as a cause of concern and drawing parallels with the financial crisis of 2008 when credit card debt hit a high of 1.2 per cent in the United States, while some believe the increasing usage shows increased use of plastic money for payments and the impact of inflation.

Bankers, however, do not seem to be worried, as card balances stand at 1.4 per cent as a share of overall bank credit and form the third-largest segment among personal loans. Moreover, compared to the 2008 crisis, bankers today are confident about card issuance to creditworthy customers, thanks to data availability through credit bureaus and account aggregators.

The point, however, is that credit card remains part of a formal structure where banks have several layers of checks to determine creditworthiness and ability to repay. Beyond this formal structure, India has seen a rapid rise in fintech lending since 2014, where the interest rate ranges from 15.2 per cent to 37 per cent and additional processing charges.

The lending industry continues to evolve with the launch of new models and approaches and is poised to become the most lucrative sub-sector in the fintech ecosystem.

IIFL FinTech, in its latest report, estimates that the book size of the Indian digital lending companies is set to grow from USD 38.2 billion in 2021 to nearly USD 515 billion by 2030, registering a 33.5 per cent increase in compound annual growth rate terms.

GenZ's Propensity to Spend
Data from TransUnion Cibil showed that youngsters are driving India's credit growth, leading to expansion in riskier segments like credit cards, consumer durable loans and personal loans.

"The rise of the millennial and Gen Z populations has influenced the growth of digital lending due to their comfort with technology and preference for digital interactions. 

Younger generations are more inclined to use digital lending platforms compared to traditional banking services, as they value convenience, speed, accessibility, and personalized solutions offered by these platforms," says Sonali Jindal, COO & Co-founder, Kissht.

Fintech companies have developed bite-sized loan products such as instant cash loans, buy now pay later (BNPL), cardless EMIs, and peer to peer lending (P2P).

"These products enable lower-income individuals to access credit and build a credit history. This approach ensures they are not trapped in debt or burdened with excessive financial obligations," explains Jindal.

These products have enhanced financial inclusion among the underbanked population by providing a hassle-free and efficient loan application process that can be easily completed from home, requiring minimal paperwork and ensuring speedy approval.

But then comes the biggest risk of delinquencies which in the digital lending industry surpasses 10-12 per cent and are higher than those of traditional lenders.

A report by credit rating agency Experian highlights that the post-collection processes have not evolved, and due to this, digital lenders have lower collection efficiency rates than traditional ones.

Jindal explains that digital lending companies adopt a phased approach to loan disbursement to mitigate risk. "We start with smaller loan amounts and gradually increase the credit limit based on the borrower's repayment behaviour and creditworthiness. This approach allows them to monitor the borrower's performance before extending larger credit lines," she says.

Gaurav Jalan, Founder & CEO, mPokket says the focus is on consumer education since many consumers are getting formal credit for the first time. "By guiding and motivating customers to remain financially responsible, we endeavour to mitigate the perceived risks and empower users to make informed financial decisions," he says.

Tapping SMBs Credit Crunch
Beyond consumer loans, digital lending platforms have a huge addressable market in the small and medium businesses (SMB) segment. Boston Consulting Group, in its report titled, ‘Global Fintech 2023: Reimagining the Future of Finance,’ expects B2B lending to lead the next era of the fintech economy. “Fintechs serving B2b have ample room to disrupt, as small to mid-sized enterprises (SMEs) worldwide have an estimated USD 5 trillion in annual unmet credit needs,” it says.

Exponential growth in the use of the internet and technology to bridge accessibility and reach and buoyancy in economic activity are acting as strong levers in the growth of digital lending in this space.

The BCG report adds that it can be more lucrative for digital lending companies to serve SMEs than individuals, as the loan sizes are larger and the scale is broader. Typically, more information is available that enables visibility into their complete financial picture.

“Our proprietary research shows a USD 250 billion credit deficit for digital SMEs in India today. SMBs in India often face difficulty accessing credit from traditional lenders. This is due to several factors, including the lack of collateral, limited documentation, and the high cost of lending,” says Bhavik Vasa, Co-founder, GetVantage.

However, like consumer loans, risks hang over this space as well. Accelerated speed of digital onboarding can increase the risk of fraudulent applications and identity theft, reckons Hardika Shah, Founder & CEO of Kinara Capital.

Digital lending platforms now deploy robust identity verification measures and regular security audits to identify and address potential risks effectively.

Strengthening Regulatory Regime 
The growth in India’s digital lending sector has also led to a proliferation of unlawful digital lending apps, often with cross-border linkages, which, in turn, prompted the RBI to step in with the release of the Digital Lending Guidelines in September 2022.

“The regulatory aspects only become stronger with values placed on customer protection from predatory practices and its practitioners, ensuring compliance and data security. The fintech companies that can navigate the regulatory environment successfully can potentially benefit from the increased trust and reputation and the innovation opportunities,” says Harshvardhan Lunia, Co-founder & CEO, Lendingkart.

More recently, on 8 June 2023, the RBI also addressed a grey area of the September 2022 guidelines by recognising the default loan guarantee structure known as the first loss default guarantee (FLDG).

“FLDG will help in opening up capital in the market and avoid aggressive lending practices. With the low FLDG with a 5 per cent cap for fintech, funding will increase from banks or NBFCs looking to expand their portfolio and serve niche customer segments, such as MSMEs, rural or agricultural, low-income, or variable-income workers, or many who are new to credit,” says Shah.

With fintech players struggling to establish a proven revenue model, which worsened post-UPI in the payments segment, they will now double down on building robust revenue streams through various forms of credit/lending driven by rising per capita income and a strengthening regulatory regime.