Small ticket, big business: Fintech firms see surge in instant loans

A recent report by CRIF High Mark has it that small-ticket personal loans contributed 50 per cent by volume in FY21

Can credit be handed out faster than Maggi noodles? Last Thursday, CASHe launched a WhatsApp-enabled service for instant credit, which V Raman Kumar — the fintech’s founder and chairman — claims is a first-of-its-kind, because “today’s smart consumers demand instant gratification and contactless support”.

With so many “smart consumers”, CASHe saw a 237 per cent annual growth in the number of small loans disbursed, to 430,000 in FY22, from 127,000 in FY21, with an average ticket-size of about Rs 40,000.

A recent report by CRIF High Mark (How India Lends: Credit Landscape in India FY21) has it that small-ticket personal loans (STPL, or those under Rs 100,000, which are a sub-set of the personal-loan market) contributed 50 per cent by volume in FY21.

The report is the only granular summation available in the public domain, though the  Reserve Bank of India’s (RBI’s) Financial Stability Report, December 2021 (FSR December 2021), too, had observed that retail loans are generally recording double-digit growth, “although the pace of growth remains below its pre-Covid level.”

Housing and other personal loans constituted 64 per cent of incremental credit during the last two financial years. While state-run and privatesector banks dominate the personal loans segment, STPL is the turf of non-banking financial companies (NBFCs).

“The lending landscape has dramatically shifted in the last few years. Personal loans and instant loans against credit-card limits have seen an uptick,” says Navin Chandani, managing director and chief executive officer (CEO) at CRIF High Mark. “Millennials have entered the loan spectrum and are likely to have a majority share in terms of borrowers.” 

The drivers

Now, quick-gratification loans have been around for years and gathered pace in step with consumerism. Marquee names like HDFC Bank, ICICI Bank and Axis Bank do have such offerings, but, given their unsecured nature, were cautious and selective when sanctioning them. 

Fintechs and NBFCs were quicker off the mark when hawking these loans to new-to-credit or new-to-category customers, riding on the back of what they considered to be their better ability to profile customers and crunch credit-bureau data.

Bhavin Patel, co-founder and CEO of LenDenClub, argues that fintechs took the lead by introducing innovative digital lending products like buy-now-pay-later (BNPL), and pay-in-parts offerings. “These products are easy to avail of, as they are built on robust artificial intelligence and machine learning rails and provide convenient payment mechanisms,” he says. The company’s loans disbursed grew more than 85 per cent in number in FY22; the amount was up by over 150 per cent.

But what is interesting is that post-pandemic, there appears to have been a change in the end-use of such loans — they are being used for medical emergencies, advances on salaries, and towards paying rentals. And the evidence is not merely anecdotal. This brings us to the issue of delinquencies.

“Delinquency rates for small-ticket size loans are on a par with various other secured loan products that are available in the market,” says Patel.

Kumar is upfront. He says delinquencies in unsecured STPL range between  7 and 12 per cent and are a concern — they peaked during the first two Covid phases owing to the slowdown and job losses. “And the reason why these loans are expensive is that lenders have to factor in higher delinquencies.”

Better technology and underwriting smarts plus automated collection strategies have helped CASHe to keep these in the 8-9 per cent range. “We expect this to stabilise around 7.5 percent year,” Kumar adds.

The pain points

The party seems to be winding down as well. The CRIF High Mark report says that overall personal loans recovered, with originations in Q3FY21 and Q4FY21 higher than the pre-pandemic level in Q4FY20, but STPLs remained adversely impacted in FY21 due to the pandemic. The portfolio-at-risk (PAR) for personal loans (in the 31-180 days-past-due period) was 3.3 per cent in FY21; for STPL, it was higher, at 8.8 per cent.

Another trend is the 40 per cent reduction in the average ticket size of personal loans to Rs 150,000 in FY21, from Rs 240,000 in FY17. This data for STPL is not available, but it indicates broadly that people are borrowing smaller amounts that may not necessarily be used for conspicuous consumption, but to ease the grind of everyday life. If true, this is an ominous sign.

These aspects need to be read along with another observation in the RBI’s FSR, December 2021, that the retail-led credit growth model itself is confronting headwinds. First, delinquencies in the wider consumer finance portfolio have risen. Second, the new-to-credit segment — the key driver of consumer credit growth in the pre-pandemic period — is showing a decline in originations.

The report said an “analysis of historical data shows that in emerging market economies, non-performing assets typically peak six to eight quarters after the onset of a severe recession.”

Whether we are in a recession is arguable, but we are definitely not in a sweet spot by any stretch of the imagination — the FSR, December 2021 is indirectly saying that the retail book of Mint Road-regulated entities may be carrying pain spots.

P2P platforms

Yet another point has not got the attention it deserves. RBI data show that while lending on peer-to-peer (P2P) platforms makes for a minuscule share (Rs 2,093 crore as on September 30, 2021) of aggregate NBFC credit, there was significant traction in activity during the pandemic period — the Rs 2,093 figure represents a three-fold growth in the credit intermediated. (P2P is akin to another form of crowd-funding.)

And the fact that customers thought of P2P platforms as a better avenue to source credit tends to hide the reality that investors also searched for higher yields in a low interest-rate environment. And, therefore, the bigger plot from hereon will be worth watching.

The last three years have seen an abundance of liquidity, with the RBI accommodative in its monetary policy. All that has changed, and we are well into a switchover in the interest-rate cycle. In itself, this should not be a concern, but do remember that from 2019, Mint Road’s regulation is that all consumer loans (that is, loans given out since) should be pegged to external benchmarks — the repo rate or Treasury Bill yields.

Simply put, a sharper transmission of the hike in policy rates to borrowers is on the cards. And unlike during the pandemic, no loan-servicing breather is on offer. And, we have no data on delinquencies, or even on the restructuring sought by customers by retail segment.

It is also pertinent to keep in mind that the retail book undergoes a churn every three or four years, given the shorter tenure of such loans (save for mortgages, which are of much longer tenures and are linked to appreciating assets).

In the specific case of loans disbursed for instant gratification, also unsecured in nature, how they will turn out is anybody’s guess.