CRIF analysis of retail lending in India in December 2020

Among the various retail products, personal loans have seen some of the most dramatic changes in terms of product design and customer segment. Personal loans have also been most affected by the disruption caused by FinTechs and the adoption of technology by incumbent lenders.

In its recent publication, CreditScape Vol VII - PERSONAL LOANS, CRIF High Mark analyzes the current situation in India.

As of August 2020, the personal loan book stood at ₹5,07,684 crore, having grown by only 0.57% since March 2020 due to COVID-19 disruptions. In the previous 2 years, the personal loan book had grown by around 40% annually, which dropped to a relatively sluggish annual growth of only 26.4% as of March 2020.

According to figures for March 2020, active loans had grown rapidly, by nearly 60%, much faster than in previous years. However, originations in the five months of the financial year were affected by COVID-19, with a minor decrease in active loans. While there had been growth in the portfolio, the average ticket size reduced continuously over the previous 2 years, reducing by 18% Y-o-Y until March 2020. As of August 2020, the average ticket size had increased by 5% since March 2020. Amount delinquencies in the 31-180 DPD and 91-180 DPD buckets increased by 44 bps and 26 bps respectively, while loan delinquencies doubled in the 2 years prior to March 2020.

Observed at the end of FY 2020, over the previous 2 years, the personal loan sector saw continued growth in the portfolio and a sharp spike in annual disbursements. Rising urbanization, increasing household incomes, and a steady rise in nonessential spending by Indians has boosted demand for such credit, which is also easy to get without collateral.

The rising millennial population has embraced the idea of easy credit, leading to an increasing number of NBFCs and neo-age lenders entering the personal loan market with new customized offerings. Such lenders have been observed to have increasingly shifted focus to small ticket loans offered to a larger number of borrowers to increase penetration. However, in order to ensure business viability, lenders need to focus on creating a healthy loan book with a strategized approach toward managing risk as well as collection.

Up to now, not all lenders have warmed to the idea of digitalization and the use of the latest technology for online disbursements and collection. However, going forward, in the “new normal” resulting from the COVID-19 pandemic, it is imperative that all lenders adopt new and digital models of lending and repayments, for greater sustainability and penetration, while RBI continues to enhance security measures for digital payments.

The COVID-19 crisis has brought with it a large amount of uncertainty for lenders, where most, although with excellent liquidity, are taking a cautious approach to offering credit, especially unsecured, fearing a surge in defaults. At the same time, many lenders and FinTechs, in order to sustain their business, are lending to new borrowers with thin credit files.

In such times, along with applications and other sources, a bureau score, which is a constantly evolving metric, dynamic in nature with algorithms that lead to accurate profiling of the borrower’s creditworthiness, comes in handy and gives confidence to lenders to lend even large ticket loans without an adverse impact on asset quality.

Read more in CreditScape A Publication On Credit Landscape Vol VII - PERSONAL LOANS