5 personal loan trends that will prepare India for the future
May 28, 2021
6 min read
Opinions expressed by Contractor the contributors are theirs.
You are reading Entrepreneur India, an international Entrepreneur Media franchise.
Over the past decade, the banking and financial sector has changed dramatically, with the industry integrating advanced technologies into its day-to-day operations. The increased proliferation of the internet and the use of smartphones have paved the way for a paradigm shift in the way people and financial institutions interact with each other. Technology has simplified the banking process to a great extent and this ease of banking and financial services has also been reflected in the borrowing behavior of Indian customers. One of the most significant changes observed concerns the personal loan market.
According to data from RBI (Reserve Bank of India), there has been a 26.9% increase in the number of personal loans over the past year. Like other financial services, the personal loan segment has been grown thanks to digital services and the rise of instant loan startups. Since the start of the pandemic, like other segments, the personal loan market has also undergone a massive, albeit positive, transformation.
As the country began to crawl towards recovery from the first wave and subsequent lockdowns, a disastrous second wave of the pandemic has struck. Declining economic activity and lockdowns imposed in several states have once again prompted many people to turn to instant loans to avoid a financial crisis. Even as this scenario continues, the personal loan market is witnessing the emergence of multiple trends which are sure to shape the future of the segment and prepare India for the future. Here are 5.
Increased demand for digital lending channels
As mentioned earlier, technology has been instrumental in the change in the personal lending segment and platforms have jumped on the digitalization bandwagon. Considering the convenience that digital platforms offer, there has been a massive adoption spike, especially over the past year or so. Lending platforms are already taking advantage of technology and increased internet penetration to create fast, secure and easy-to-use applications / infrastructure, thereby digitizing the entire loan application and approval process. .
Unlike traditional institutions and processes, digital lending platforms follow a seamless and risk-free approach to borrower and lender with features like KYC registration, digital credit history, and more. Soon lending will be revolutionized by digital transformation into the low income segment where the true potential of technology will be unleashed, enabling people to avail personal loans through platforms of a full nature.
The rise of NBFCs
Until recently, it is the traditional financial institutions such as banks or informal sources of credit that people turn to for personal loans. The problem, however, is that banks need a lot of paperwork to fill out and the loan approval process can take a long time, even months in some cases. Also, when it comes to personal loans, banks often require borrowers’ monthly / annual income to be above a certain level, which makes it difficult for low income people to qualify for bank loans. When it comes to informal sources of credit, for example money lenders, borrowers are often charged unreasonably high interest rates, which ultimately leads them to fall into the debt trap. However, with NBFCs, especially instant loan applications, the scenario is different.
NBFCs cater to the low income segment of the population, charge reasonable interest rates, have a transparent process, and also offer low cost personal loans. The past few years have seen the country’s NBFCs climb to the top of the personal loan market, with their market share increasing from 22.68% in March 2018 to 44.92% in March 2020 according to the Credit Information Bureau. Through convenience, fluidity and transparency, NBFCs have managed to rapidly expand their borrower base in a short period of time.
When speaking of NBFCs, it is important not to overlook an emerging category of financial service providers – neobanks. A fully digital bank with no branches, neobanks are a wide range of financial service providers that crave today’s savvy customers. Neobanks take a less confrontational approach in positioning their offering vis-à-vis traditional banks and are rapidly gaining ground for faster customer acquisition and consumer appeal. While neobanks are still at an early stage in India, it is predicted that they will soon become a go-to solution offering multiple services including personal loans under one roof.
Lenders adopt new-age underwriting
Today, in addition to financial and credit history, lending platforms have adopted new-age data collection methods such as borrower’s digital footprint, mobile data, etc. to get in-depth information about their repayment capacity and their behavior. This allows them to bypass conventional data points or even process loan requests when conventional data is insufficient.
In addition, today’s lenders use advanced AI and ML-based underwriting models as opposed to the human-centric pen-and-paper underwriting which relied on the ability to evaluate. subjective of the human underwriter compared to new age models which are more objective and robust. While this conservative appetite will prevail in the near term, the long-term outlook for the Indian lending segment is still optimistic given the huge credit penetration gap.
Greater preference for non-Tier I markets
With the surge in digital adoption, people across the country, especially those in Tier II, III, and IV cities, and even hinterlands can access digital lending channels. In fact, a recent report published by the Internet and Mobile Association of India (IAMAI) and Nielsen showed that rural India has slightly more Internet users than urban India, further facilitated by very affordable data prices. And as lenders can now access clients in these areas, the focus will be on non-Tier I markets, as these markets have historically demonstrated good credit repayment behavior, making them lucrative and facilitating broader scope for lending platforms.
Wide range of loan products
During this time, the standard personal loan was the only product available. However, with the changing times and the rise of digital payments and technology-enabled financial services, credit cards came into play. Then came cashier financing, virtual credit cards and consumer products. line. In addition, the personal loan segment has also witnessed the introduction of specific products for use cases such as tuition financing etc. With the consumption of the personal loan segment expected to experience explosive growth, there will be more credit products added in the future.
The lending landscape has changed a lot over the years and applying for a personal loan is now a quick and easy process that will see the money deposited into your account in just a few hours. With the increasing adoption of technology and increasing competition in the market, the personal loan segment will continue to evolve and adapt to changing scenarios.
Besides these, there is yet another element that has gained immense traction in recent times: cryptocurrency. Over the next decade, crypto will become a defining trend in the FinTech industry and we will see the dawn of new credit products such as cryptocurrency-based lending over the next 5-10 years. In fact, portals such as Aave, Compound and Yearn in the western market have already introduced this concept. The aforementioned trends are expected to continue for the foreseeable future, setting the stage for the personal loan market.