The retail lending burden: Behind the surge in unsecured loans

Delhi-based Harinath Mehra is worried about his friends. More specifically, their spending habits. Armed with multiple credit cards, his friends often go on spending sprees. What worries him the most is their tendency to spend more than they can afford, which has become a habit now. “For instance, many times they end up ordering a full meal when all they want is a burger,” says the 24-year-old.

It’s not as if Mehra was born wise. “I went through a lot of stress and anxiety when I couldn’t pay my credit card bills. It was not easy to deal with recovery agents, and it caused me a lot of mental harassment,” recounts Mehra. Thankfully, he is debt-free now.

He isn’t alone. Millennials and GenZ folks, enticed by the ready availability of credit cards, Buy Now, Pay Later (BNPL) schemes, and other options on lending apps, can easily fall into a debt trap by overspending using these options, then paying only the minimum due or defaulting on their debt obligations, and then getting caught in the rigmarole of debt recovery. In fact, a July report by credit bureau TransUnion CIBIL reveals that 40 per cent of the retail loan demand is driven by younger customers aged between 18 and 30 years. Experts say this could become a serious challenge, given the demographics of the country where over half the population (52 per cent) is aged below 30, per the National Family Health Survey-5 (2019-21).

Consider this: According to data shared in Parliament, the amount outstanding on credit cards rose 28 per cent to Rs 2.10 lakh crore in March 2023 from Rs 1.64 lakh crore in March 2022. During the same period, credit card defaults rose to Rs 4,072 crore from Rs 3,122 crore in March 2022, which implies that defaults increased almost at the same rate as loans being disbursed.

“Credit card payment defaults increased in June 2023, despite credit card lending growth. Unsecured credit portfolios and small-ticket loans drove retail credit expansion. Serious delinquency rates for credit cards rose by 2.9 per cent, while consumer durables delinquency increased by 1.5 per cent,” says Mahesh Shukla, Founder & CEO of PayMe, a fintech firm that offers short-term and personal loans. The fintech has seen 145 per cent jump in retail loans to Rs 450 crore in FY23. Its gross NPA is currently at 3.2 per cent.

The ordeal of 37-year-old Ritu Sree from Hyderabad is yet another example. She was trapped in a web of app-based loans she took for her wedding and parents’ medical expenses. Initially, she juggled Rs 16.37 lakh in debt on a monthly income of just Rs 30,000. But, a sudden financial catastrophe, coupled with constant lender calls (nearly 300 a day) and harassment, started taking a toll. Sree found SingleDebt, a debt management solutions provider, while searching for legal advice on creditor harassment. Its counsel has helped her regain control over her finances.

Due to such instances, debt-relief platforms have seen a boom of late. “Our customer base has increased three times from last year… the trend shows that overleveraging is happening and stress is building up,” says Ritesh Srivastava, CEO & Founder of Gurugram-based debt relief platform FREED. He says the average loan size for FREED’s customers has risen to Rs 5.30 lakh now from Rs 4 lakh in 2020, and the average age of a borrower has gone up from 29 to 32.

Harish Parmar, Founder of SingleDebt—that has seen a 25 per cent increase in business—warns that this boom could snowball into a crisis as serious as the 2008 US subprime one. “People are struggling to pay online credit they got from BNPL and loans on apps. More due diligence has to be done... If that is not done, then this is a time bomb ready to explode… a lot of irresponsible lending is taking place.”

Digital Lending Surges

Catapulted by the rise in small-ticket lending, India has seen an annual growth of 39.5 per cent in digital lending over the past 10 years. Per a report by IIFL Fintech, India’s digital lending market is expected to touch $515 billion by 2030 from $38.2 billion in 2021, at a CAGR of 33.5 per cent. Do note that most of these are unsecured loans, disbursed without any collateral.

Two things led to this surge: digitalisation and cross-selling. The pandemic helped fintechs shine because they could serve customers from a distance. Subsequently, payment apps such as Mobikwik and Paytm started cross-selling products, leading to easy loans. Today, Bajaj Finserv, Navi, LoanTap, PayMe, SmartCoin are among players that offer app-based loans.

To facilitate lending, fintechs tie up with NBFCs or banks, and leverage tech to streamline the application and disbursement process. Customers can easily apply for loans through apps by submitting the required documents, which are authenticated using a number of digital tools. Often, the loan is disbursed within hours.

The partnership with fintechs is one reason why there has been a spike in unsecured loans of NBFCs; according to a report by rating agency Icra, the number rose to about 23 per cent of the retail NBFC AUM in March 2023, from 17 per cent in March 2021. Per a Reserve Bank of India report, 53 per cent of loans disbursed by NBFCs, and 10.8 per cent of the total amount disbursed, came through digital channels. In the case of banks, only 6.04 per cent of loans and 2.07 per cent of the total amount disbursed was through digital channels.

How do NBFCs benefit? They can reach out to new-to-credit borrowers who are otherwise difficult to find. This is important because as of June 2022, one-third of the retail credit market consisted of new borrowers, and the number has been increasing since. Then there are subprime borrowers—individuals with lower credit scores—who, according to Shukla of PayMe, accounted for 32 per cent of retail loans as of October 2022, an increase from 28 per cent in 2019.

While fintechs offer easy loans, they charge higher interest rates than banks. What, however, attracts most customers to them is the speed with which the loan gets disbursed. And therein lies the problem, say experts. “They (fintechs) should take some time to process the documents and not be under pressure to pay out loans in half an hour because that could mean they are not doing their full due diligence. RBI has to encourage fintechs to do full due diligence,” says Parmar of SingleDebt.

Banks too are focussing on retail loans. Per RBI’s Financial Stability report released in June, retail loans grew at a CAGR of 24.8 per cent from March 2021 to March 2023, almost double the CAGR of 13.8 per cent for gross advances. Further, unsecured retail loans increased from 22.9 per cent to 25.2 per cent, while secured loans declined from 77.1 per cent to 74.8 per cent. This is why RBI has warned that retail loans may become a systemic risk in its Report on Trend and Progress of Banking in India 2021-22.

However, since banks generally have a longer relationship with customers, their due diligence is better than fintechs. “The problem is increasing in the fintech space at a fast clip as there are many new players coming into the marketplace,” says Parmar. Among these players are illegal China-based apps. RBI’s working committee on digital lending found in November 2021 that of the nearly 1,100 such apps available to Indian mobile phone users, nearly 600 were illegal. Such apps usually charge exorbitant interest rates, employ aggressive debt collection techniques, or misuse personal data.

Exercise Caution

Meanwhile, consumption is on rise in the country and has led to a fall in savings. Recent RBI numbers show that household net financial savings in FY23 dropped to 5.1 per cent of GDP from 7.2 per cent in FY22, while annual financial liabilities surged to 5.8 per cent of GDP from 3.8 per cent in FY22.

The good thing is that NPAs as a whole have not spiked yet. “There is definitely a concern that non-collateralised loans are increasing but cases of loan default are low as everything is based on the credit score,” says Madan Sabnavis, Chief Economist at Bank of Baroda. Experts suggest fintechs, NBFCs and banks need to heed the warning signs and be more cautious while lending. According to the TransUnion CIBIL report, the delinquency rate for credit cards, measured as over 90 plus days past due (DPD), reached 2.94 per cent in March 2023, a jump of 66 basis points over the previous year. Similarly, there was a surge in vintage delinquency in personal loans, escalating from 10 per cent in Q3FY21 to 11 per cent in Q3FY22. Loans for consumer durables have also risen to 4 per cent from 2 per cent in Q3FY21. Vintage delinquency is calculated as a percentage of the sanctioned amount on accounts more than 30 days overdue within six months from origination.

There is clearly a need for tighter regulations. A positive development in September 2022 was RBI introducing a comprehensive legal framework to regulate the digital lending ecosystem. Although lending apps don’t fall under its purview, Regulated Entities or REs (banks and NBFCs) engaging with them are obliged to perform a thorough assessment. But despite several measures, complaints have doubled against digital lending apps in FY23, jumping to 1,062, according to a reply of the finance ministry in the Lok Sabha in July.

Meanwhile, the Digital Lenders Association of India(DLAI), comprising more than 90 members, already has a voluntary code of conduct to facilitate customer protection. “We updated it during the Covid-19 pandemic, and are in the process of another update based on the RBI guidelines. As far as the current scenario is concerned, the percentage of bad loans is relatively low and it varies segment-wise,” says Jatinder Handoo, its CEO.

Experts warn that unsecured lending could potentially jeopardise the financial system, especially if platforms take shortcuts. This is especially worrying as there have been instances of firms neglecting proper KYC documentation or credit bureau checks.

The availability of easy loans can do wonders for financial inclusion. But caution is needed—lenders must be cautious about disbursing loans, while borrowers must be careful about how much they borrow so that India’s digital revolution can remain one that the world wants to emulate.

 

@teena_kaushala