Consumer loans in India have grown at a rapid clip in the last few years. The retail lending balances touched Rs 89 lakh crore, surpassing corporate lending, which currently stands at about Rs 74 lakh crore, according to a report by non-banking finance company InCred Finance.
Retail loans now constitute close to 46 per cent of the overall credit in the economy. The biggest growth driver among retail loans has been consumption loans; segments like gold loans, car loans, personal loans, two-wheeler loans, consumer durable loans and credit cards have grown at more than 25 per cent, the report observed. Overall, even on a higher base retail loans have grown at 22 per cent, which is way faster than the 14 per cent growth in corporate loans.
Within the consumption loan segment, personal loans has been the largest segment with outstanding balances of about Rs 11 lakh crore. This, according to Prithvi Chandrasekhar, CEO, consumer finance and risk analytics at InCred Finance, has been driven by a huge growth in small-ticket personal loans, which are essentially loans of less than Rs 25,000. Such loans have seen a four-fold rise in the past two years alone. Even traditional bigger ticket size personal loans, where underwriting standards are more stringent, have doubled in the last two years.
"Half of all consumption loans are in the personal loans category," said Chandrasekhar.
He feels an increase in supply, essentially the emergence of many players who are offering such loans to people who previously didn't have such access, is the major reason behind the jump in small ticket loans in the last couple of years. In the last few years, there has been an emergence of many fintechs offering digital lending products.
Several startups are just distributors or facilitators of such loans in tie-ups with other registered entities.
This surge in retail loans, and in particular unsecured personal loans, hasn't gone unnoticed. The Reserve Bank of India last month tightened norms around retail loans. It raised the risk weights on such loans, meaning banks and NBFCs would have to back retail loans with more capital.
According to Chandrasekhar, this move will lead to a rise in cost of funds for the lenders. But, he also feels that in the backdrop of RBI's digital lending guidelines, there will be a shift in business from loan providers to the banks and NBFCs that actually provide the loans.
"RBI's digital lending guidelines make a very clear distinction between regulated entities (RE), which are banks and NBFCs and loan service providers (LSPs), some of which are not exactly in the loans business, but originate lot of personal loans that can be booked on NBFC or bank balance sheets. No LSP can offer a FLDG (first loss default guarantee) of more than 5 per cent to an RE. The delinquencies in small ticket personal loans are over 10 per cent, so can't be fully covered by an LSP from a FLDG viewpoint. That will naturally contract the business the LSPs do," he said.
With the RBI's nudge and worsening risks, there is likely to be a shift away from the small ticket personal loans segment, towards loans, where there is far more due diligence. In the process, banks and NBFCs are expected to take away some of the market share from the LSPs.
Even as the RBI has tightened the norms and the base is already high, InCred expects consumer lending will continue to grow at around 15-20 per cent annually in value in India.
"India's economic growth story continues to outshine the world and create a huge demand for credit that serves a genuine need in customers' lives. At a macro level, the opportunity in consumer finance remains an immense one," said Bhupinder Singh, Founder and Group CEO of InCred.
