India’s Personal Loan Market Is Changing. Not All For The Good

Getting a personal loan has never been easier. A few clicks are all you need. Offers from banks and non-banks crowd your screen. And no-cost-EMIs mean your interest cost may be limited.

The result is that a larger number of personal loans are getting processed, of smaller sizes, and by younger borrowers. That’s according to a study by credit bureau CRIF High Mark, which was released on Tuesday.

The number of personal loans sourced per year has nearly tripled between FY18 and FY20, with growth flattening in the current year. As of August 2020, the personal loan book stood at Rs 5.07 lakh crore, according to the report.

Borrowers Get Younger

According to the data from CRIF, borrowers under the age of 30 have been contributing to higher volumes in personal loans over the last two years.

While in the financial year ended March 31, 2018, borrowers aged 18-30 contributed 27% of the volume of loans originated, the share rose to 41% in the financial year 2019-20. Comparatively, those above the age of 40 contributed 41% of the volume of loans in FY18, which fell to 24% by March 2020.

In the current financial year, borrowers between the ages of 18-30 contributed to 31% of the volume of loans till August 2020, indicating cautiousness among lenders.

“Observed over the last 3 years, NBFCs have continued to focus on lending to millennials and young customers under the age of 35 with a constantly increasing share in annual originations,” the report titled CreditScape said. “These borrowers also have a large role to play in the steep growth of small-ticket personal loans market in India.”

More Loans, Smaller Loans

A host of non-bank lenders are pushing debt for consumption via products like no-EMI loans for consumer durables, payday loans and buy-now-pay-later, among others.

“Over the years, there has been a visible shift in the credit behaviour of personal loan customers, with borrowers moving from a need-based demand to convenience-based demand e.g. checkout financing,” the report said.

This has shown up in the reduced ticket sizes of personal loans. The share of personal loans of less than Rs 50,000 has risen five times in a span of two years, it said.

Wider Geographical Spread

Lenders have targeted tier-III cities and beyond to grow their unsecured loan books in the ongoing financial year.

As of August, outstanding personal loans to borrowers in these cities stood at over Rs 2 lakh crore, higher than the Rs 1.8 lakh crore in metros and Rs 1.21 lakh crore in tier-II cities.

On a year-on-year basis, the personal loan portfolio in tier-III towns and beyond rose 14.5%, as compared with a growth of 10.79% in tier-II towns and about 3% in metro cities.

Low-income borrowers constituted around 87% of the total origination volumes in the ongoing fiscal till August. In the preceding financial year, the ratio stood at 86.5%, while in FY18 it was 73.66%. The income data covers only 36% of personal loan borrowers, data for whom is available with the credit bureau, the report said.

Is This Loan Growth Risky?

As per data in the report, non-bank lenders reported a delinquency rate of 7.58% in the 91-180 days overdue bucket among borrowers who had taken loans worth less than Rs 50,000. In comparison, private banks and public sector banks saw a delinquency rate of 0.41% and 0.44% respectively, for similar borrowers.

To be sure, loans worth less than Rs 50,000 make up only 2.7% of the total unsecured personal loans portfolio, the report said. As such, the impact on the broader banking system may be more limited.

Overall, loan delinquencies as a share of volumes have deteriorated from 0.9% in March 2018 to 2.64% in August 2020, in the 91-180 days past due bucket. This is largely due to the surge in small ticket size lending to risky customer segments, the credit bureau said.

However, as a share of the loan , the delinquency rate in the 91-180 day bucket stood at 0.61% in August 2020 for all lenders, as compared with 0.52% in March 2018.

In order to cope with the rising defaults, most lenders are mapping new strategies to put more effective collection mechanisms in place, specifically targeting small ticket borrowers, as the lockdown and the six-month moratorium is lifted. Many public sector banks have also offered top up personal loans to their borrowers to tide through these trying times.

CreditScape Report, CRIF High Mark