Millenials’ smartphone usage could disrupt major businesses over the next three years. (Photograph: Kainaz Amaria/Bloomberg)

Is Debt The New Working Capital For The Millennials?

Back in 2016, New Delhi-based KN Ajit Narayan decided that he was done working for now. After spending two years at a mobile wallet company, Narayan wanted to move on and create a product of his own.

But before that he wanted to take some time off and travel across India. He had some savings of his own but Narayan thought there were better ways to fund his travels.

“I got a Rs 10 lakh personal loan from ICICI Bank for a period of five years and started my trip. I traveled across nine states and 18 cities in the last two years. Now that I am done travelling, I can finally focus on the product I am developing,” Narayan told BloombergQuint.

How does he plan on repaying the loan without a steady income? The 33-year old techie shrugs when asked that. His savings and a portion of the personal loan which hasn’t been used is going towards paying the EMI on his loan.

What do his parents have to say about all this? Sometimes they do get anxious, he acknowledges. On days like that, he simply tells them that all is okay and refuses to discuss his finances any further.

To many in the age group of 20-35 (broadly referred to as the millennials) what Narayan did will seem perfectly normal. But ask someone from his parents or his grandparent’s generation and the reaction may be very different. Back then debt was taken to buy assets. Houses. Cars. At most household consumer durables.

Today, the use of debt has widened. Millennials like Narayan are taking on debt for experiences, clothes bags, eating out and even making sure they can ditch the train and ride home comfortably in a cab.

Arvind Kapil, group head of unsecured loans, home and mortgage loans at HDFC Bank - the country’s largest private bank by assets - puts it well. Debt is the new working capital of the millennial generation, he tells BloombergQuint. If in the past, a personal loan of about Rs 3 lakhs was getting used across two or three large purchases, the same amount is now getting used over 15-20 transactions, explains Kapil.

The millennial generation is definitely less intimidated by credit, adds Rajiv Anand, executive director and head of retail banking at Axis Bank - the country’s third largest private bank. This generation is more leveraged than the generations before them, he says.

The Rise & Rise Of Retail Credit

This changing attitude towards debt is showing up in the numbers.

Total unsecured credit, which includes consumer durable loans, has increased to nearly Rs 6 lakh crore as on April 2018, compared to 1.32 lakh crore in April 2010, shows data from the Reserve Bank of India (RBI) monthly data. The last three years, in particular, have seen a sharp jump.

Over this period, total outstanding retail credit has also risen to over Rs 19 lakh crore as of April 2018, compared to Rs 5.8 lakh crore at the start of the decade. The share of unsecured loans in total retail loans has also risen from 23 percent in 2010 to 31 percent now. Sectoral data prior to 2010 is not available.

The share of young borrowers in this pool is also rising.

According to a report released last year by BCG Consulting, Indian Banks’ Association (IBA) and FICCI, customers under the age of 35 are estimated to have contributed 40 percent of outstanding retail loans by December 2017, as compared with 27 percent in December 2014.

Some of this may have to do with the fact that younger people are entering the formal banking system sooner, which also gives them access to credit products. Data from India’s largest credit bureau - TransUnion CIBIL- shows that millennials now constitute 40 percent of all new bank accounts opened, up from a quarter four years ago.

Harshala Chandorkar, chief operating officer at TransUnion CIBIL, says that most lenders have seen a shift towards younger borrowers. But this trend is still mostly limited to large cities. Borrowers in smaller towns remain more conservative, Chandorkar said.

Arundhati Bhattacharya, former chairman of State Bank of India, says that millennials have much greater access to formal credit compared to generations before them. It is alright to travel on credit or shop on credit, Bhattacharya says. But too much of good thing can be bad, she cautions.

As millennials have the highest access to formal credit than generations before them, they are at risk of falling into debt traps. Millennials need to develop an understanding of when to save and when they can spend.
Arundhati Bhattacharya, Former Chairman, State Bank of India
Is Debt The New Working Capital For The Millennials?

Credit With A Click

Deciding what came first - the availability of easy credit or the demand for it - would be akin to solving the age-old chicken-and-egg riddle. Either ways, the palette of credit options to chose from has widened.

Credit cards remain the easiest option. After a brief hiatus following the 2008 crisis, banks have once started to grow their credit card portfolios. The number of credit cards outstanding have risen to 3.78 crore in April 2018, as compared with 1.78 crore at the end of April 2011.

Sammy, who works as an anchor and emcee for various brands says he has four credit cards. Two for daily usage and two for ‘emergency’ use. He’s never faltered on a card payment but he knows friends who have abused their credit cards, Sammy tells BloombergQuint. The cost of default can be high with the interest cost on outstanding amounts as high as 40 percent in some cases.

Apart from the ability to buy on credit, Sammy loves the loyalty benefits that come along with cards. They got him a pair of bluetooth headphones for free! “Somebody who is young, who is single, really, the world is at his or her feet, you can go out there, spend that little extra buck knowing that you can make it back again,” Sammy says.

Credit cards are one option. But there are many others.

Banks are offering their customers loan approvals in minutes, actually seconds. HDFC Bank offers its own customers the ‘10 second loan’. If you are a customer of the bank and have a pre-approved loan limit, you can access this loan in 10 seconds any time of the day or night.

ICICI Bank claims, on its website, that they will disburse a pre-approved loan in 3 seconds. No paperwork. No security. No collateral. Many other banks offer similar facilities.

Kotak Mahindra Bank offers an option to get a personal loan on your credit card instantly. These digitally processed loans work well for millennials, says Ambuj Chandna, head of consumer assets at Kotak Mahindra Bank. “In a span of just a year, we have seen a gradual to a small rise from 59 percent to 62 percent in personal loans disbursed to those under 35 years,” Chandna tells BloombergQuint. Loan rates on such unsecured personal credit is upwards of 14 percent.

Don’t have a pre-approved limit from your bank?

You can always look for credit on a fintech platform, like peer-to-peer (P2P) lenders, which allow you to get unsecured credit from peers who may have money to spare. According to P2P loan provider Faircent’s statistics, two thirds of its borrowers are under the age of 35 and salaried; three-fourth are married; most are men. Rates of interest on this platform range from 12 percent to 28 percent per annum.

And then there are service providers like taxi aggregator Ola Cabs, which provides Ola Credit, a service where customers can borrow up to Rs 1,000 to book cab rides and repay within a period of seven days. Most of these products are targeted at the under 35-year olds.

Mobile payment firms like PayU are also offering services where customers can buy now and pay later. One such product is aptly termed as LazyPay. The LazyPay platform sees about 20,000 hits a day on its website. Nearly 75 percent are millennial borrowers, Pallav Jain, head of consumer business head at PayU tells BloombergQuint.

Most of LazyPay’s customers borrower closer to the end of the month, when salaries are running out, says Jain.

Siddharth Shamsher is a student at Manipal School of Communication. He lives in a hostel and the mess food isn’t great. So he orders in. When pocket money runs out, he uses LazyPay’s option to buy now and pay later. “They have a feature where I can pay towards the end of the month. Of course it does affect my pocket money because next month I have to adjust,” he tells BloombergQuint.

The concept of payday loans has arrived on Indian shores.

Is The Rising Leverage A Concern?

Hearing stories of how easily debt can be accessed and the varied reasons millenials are taking on debt, you’d be forgiven for asking if rising leverage is a worry.

Bankers say no.

Most say the availability of data from credit bureaus has allowed for increased lending without excess risk.

“All players have always perceived unsecured (credit) as risky. At an industry level, this risk is substantially mitigated by the bureaus. Bureaus are not information providers. They have constructed a social construct of pressure and education that helps you pay on time,” said Kapil from HDFC Bank.

But credit data may not be enough in itself. What it measures is the customer’s intent to repay loans, since a credit score is essentially a culmination of their past repayment record. But what if a customer takes on debt beyond his or her means, denting the ability to repay?

Bankers say that they have devised ways to assess the intent, ability and probability of repayment.

According to the retail banking head a mid-sized private bank, who spoke on conditions of anonymity, lenders are looking at aspects like “velocity of credit”. This is essentially the average time a customer waits before taking a new loan. As the time period reduces, a customer becomes more leveraged quickly and thus more risky. So far, Indian borrowers are not showing any worrying signs on the velocity of credit matrix, the banker said.

According to LazyPay’s Jain, the company creates a ‘trust score’, based on transactions that the customer makes on the PayU platform. This score helps the company shortlist trustworthy borrowers. The company also employs a graded approach, by extending a small loan initially and gradually increasing the amount over time, to ensure that it can establish a repayment record of the customer.

So far, the going has been good. The default rate on personal loans is at 0.5 percent, shows data from TransUnion-CIBIL. For credit card loans, the default rate is at 1.7 percent.

Could risk build up and bad loans rise if there is an economic downturn? Sure. But career-banker Bhattacharya says she has no ‘tolerance’ for those who suggest the need for more checks and balances on personal loans.

Nuclear energy can be harnessed for peaceful purposes as well as for destructive ones. Likewise, freedom of expression is being abused. Does that mean we want it taken away from us?
Arundhati Bhattacharya, Former Chairman, State Bank of India