The second decade of the 21
st century has seen significant growth in the consumer credit market, in which a major proportion has been contributed by unsecured loans. In fact, unsecured loans growth has been four times than that of the overall growth of bank credit in the last couple of years. According to a recent Crisil Research report, unsecured lending, mostly comprising credit card loans, education loans, SME credit and personal loans, among others saw a compound annual growth rate (CAGR) of 27 percent between FY15 and FY18.
Unsecured credit has always been an attractive option for borrowers since they can avail credit without any collateral, but the lenders shied away from the market due to perceived higher credit risk. Today, the scenario has changed as lenders are well equipped with better tools and technology to assess the associated credit risk and hence, now are active in the market to earn higher interest rates.
Some of the factors that have led to the phenomenal increase in unsecured loans are as follows:
Emergence Of Non-Banks With Flexible Products And Services
Shadow banking system comprises of Non-Banking Financial Companies (NBFC) and Fintech companies which are regulated by the Reserve Bank of India (RBI) and operate in niche segments. These niche customer segments are customers that are under-served by the traditional banking system. Given high competitive intensity in the prime and safer customer segments from banks and high cost of funds for NBFCs, the latter now focus on segments that were traditionally perceived to be riskier by banks.
NBFCs compensate high cost of funds by earning higher yield coupled with higher operative efficiency and strong risk management systems. In the
September 2018 quarter, personal loan sanctions grew at a rate of 59 percent followed by consumer loans at 51 percent and credit cards at 28 percent, between 2017 and 2018. While for banks, credit cards have been at the forefront of their growth in unsecured credit, it has been personal loans and consumer loans that have led the growth for NBFCs.
Today, while securing a loan, most formal banks ask for a minimum credit score of 700, whereas various top private banks keep it even higher - 750. On the other hand, NBFCs may give loan to people with relatively low credit score subject to them passing other evaluation criteria of NBFCs. In addition to sanctioning loans on low credit scores, NBFCs also give several relaxations based on factors like the type of residence, employer categorisation, and income level of the borrower. Moreover, these banks provide instant loans to low-salaried individuals with income as low as Rs 20,000 per month, in comparison with Rs 30,000–40,000 required by top private banks
NBFCs operate with a wide financial radar. For example, they will finance individuals living in shared accommodations and those employed with unlisted companies, which is not possible in case of banks as they mostly reject applications of such individuals despite their good credit score. In addition, NBFCs may advance credit to those with less than one year of work experience as well, whereas the top banks ask for at least two years of experience.
Technology Enabled Products And Processes
Technology has been a key enabler for NBFCs and Fintech companies in their journey to build a successful business model for their niche segments. Some of the recent times changes which include mobile banking, online loan application and approval process, e-kyc, use of handheld devices, automated credit scoring tools, digital document upload and verification etc. have all helped financial entities in building cost effective and customer centric platforms. Using technology, these entities have improved the credit evaluation process and have managed to ease off the lending process with hassle-free online submission of documents. Now it only takes few minutes for an applicant to fill out his/her detail online and get instant credit within 48 hours as compared to the high turnaround time (TAT) of private banks, which is usually 7 days.
Digitalisation And Consumer Data
Credit bureaus have played the most crucial role in ensuring whether the credit is provided to the right customer by calculating the credit score based on past credit history received by them from banks and NBFCs. A credit score is calculated by weighing five factors, these are payment history, the total amount owed, length of history, types of credit availed till now, and new credit.
Coverage of credit bureaus have reached an all-time high and is growing rapidly, which gives a sense of comfort to the lenders to extend unsecured credit to consumers with a healthy score. Further, credit bureaus allow to develop intelligent algorithms to predict customer behaviour based on the past performance of a portfolio of similar customer profiles.
Today, several shadow banks have leveraged consumer data through digital technologies, to create customised financial products for the consumer. NBFCs and Fintech companies deploy real-time risk evaluation algorithm by leveraging digital technologies such as artificial intelligence, data analytics, machine learning to read customer behaviour and then check the credit profiles of the customer before approving the loan. These algorithms not just use the traditional data from credit bureau but also integrate insights from an alternate data source such as utility bills, social media profiling, SMS profiling and online behaviour to build a comprehensive credit profile of any prospective borrower.
The Road Ahead
From the consumer point of view, gone are the days when securing a loan was a tedious and long-drawn process for most people, and mostly limited to the big borrowers. Now factors like low income, low credit score or inadequate income documents do not disqualify someone automatically from getting an unsecured loan. This has significantly increased the popularity of unsecured lending, both for lenders and borrowers. However, as the pace of unsecured lending continues at a scorching pace, it becomes extremely essential for NBFCs to be mindful, disciplined and innovative when it comes to underwriting credit.
Gaurav Gupta is co-founder and CEO of Myloancare.in