According to a report by credit bureau CRIF High Mark, the share of small-ticket loans in personal loans disbursed during the last two years has jumped almost five times. During 2017-18, these loans were only 12.9% of the personal loans disbursed, which shot up close to 60% by March 2020.
A report in ‘The Times of India’ says that small-ticket personal loans, which were always the first choice among borrowers in the same segment a decade ago, are making a comeback. This time, they are being driven by software deployed by finance companies and fintechs to approve and disburse low-value loans based on analytics.
Small ticket personal loans are considered as personal loans of ticket size less than Rs 50,000 and have been observed to drive volumes by as much as 162% Y-o-Y, as of March 2020.
Some of the key findings from the report state that personal loans demand is largely being driven by millennials and young borrowers in the age group 18-30 years. In the last two fiscal years, about 41% of personal loan borrowers were 18-30 years. Two years ago, 27% borrowers were from this age group.
Borrowers <35 years have been the most active in borrowing small ticket personal loans with an increase of 12% in volume share in annual originations in the last 2 years.
Mature customers >36 years, with greater stability in their incomes to afford other forms of secured loans such as home loans, vehicle loans, etc. have been observed to demand lower proportions of personal loans in their credit portfolio.
However, in FY 2020-21, disruptions due to COVID-19 have led to an increase in the share of mature borrowers, while younger borrowers have demanded a lower volume of personal loans. The pandemic has been observed to have had a reverse effect on borrowings with an increasing proportion of >35 years borrowers in originations in FY 2020-21 (till August).
As of March, 50% small loans were of the ticket size of Rs 5,000 or less. “It is a strong indication that concept of checkout finance and pay day loan is catching up," the report added.
The proportion of loans disbursed to those with income of below Rs 3 lakh has grown over the last three years, reaching 69% in new loans in FY20. Non-banking finance companies (NBFCs) have increased their share of loans to this segment.
Here are some of the key highlights of the report:
NBFCs continue to grow in the personal loan (PL) segment in volume terms, doubling their market share in the last two years up to March-end 2020. In terms of volume, NBFCs’ market share in PLs improved from 22.68% in March 2018 to 44.92% in March 2020. Their market share in August 2020 was at 42.16%.
The report says “NBFCs and neo-age lenders (FinTechs) are increasingly targeting young, low income, digitally savvy customers who have small ticket and short-term credit needs, and no or limited credit history customers. These people are generally avoided by the incumbents because of their high perceived risk”.
NBFCs including FinTechs are doing more and more small ticket personal loans business, offering a variety of personal loans to customer segments who may not qualify for personal loans via traditional lenders as well as tailored offerings to the changing preferences of customers.
As per the report, public sector banks continue to dominate the landscape of the personal loan by value, with a share of nearly 40% as of Aug 2020, offering credit to their captive customer base, including in tier II and III cities. In terms of value market share at the end of FY 2020, there is no significant shift in the last 2 years for NBFCs.
Public sector banks and private banks, largely disbursing high-value personal loans or pre-approved loans to other customer segments who may not be banking with NBFCs, have a larger share in the number of disbursements.
Within the personal loan segment, credit of below Rs 50,000 is considered a small-ticket personal loan (STPL). The overall size of the STPL loan business is estimated at around Rs 12,000 crore, after clocking a 77% rise in value terms during the last financial year as several app-based lenders entered the market. Incidentally, small-ticket loans have seen the maximum stress among borrowers, with 9.4% of the loans by value coming under stress.
According to the CRIF High Mark report, while there is growth in the portfolio, the average ticket size has reduced continuously over the last two years, declining by 18% year-on-year by March 2020. As of August 2020, the average size increased by 5% over March 2020
The TOI report points out that the high growth and dodgy recovery practices, exploiting personal data, adopted by some app-based lenders forced RBI to crack down on them in June, making it difficult for banks or NBFCs to lend through digital platform providers. One of the features of payday loans (repaid when salary is credited) is the extremely high rate of interest, hovering around 15% per month. This allows lenders to operate even when delinquencies are at around 10%.
The TOI report adds that “Rating agencies say that there is no problem to lenders on account of retail loans yet. According to ICRA, collection efficiency (repayments) in the loans the rating agency tracks has remained steady in October 2020. However, the current collection efficiency continues to be below the pre-lockdown levels and is in the region of 81-95% across retail loans”.