The rise of small loans in times of COVID
The COVID-19 outbreak in 2020 impacted borrower behaviors, especially in the consumer segment, which continued into 2021.
As a result, between March and May of this year, low-cost loans increased two to seven times, mainly due to strong demand from millennials.
Much of the demand is due to short-term expenses related to COVID and supported by the easy availability of credit. The serious second wave triggered a host of new reasons to avail of small, short term loans. These include job losses and pay cuts, unforeseen medical emergencies, supplement plans or the purchase of new health insurance policies, refresher course fees, rent deposits, etc.
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The changing trends are reflected in declining demand for travel-related loans and an increase in those for medical emergencies. Regarding short-term loans, the average ticket size is Rs 25,000 while for BNPL (buy-now-pay-tard) products, it is less than Rs 5,000. However, these loans are now under scrutiny as further pressure on the economy could lead to an increase in defaults.
Conversely, monthly loan disbursements have hit pre-COVID levels. In both subways and non-metros, the demand for new loans is equal, as the current financial stress also affects city dwellers.
Given the evolution of demand and the risk profile of consumers, interest rates have become more dynamic to take these parameters into account. According to a report from TransUnion CIBIL and Google, as of Q42020, the origination of over 60% of all personal loans was less than Rs 25,000.
Testifying to the diversity of borrower profiles in 2020, 49% of first-time borrowers were under 30, 71% were non-metro and 24% were women. Highlighted by research such as ‘phone on loan’ and ‘laptop on EMI’, small loans under Rs 25,000 have increased from 10% in 2017 to 60% in 2020.
Another reason for the increase in low cost loans is that people now prefer to spend on low value transactions. Additionally, as technology promotes better digital access, it helps fintech lenders locate, reach and interact with these new customers.
Plus, first-time borrowers such as Gen Z and Millennials have virtually no credit history. As a result, these cohorts find it more difficult to obtain large loans from conventional sources of credit such as banks and the former NBFCs, who are reluctant to lend to applicants with no credit history due to their perceived risks higher.
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Since traditional lenders rely heavily on in-person engagement with customers and formal credit histories, including bank statements and RTIs, those who don’t have the same turn to digital lending platforms .
Unlike conventional credit channels, fintech lenders do not rely solely on formal credit records and instead assess risk using alternative data sources such as bill payments, use of other applications, history of banking transactions, etc. Subsequently, loan disbursements occur quickly and transparently.
Immediacy and loyalty
The TransUnion CIBIL-Google report notes that since disbursement speed and convenience remain the hallmarks of these loans, 97% of all personal loans from digital-native lenders are below Rs 25,000, which is the largest share of this segment.
Additionally, the report notes a noticeable increase in demand for credit from non-metros – acting as the source of 77% of all retail loan applications in the year 2020, including level regions. 2 and beyond. Of these, 70% of the total inquiries came from existing credit borrowers.
This is one of the main reasons tech-savvy cohorts, including millennials, prefer to approach fintech lenders for short-term or immediate needs.
Indeed, fintech players are known to offer instant approvals and immediate disbursements thanks to their fully digital integration system. Additionally, tech-backed fintech lenders reward positive borrower repayment behavior.
Meanwhile, although consumer borrowing behavior has already changed in recent years due to digitization, the pandemic has accelerated the trend.
Taking into account a two-year delay, small note disbursements increased five times, according to a report by CRIF India.
In the past two years, 41% of consumers using personal loans were in the 18-30 age group.
Just two years ago, this age group represented only 27% of borrowers. Incidentally, most of the borrowers with loans under Rs 50,000 come from low-income families.
Given these trends, NBFCs and new age fintech start-ups prefer to target low-income but digitally savvy young consumers with short-term, low-cost credit requirements, with little or no credit history. .
Finally, thanks to their greater propensity to be loyal to their favorite lenders, the relationship between millennials and new-age lenders is a winning proposition for both parties.
(The author is CEO and Founder – mPokket.)