Small-ticket personal loans (STPL), which are essentially loans below ₹1 lakh in value, have shone the brightest witnessing a whopping 12X growth in the number of loans sourced per year between FY17 to FY21.  

Within the small loans category, Micro loans below ₹10,000 have grown over 20 times in just five years.  

Data from CRIF shows that lower loan ticket sizes are dominated by NBFCs and Fintech on both volume and value metrics. Until fiscal 2017, public sector banks made up the biggest share of STPLs at nearly 57% in both volume and value, with NBFCs at 20.6% in the volume metric. As on last quarter of FY 2020, NBFCs originated 90.3% of the total STPLs in terms of volume and 68.2% in terms of total loan value. Share of PSBs shrunk to a menial 2.6% and 13.5% in volume and value, respectively, in FY 2020.

NBFCs have driven this growth by the way of loan offerings like buy-now-pay-later (BNPL) and no-cost EMI on all kind of consumer durables being sold under the sun, Travel now and pay later , School fees funding are some of the innovative products .

Being the second-most populous country in the world, a huge 45% of the population belonging to the middle class do not have access to bank loans due to low credit scores. But with the complex lending process and the unwillingness of financial institutions to lend money to low/absent credit scores, people were left with no choice but to borrow from friends or families.

Since there was a lot of vacuum available and with a lot of technological innovations , the new-age lending platforms were born to serve the demand of millennials who were mostly salaried and self-employed, between 25-45 years of age. They had many aspirations, and with the pandemic hitting the country, they also started facing many medical and financial emergencies.

The new-age online lending platforms simplified and boosted lending in India and provided micro-loans to the vast underserved middle/lower-income segments. They were getting good reviews because they were 100% digital, had a rapid online process, instant disbursal, and reduced ticket values (as low as Rs. 5000).

If managed properly, these small-ticket loans increased the purchasing power of people. Let’s say a consumer wants to buy a TV worth Rs. 40,000, but he only has Rs 30,000 with him now. Now he has two options – to settle for a TV of smaller size  or buy later. But with short-term personal loans coming into the picture, he can borrow Rs. 10,000 through a digital lending platform instantly and buy the product of his choice . All that is needed is selecting the loan amount and tenure, uploading the required documents, and getting the money instantly in his bank account.

So, why were they gaining popularity, and what advantages did they give to customers?

Builds credit history

For new borrowers, it came as a huge relief. Apart from supporting their day-to-day needs, these loans build a credit history, which later helped them become eligible for high-value, long-term loans they may require in the future. The platforms keep increasing the Loan eligibility ever time the old loan is repayed

100% Digital

Applying for a loan was never digital before. Instead, a lot of time and energy is wasted on paperwork and intermediatearies who were paid commissions by banks .With today’s technology, new-age lending platforms give loans in an entirely digital format. All you need is a smartphone and internet connectivity.

Quick online process

Remember how people used to plan ahead of time if they wanted to buy something? From the time the loan papers are filed until the time the loan is disbursed, it can take days or even weeks. Because of the paperwork, most of us despise the loan procedure.

But the digital lending platforms only take a few minutes. You just need to download the app and register, give some basic details , upload the documents, choose the loan option and apply, and the funds will be transferred to your account.

Instant Disbursal

With digital lending apps, there is minimal buffer time between you applying for a loan and its disbursal, thereby eliminating the need for human interference and agencies,  making borrowing just a few clicks away. The basic set-up takes a few minutes for registration & uploading the necessary documents for authentication. You can choose from the available options that suit your requirements, apply easily, and receive the funds in your bank account. The instant disbursal feature spiked the demand even higher due to medical emergencies and financial need in the Covid times.

Instant repeat loans

The ease of borrowing and repaying money through online platforms certainly saves energy and time. But, the smaller amount will automatically have a smaller repayment tenure that attracts the buyers for re-borrowing. Once you repay the borrowed amount, you can again borrow another small–ticket loan instantly many times with a higher limit and the process is even easier since you have already submitted all the required details and documents.

Better management of loans

If we look at  this from the lenders view , the digital disbursal has also aided them in better tracking and management of loans thereby reducing need for manpower. Companies were able to verify prospects through AI and credit records through bureau. They were also able to minimise costs and risks using data analytics and geo-tagging.

Some figures showing the growth of personal loan apps in India

• In the personal loan segment, any credit below ₹50,000 is considered a small-ticket personal loan. And the small loans segment has been driving great growth volumes of as high as 150% during 2020 by way of the number of loans disbursed and constantly growing YOY.
• Small-ticket personal loans were not in the limelight a few years  ago, but the loan options are outperforming most lending options today. Being driven by software that fintech institutions and finance companies deploy, they now approve and disburse small-ticket loans based on data analytics.
• The overall size of the small personal loan business can be approximated at around ₹12,000 crores. The bump comes after small loan apps clocked a 77% rise in value compared to a previous financial year, with many app-based lenders entering the market.
• Fintechs and  finance companies are increasingly targeting young, digitally savvy, low-income customers with short-term and small-ticket credit needs but having zero or limited credit history.
• The portion of small-ticket loans in all the personal loans disbursed in the last two years has multiplied around five times. While the small-ticket loans accounted for a mere 12.9% of all personal loans disbursed in 2018, they jumped to around 60% in 2020.
• There has been some moderation since 2020, with most types of personal loans growing faster with the use of technology. However, small loans still account for almost half of the new disbursements made and this is still small considering the country with 1.4 Billion population and majority without access to banks.
• Banks generally extend small-ticket loans to their existing customers with proven credibility and a good track record of cash flow. But unlike banks, loan apps run algorithms and analytics on information gathered from bank statements and social media profiles sent by borrowers, which is less reliable but with limited data they take small bets on the borrower.
• However, India has also seen many apps exploiting personal data and using dodgy recovery practices. And so, RBI was forced to crack down on them and ban some app-based lenders. This has made it difficult for banks and NBFCs to lend with the help of digital platform providers. However the regulations will help the industry evolve.
• Payday loans are loans that are repaid upon the credit of salary. Payday loan providers charge high interest rate, allowing lenders to operate at comfortable  margins.
• While small loan apps have seen considerable growth in their portfolio, the average ticket size of loans has reduced over the last two years, at around 18% year-on-year by 2020. But since the pandemic, the average size has increased by almost 5%.
• As per the rating agencies, there is no problem to the lenders because of retail loans until now. As per ICRA, the collection efficiency or repayments in loans have remained steady until October 2020. After that, however, the collection efficiency has reduced in comparison with pre-lockdown levels. The repayments are in the range of 81% to 95% across retail loans.

Some highlights indicating personal loan growth in India

Below are some of the highlights that show the growth of personal loans in India:

• Per one RBI report, personal loans accounted for 28% of the total bank credit by 2020.
• The last few years have seen high growth in unsecured lending among youngsters.
• The growth rate is the same for personal loans as well as consumer durable loans. One reason for this growth is fintech lenders providing loans either via partnerships with existing banks or NBFCs. This makes it easier for customers to avail an unsecured loan at affordable costs without visiting the bank.  
• Among all the loan accounts, the female borrowers held around one-third of the share in March 2020 compared to around one-fifth share in the last few years. 
• While the loan accounts with banks grew by 17.3% in 2020, showing an increase in bank lending last year, personal loans grew by 28% compared to 33.5% growth during the same period the previous year. 
• With the increase in the number of loans, a drop is seen in the average ticket sizes for personal loans offered by NBFCs. 
• Among the 28% increase in personal loan accounts in 2020, 37% were loan applications from the customers who took a personal loan due to medical and health care emergencies.
• The moratorium period that banks offered is one major factor that helped most of the personal loan borrowers to maintain liquidity of funds while having loans on them.

Important: One thing to keep in mind while taking out loans through digital lending apps is whether or not RBI-registered NBFCs are processing the loans. This will save you from the trap of shell companies operating in an unregulated manner.