With over 1.3 billion people, India has one of the world’s largest and most complicated credit markets. The need for retail lending is increasing as wages and consumption rise. The credit landscape in India is constantly changing, with a shift in consumer taste, a change in demand toward low-interest personal loans, growing use of digital platforms, and the introduction of non–traditional lenders into the ecosystem.

The loan market in India was valued at 156.9 lakh crores in March of 2021, representing a 100% increase from FY17 to FY21. Retail and commercial loans account for 49% of overall lending in India, while microfinance accounts for 2%.

There has been a trend in small-ticket loans from FY17 to FY21. Despite a 2X rise in active retail loans, average balances per borrower have remained constant. Borrowers with four or more active retail loans are increasing, while those with one or two retail loans are decreasing.

The major loan categories and their performance from FY17 to FY21:

• Small Ticket Personal Loans (STPL 1 Lakh) are a significant part of the Personal Loans market, accounting for 50% of total volume in March 2021. NBFCs or Fintechs dominate the Small Ticket Personal Loans market, whereas Public Sector Banks and Private Banks dominate the entire Personal Loans market. From FY17 to FY21, overall Personal Loans saw a 2.3X increase in originations by value and a 3.8X increase in originations by volume. In contrast, Small Ticket Personal Loans saw a 3X increase in originations by value and an 11.5x rise in originations by volume. As a result, the average ticket size of personal loans has decreased by 40%, from 2.4 lakhs in FY17 to 1.5 lakhs in FY21.

• From FY17 to the covid pandemic, consumer durable loan originations increased 2.5X in value and 3X in volume. Consumer durable loans are mainly provided by non-bank financial companies (NBFCs). As a result, the average ticket amount dropped from 21,000 in FY17 to 17,000 in FY21. In FY21, 54% of durable consumer loans were given to people under 35, while 34.5% were given to people with no credit history.

• From FY17 to FY20, Two-Wheeler loans originations increased 1.8x in value and 1.2x in volume. However, it declined in FY20 due to the Covid epidemic. NBFCs control the majority of two-wheeler loans. From 57k in FY17 to 60k in FY21, the average ticket size increased 20%.

Figure1: Personal Loan Origination-Ticket Size

Source: How India Lends 2021 Report (crifhighmark.com)

Figure 2: Small Ticket Personal Loans- Originations Summary

Source: How India Lends 2021 Report (crifhighmark.com)

COVID-19 outbreak in 2020 impacted borrowers’ behavior patterns, especially in the consumer market, which has lasted into 2022. As a result, between March and May of 2021, small-ticket loans increased by two to seven times, owing primarily to solid millennial demand.

Much of the demand is driven by COVID-related short-term expenses, aided by the easy availability of credit. In addition, the devastating second wave has given rise to a plethora of new reasons to take out small, short-term loans. Job losses and salary reductions, unanticipated medical emergencies, top-up plans or the purchase of new health insurance policies, rent deposits, and other expenses fall into this category.

The reduction in demand for travel-related loans and the rise in demand for medical emergency loans indicate the shifting patterns. According to TransUnion CIBIL and Google research, more than 60% of all personal loans originated in Q4 2020 were for less than Rs 25,000.

In 2020, 49% of first-time borrowers were under 30, 71% were from non-metros, and 24% were women, demonstrating the diversity of borrower profiles. In addition, small ticket personal loans under Rs 25,000 have increased from 10% in 2017 to 60% in 2020, as evidenced by searches such as ‘phone on loan’ and ‘laptop on EMI.’

The average ticket size of Personal Loans has decreased by 42% from FY19 to FY21, owing to NBFCs’ focus on lower ticket loans. Subsequently, the Small Ticket Personal Loan portfolio makes up only 4% of the credit bureau’s mass-market division, but it accounts for 62% of total volume.

The majority of STPL, consumer durable, and two-wheeler loans are taken up by people under the age of 25, implying that older people take out other loans such as business loans, affordable housing, and commercial vehicles. People now prefer to spend on low-value transactions, which is another explanation for the rise in small-ticket loans. As technology facilitates greater digital access, it aids fintech lenders in identifying, contacting, and connecting with these new customers.

Furthermore, first-time borrowers have virtually no credit history. As a result, these groups have the most difficulty in obtaining large-ticket loans from traditional lending sources like banks and older NBFCs. It is because banks see applicants with no credit history as risky customers.

Fintech lenders, unlike traditional credit channels, do not rely primarily on formal credit records to assess risk; instead, they use alternative data sources such as bill payments, usage of other applications, bank transaction history, and so on. Following that, loan disbursements progress quickly and without a hitch.

According to the TransUnion CIBIL-Google research, the speed of disbursement and convenience remain the trademarks of such loans. Besides, technology-enabled fintech lenders are rewarding borrowers who make timely payments.

Meanwhile, while consumer borrowing habits have begun to shift in recent years due to digitalization, the pandemic has accelerated the process. According to a survey by CRIF India, small-ticket disbursements have increased fivefold over two years.

During the previous two fiscal years, 41% of customers who took out personal loans were between ages 18 and 30. However, this age group accounted for only 27% of all loans two years ago. Interestingly, most borrowers who take out loans under Rs 50,000 are from low-income families.

As a result of these trends, new-age NBFCs and fintech start-ups prefer to target young, low-income, but digitally-savvy consumers with small-ticket, short-term loan needs and a little or no credit history.

Finally, because millennials are more likely to be loyal to their preferred lenders, the relationship between them and new-age lenders is a win-win situation for both parties.