Unsecured loan concerns: Fintechs explore long-term loans after RBI alert

The Reserve Bank of India’s (RBI’s) recent decision to increase risk weighting on unsecured personal loans has served as a yellow signal for fintech companies offering products such as “buy now, pay later” (BNPL), and postpaid or unsecured small-ticket personal loans (STPL).
 

Fintech players Business Standard spoke to said growth for unsecured personal loans might moderate and not move into the red.

Firms giving loans of more than Rs 50,000 may register growth as against small-ticket size and small-tenure loans.
 

“There will be an upward movement of ticket size for high creditworthy customers. Further, as against offering short-term loans, say, of less than three months, there will be a propensity for lenders to offer longer-term loans if the customer has the capability to repay,” said Ranvir Singh, founder and chief executive officer at RING, a fintech firm.
 

Industry players say there is a need to normalise the surging growth in the segment and arrest any accumulated excesses before they snowball into a bigger problem.“In all these segments at some point in time, excesses are built in, be it credit cards, or unsecured personal and unsecured business loans,” said Anurag Jain, founding member, Digital Lenders Association of India (DLAI), an industry association for digital lenders.
 

“They need to be contained at the right time so that they do not balloon into a bigger problem for the industry. You have seen a lot of lenders going back and cutting down exposure to some of these areas,” Jain said.
 

Fintech participants say as the industry grows and matures, there will be a need to revisit lending models and improve the quality of their portfolio.
 

“Fintechs are bringing in a paradigm shift in the lending industry with no precedent or benchmarks in terms of customer performance or behaviour. There is bound to be a learning curve. Fintech-lending companies are constantly testing and learning from the data about their customer segments to refine their models to improve portfolio quality,” said Sugandh Saxena, chief executive officer, Fintech Association for Consumer Empowerment (FACE), an industry association for digital lenders.

Meanwhile, for the past few months, the regulator has been cautious about the increase in unsecured personal loans, which can spiral into potential bad loans.

According to Credit Bureau TransUnion CIBIL’s report published last month, small-ticket personal loans of less than Rs 50,000 have accounted for 25 per cent of total origination volumes since January 2022. The report noted the proportion of credit-active consumers taking small-ticket personal loans increased to 8 per cent in June 2023 from 3 per cent in June 2019.

In the personal loan segment where the ticket size was less than Rs 50,000, the report observed vintage delinquency — the percentage of loan accounts where repayments have been delayed by over 30 days in the first six months — to be higher than pre-pandemic levels. In Q4 2022, vintage delinquency was recorded to be 10.24 per cent compared to 7.56 per cent in Q4 2019.

“There was some over-leverage building up among customers. Around 16 months back, we started cutting the (credit) line for people, wherever we saw a trace of over leverage building up which moderated our growth and helped us drive credit towards more creditworthy customers,” Singh said.

Similarly, fintech major Paytm last week decided to reduce disbursing small-ticket loans, specifically those less than Rs 50,000. The company said this adjustment would result in a roughly 50 per cent decline in these disbursements, also known as postpaid loans.

That said, fintech participants say delinquencies in the unsecured personal loans segment are high, given the nature of the financial product itself.

“Delinquencies are the lowest in asset-backed loans such as home loans. As one moves towards unsecured loans, the delinquencies are higher. But the higher return that the product gives compensates for this,” Jain said.

DIVERSIFYING RISK

> Demand for unsecured small-ticket personal loans still high

> Fintechs say it’s necessary to ensure customers don't return to informal lending

> Suggest a need to normalise surging growth in the segment and arrest any accumulated excesses in the system

> Required to revisit lending models and improve portfolio quality