Ra-ra year for retail loans

Lenders were eager and individual borrowers enjoyed various benefits

The year was a notable one for retail loans. With banks cautious about corporate lending, there was renewed focus to step up lending to the retail segment. Borrowers were also attracted by low interest rates.

Thanks to higher online penetration and interesting credit scoring methods, loan application and approval process became faster and smoother. This also helped first-time loan takers and other categories of borrowers who were avoided in the past.

Low rates

As the RBI cut interest rates, savers cried all the way to the bank, but borrowers smiled all the way from it. State Bank of India, for instance, cut its lending rate for home loans from 9.7 per cent late last year to 9.1 per cent in November. Jewel loan rates from SBI also dropped — from over 12 per cent in January to about 11 per cent. Interest rates on non-collateralised categories such as personal loans also eased. Typically these have a wider spread over the base lending rate and hefty rates were justified on the basis of higher risks. This year, besides lower base rate, lenders’ eagerness to grow their retail loan book narrowed spreads somewhat.

Also, the ability to better bucket an individual’s risk profile — through credit scores, transaction history — helped to reduce rates.

Partnerships by lenders also aided in lowering overall interest outgo for the borrower. For example, it is common for consumer durable loans and car loans to be offered in partnership with manufacturers. Promotions are passed on as benefits to buyers by way of reduced interest rate, deferred payments or longer tenure. The same idea was extended to other categories such as medical equipment or procedure and travel. Thanks to technology-enabled processes, the loan disbursal time has been reduced.

Faster process

A borrower could make an online application and complete the e-KYC process. Lenders used alternate data sources to reduce documentation and disburse loans faster. For example, they could use the GPS in the phone as a surrogate for address verification and replace expensive and time-consuming credit fulfilment practices.

Existing account holders could get approvals for some loans (up to certain limits), in under an hour — a boon for situations such as medical emergencies. Also, it makes pay day loans — where salaried employees can borrow a portion of their salary for 10-20 days, until they receive their salary — a possibility. Online platforms also help borrowers reach out to the right kind of lenders. This helps lower the rejection rates and time spent in seeking new lenders.

Besides existing loans, many new products were launched. Also, unlike in the past, when there was one broad umbrella called personal loan, different flavours were added. Categories such as wedding, travel, home-improvement and medical were created to meet specific needs through different loan terms.

For example, given the high cost of typical Indian weddings, banks such as Central Bank, Axis Bank and State Bank of India as well as NBFCs such as Bajaj Finserv and Tata Capital offer wedding loans. Also on offer for home-seekers is loan to pay the rental deposit.

Borrowers were also freed from rigid repayment terms. Tata Capital, for instance, lets borrowers opt for a step-up or a step-down EMI. There were also loans where only the interest was paid every month and principal repayment was flexible.

Wider reach

Besides banks and NBFCs, peer to peer (PTP) lending platforms connect borrowers with lenders online. Portals such as Lendbox, LenDenClub, CashKumar, i2i, RangDe, Milaap, Kiva and Faircent help loan seekers by providing access to a range of lenders who offer different loan terms. According to an RBI consultation paper, 30 such platforms are operational in India.

Thanks to better credit information, target segments such as first-time borrowers and self-employed — typically not favoured due to perceived risks — also saw improved credit access.

For first-time borrowers, data from alternate sources — information from e-commerce and telecom service providers, regularity of rent and utility payments — is used to assess credit worthiness. Social media information and online psychometric tests are used to assess the borrower’s willingness to repay.

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