India today stands tall as one of the most dynamic markets globally with a strong economy, a young population, and a gold-standard digital infrastructure. The last few years have been an exciting time for India’s financial services space, with payments leading the way, building a case-study for the world to see.
I strongly believe the next 5 to 7 years would belong to lending as a strong and world-class ecosystem would come into place. While the consumer credit market continues to be deeply under-penetrated with only ~5% of India’s population having a credit card and a household to GDP ratio of under 15%, we have the railroads in place that are set to usher in the next phase of strong growth. There may be some scepticism around the industry’s growth in the short-term due to changes in the regulatory environment, the following trends would emerge strong to lead the industry’s growth:
1. Rapid digitization would boost digital lending: While the pandemic led to a severe jolt to the lending industry, it also helped it leapfrog at least 3 to 5 years, with respect to digital capabilities. Over-reliance on physical and paper-heavy processes led to a sudden and deep halt for several months in 2020, resulting in a realisation for the entire industry of the need to build digital infrastructure. Since then almost all large Banks and NBFCs have strongly focussed on bringing in end-to-end digital processes, and today, the industry is much more robust and anti-fragile, with greater ability to withstand strong external challenges. Several consumer segments today can access unsecured loans and credit cards seamlessly, through completely digital processes.
India’s burgeoning internet-savvy population with a preference for digital only channels have resulted in strong growth for sectors like e-commerce, food delivery and digital payments within financial services. Over the next few years, we can expect to see a similar trend within lending, with digital lending growing rapidly and taking a larger size of the pie in overall lending.
According to a Google Temasek & Bain Report, digital lending contributes ~12% of the industry’s total unsecured loan disbursals and is expected to reach ~40% by FY 2030, becoming an even more significant part of the country’s consumer credit market.
2. The new data ecosystem would lead to seamless processes and expansion of the industry: A key roadblock that was holding back the penetration levels of consumer credit in India was the unavailability or difficulty in accessing relevant consumer data for large segments. However, over the last decade, India has built what is probably the world’s best digital infrastructure through Aadhaar and IndiaStack – that have already led to exponential growth in sectors like digital payments.
Now, with initiatives like GST, Account Aggregator and more mature credit bureaus coming into play, India’s new data ecosystem has set the base for long-term and inclusive growth of the lending industry.
The country’s data-rich ecosystem would be a key catalyst leading to innovative and strong underwriting models at lower costs. With the advent of advanced underwriting models, large Banks and NBFCs can make more informed and accurate decisions, mitigating risks and enhancing overall efficiency. This would not only streamline lending processes but also empower the industry to expand its services to traditionally underserved segments.
As the landscape continues to evolve, a strong data-driven approach is likely to result in better accessibility and affordability, also leading to inclusion.
3. Progressive regulations would lead to a more sustainable long-term growth for the industry: With the lending industry evolving rapidly, the RBI has been proactive and progressive, helping the industry expand and protecting the consumers’ best interests. Its decision to bring in V-KYC before the pandemic, for instance, has gone a long way in helping lenders build more secure and frictionless processes, leading to faster turnaround time.
The regulator time and again has stepped in to check any systematic risks and protect both the interests of consumers and the overall industry. While some may lead to short-term challenges for certain type of lenders or consumer segments, the regulator’s moves have been for the long-term good for the industry.
Also, the fundamentally good Fintechs, who manage risk in the right manner with strong risk models in place, would continue to grow. There may be some moderation in growth in the short-term in phases, but that is part of evolution for any industry in the world.
4. New, deep and innovative partnerships would emerge across the industry: When Fintechs first started emerging, many saw them as competitors, to large Banks vying to take market share. However, what has emerged in the last few years in India’s lending industry is a more collaborative and complimentary model, where both Banks and Fintechs are teaming up and combining their inherent strengths, to solve real consumer needs at scale and create a win-partnership. We have already seen the impact Fintechs have had in sectors like payments and wealth management, through their technology prowess and focus on delivering a seamless consumer experience.
Today, there are multiple use cases across the lending industry as well, involving Bank-Fintech collaboration, where Banks with their capital, trust and consumer base are working with Fintechs that have agility, cutting-edge technology and customer-centricity, to build innovative lending solutions. Most large and mid-size Banks today are strongly focussing on elevating their experience for their consumers as well as acquiring new ones.
Over the next few years, we would continue to see deeper and innovative Bank – Fintech partnerships across the lending ecosystem, that would not just elevate banking and lending experience, but would solve niche problems and add value to the ecosystem.
5. Access to credit would ease for underserved consumer segments, leading to a more inclusive ecosystem: India’s severe credit under-penetration is caused by the lack of access for large segments like New to Credit, MSMEs and sub-prime. Before the credit bureaus came to India, these segments were catered to by the big Banks and NBFCs. However, post the 2008 recession and when lending institutions started facing losses because of growing share of NPAs, they closed the doors on these more risky segments. For the next 10-12 years, Banks and NBFCs largely catered only to super salaried prime and prime consumers – those with strong credit history, stably employed and residing in the top 100 metros.
However, in the last 5-7 years, the lending landscape in India has been rapidly transforming, due to an internet savvy population with large digital footprints, gold-standard digital infrastructure, more mature credit bureaus and the new data ecosystem. Today, the lending ecosystem is strongly placed to truly innovate and cater to the credit needs of the credit-starved segments of the population through strong and sustainable under-writing models. And as digitization gets more prevalent on ground, distribution of credit would also get easier across smaller cities and towns, at lower costs.
Over the last few years, we have seen several Fintechs lending to certain sub-segments within the New to Credit and self-employed population, through innovative lending models. And we should see this trend continuing, and can expect to see the credit gap shrinking consistently, with access to credit easing for these segments, leading to a more inclusive lending ecosystem.
Overall, India’s lending industry is perhaps in its most exciting phase, with a massive market opportunity ahead, and we can expect a digital-led superior consumer experience, innovative products, seamless processes along with wider accessibility for consumers across the credit spectrum to continue emerging over the next few years.
An edited version of this article was published in Moneycontrol on Dec 29, 2023