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Gaming consoles, gifts for his girlfriend and overseas holidays are big-ticket expenses. He draws Rs 45,000 salary from his startup, with periodic bonuses from game wins. His monthly credit card payments often add up to Rs 1 lakh. So, he revolves his credit. “On one I pay the entire outstanding. On others, I pay enough to avoid default,” he says. Zero-cost equated monthly installments (EMIs) are a weakness. That’s how he stretches his income. “I don’t know how to save,” he admits. He plans to invest in a house when he wins a big championship bonus next.
The contrasting financial habits of the Basus are an example of what’s playing out across the country — setting aside our traditional aversion to debt, young Indians are saving less and borrowing more, sometimes at exorbitant interest rates under terms that they don’t fully understand, to fund a rosy lifestyle.
But it’s more than that. This generational shift in attitudes has intersected with a massive digital disruption in the business of lending, causing an expansion in capacity and a drop in costs, allowing companies to bring more and more people into the ambit of formal credit.
Within this large trend, there are five discernible shifts. First, lending is moving online — a person in need of a loan today is far likelier to fill up a form on a website than walk into a bank branch. Second, a raft of fintech firms have sprung up, offering all kinds of convenience in accessing credit. Third, young consumers identify with their brand ethos, with a much more accessible feel and aura of transparency, rather than the imposing facades of traditional banks. Fourth, even as demand for secured loans — housing loan, loan against property, and so on — are on a decline, unsecured credit, such as credit cards and personal loans with high rates of interest, is booming. And, fifth, demand for credit is increasingly coming from non-metro cities and towns.
“At a very macro level, our economy is moving away from high savings-low leverage to low savings-high leverage (at the household level),” says Sunil Sinha, principal economist, India Ratings.
The shift is geographic, too. “The biggest growth is coming from millennials and non-metro consumers,” says Anand Parameswaran, executive vice-president, Insights Division, Kantar. Between 2016 and 2018, the number of millennials availing a new credit card or loan grew by 58%, compared with 14% for non-millennials, says TransUnion CIBIL, a credit information company. A syndicated Kantar Banking study reveals that credit card penetration in non-metros is growing faster — 12% as against 4% in metro cities in 2019.
Data from CIBIL shows that while growth in new accounts in secured categories such as home loan (-13% in Q3 2019 over Q3 2018) and auto loans (-1%) is turning negative, unsecured categories such as personal loans (133%) and credit cards (21%) have been surging. Banks have been preferring to make retail advances rather than corporate and industrial loans as bad loans in those sectors mounted. In December, the Reserve Bank of India (RBI) cautioned banks against the trend, asking them to offset risk concentration (growth has begun to soften in this segment now). This has happened even as an estimated 2,000 fintech startups and some 300 digital lenders are stepping on the gas. Credit Vidya, a startup that assesses credit-worthiness using the digital footprint of customers says it has seen quarterly enquiries from banking institutions quadruple from 5 million to 20 million in the last two years.
Deepening footprint of digital transactions — from digital payments to GST — and advanced tech mean most of the work in assessing the risk in a loan can now be done by an algorithm. “Using data, our artificial intelligence-machine learning-led algorithms can impute with a fair amount of confidence a customer’s credit worthiness, her intent and future behaviour. It has improved our ability to assess credit risk in less time and cost, thanks to lowering computation costs,” says Anup Bagchi, executive director, ICICI Bank.
Credit bureaus such as CIBIL and Experia maintain customers’ credit scores, enabling, in many instances, pre-vetted instant loans. “Digitisation has broad-based credit. Despite the big growth, delinquency has barely increased. Credit information is helping lenders vet customers and manage risks well,” says Harshala Chandorkar, COO, TransUnion CIBIL.
The Enablers
Credit these days is available just about anywhere. A trio comprising lenders (shadow banks, digital lenders, fintech players), shopping websites and businesses (sellers of both products and services) are coming together to offer attractive credit schemes and stoke consumer demand at just about any point of purchase, whether online or brick-and-mortar. Zero-cost EMI is their trump card. “For consumers, credit has been recast as savings. Zero-cost EMIs have not just normalised credit but also made consumption today on tomorrow’s income feel more rational,” says Santosh Desai, CEO, Future Brands. Often, manufacturers whose goods are being sold absorb the interest cost of such offers as part of their marketing expenses. “Breaking down a large payment into smaller chunks makes it easier and hassle-free for customers,” says Gaurav Sharma, founder of new-age bank Atlantis.
Traditional NBFCs such as IIFL, focused on secured lending, are partnering with startups such as Paycent, KrazyBee and Byju’s, to grow the unsecured portfolio. (Byju’s, an edtech startup, extends small loans to help consumers pay for their products.) “Our digital business, now at 5%, is growing at a faster clip,” says Sumit Bali, CEO, IIFL.
Fintech startup CASHe offers short-term credit of 2-to-12 months. CEO Ketan Patel says it uses a combination of a customer’s credit scores, digital footprint and insights from social media accounts to vet them. Every month, he extends 20,000 new loans with an average ticket size of Rs 40,000 and average tenure of four months. About 95% of his customers are 24-34 years old.
Even as lenders are dealing with customers who are new to credit altogether, help has arrived in the form of new-age credit bureaus, such as the startup Credit Vidya. “For people with no credit scores, we help create an alternative one and help them take loans,” says Abhishek Aggarwal, cofounder. They scan customers’ digital footprint using AI and data analytics to vet creditworthiness. With smaller loans and shorter credit cycles, “these startups are able to understand behavioural patterns within a shorter timeframe,” says Vivek Belgavi, partner (fintech leader), PWC India.
Shopping websites are by far the biggest cheerleaders. Amazon offers EMI schemes from 25 lending partners, and three of every four customers of large appliances use it. Vikas Bansal, director, emerging payments, Amazon Pay, says: “Zero-cost EMI is used frequently and has grown five-fold in two years.” Flipkart Pay Later scheme allows buyers to pay by the 10th of next month at no extra cost. Flipkart’s Cardless Credit offers Rs 1 lakh credit to shop for large ticket items. “These offerings make online payments easy, affordable and expand access to tier-2 and -3 markets,” says a Flipkart spokesperson. MakeMyTrip offers zero-cost-EMI travel plans with products such as TripMoney targeted at international travellers. “EMIs help make travel affordable. We have seen that customer spend increases 2x under zero-cost EMI plans,” says Rajesh Magow, group CEO, MakeMyTrip.
Macro Ripples
This retail credit growth has larger implications for the economy. “These are structural shifts. We will see access to credit and financial inclusion go up,” says DK Joshi, chief economist, CRISIL. At a time when consumer demand is weak, retail credit has helped. It also has an impact on India’s household savings rate, which is coming down. With insufficient domestic savings, India will have to lean on foreign funds to finance investment, says Joshi.
India’s rising household debt and lowering savings rate must be seen in a global context. “India’s household debt is at its highest. But in other economies, it is way higher. We have barely entered double digits,” says Sinha of India Ratings. As per IMF data, household debt for China and the US stands at 54% and 76% of the GDP, respectively. India’s is at 11%.
Jahangir Aziz, head, emerging market economics at JP Morgan, makes two important points. “In recent times, household credit has risen while it has declined for the industry. Granular data is unavailable but I have a feeling consumer loan at least partly is disguised loan to MSMEs.” Two, he feels that Indian policymakers should rethink being so concerned about lowering savings rate and retail credit expansion. “I don’t agree that savings is good and consumption is bad,” he says.
Lending in India, from being mostly collateral-based, is now seeing the rise of unsecured credit, with NBFCs and fintech firms leading the charge. A Kantar banking study reveals that credit card ownership and unsecured credit among 21-35-year-olds have jumped in the last three years. “Retail credit is good for the economy but it also runs the risk of bad loans rising,” says Madan Sabnavis, chief economist, CARE Ratings.
Irrespective of what policymakers might want, expect retail credit boom to continue. “India is still a nascent and under-penetrated market with 230 million credit-eligible customers, 50 million credit cards and just 37 million consumers,” says TR Ramachandran, group country manager, India and South Asia, Visa. “The biggest growth is in the 25-30 years age group,” he says. Fintech startups, which issued 40% of all personal loans in the US in 2019, compared with just 28% by banks, will play a critical role. “In India, new digital credit is just 1%. Credit landscape is undergoing a revolution,” says Sharma.
Are We Ready?
A big population of young people, with limited exposure to banking and credit are now being bombarded with mouth-watering deals, easy credit, benefits-packed credit cards and irresistible discounts. Things can go south pretty quickly.
Like Chandigarh-based Tarun Gill, 25, who is new to the world of credit. “In my village in Punjab, people used to borrow from each other instead of a bank.” Now, working for three years, he has a credit card with a credit limit of Rs 1.5 lakh. Last year, he ran up a bill of Rs 60,000 buying gifts for his girlfriend. “Till today, I have not been able to pay back. I have stopped using that credit card,” he says. Meanwhile, interest accrued is rising sharply as he rolls over the credit, paying just the minimum. He hopes to settle the dues soon with his upcoming performance incentives.
Mumbai-based Agnelo Rodriguez, 42, a private sector executive, knows how bad it can get. His love affair with credit cards began about eight years back and, at its peak, he held five cards. Free credit cards with no annual charges initially felt harmless. “I didn’t bother to understand the charges fully,” he says. Soon, his credit cards funded his impulsive expenses — shopping, birthday parties and large-ticket items such as a television set. “When the bill was huge, I would opt for the ‘pay minimum’ amount, not realising the kind of interest I was paying,” he says. Once, he took out cash on his credit card to pay his home loan EMI. Soon, he found himself in a vicious debt trap, running up an outstanding amount of more than Rs 8 lakh, which was far beyond his means to pay. Somehow, with help from friends and family, he settled the dues two years ago. “I don’t want to touch credit cards ever again,” he says. Even zerocost EMIs don’t tempt him. “Now I buy only if I have money in the bank. Instead of making it look so rosy, I wish somebody had educated me on the flipside of credit cards.”
Although very small right now, startups such as Creditbazzar, KrazyBee and Exceedcash offering payday loans are growing rapidly in India. These are ultra short-term (7 to 30 days), unsecured, app-based loans often offered within 60 minutes, at times at a hefty 1-1.5% interest rate per day (works out to annualised 365%-plus interest rate), against credit card’s 2-3% on monthly basis for rolled-over credit. Reportedly, about Rs 400 crore is being disbursed by payday loan companies every month.
Payday loans have been banned by many states in the US. China caps the interest rates but in India they remain unregulated. “Nobody talks about these things to the younger ones, either in school or at home,” says financial educator Mrin Agarwal, founder, Finsafe India. Driven by current needs, many are on a credit-fuelled consumption spree, not thinking through eventualities such as layoffs, pay-cuts as well as health or family emergencies.
In case of an unexpected eventuality, most Indians have little to cushion the impact. “Amid missing social security, our households’ capacity to absorb economic shocks and remain creditworthy is limited. This will create challenges for consumers and also constrain future credit growth,” says Sinha of India Ratings. Unlike mature countries with robust social security nets, in India, you are on your own or at the mercy of family or friends in the event of trouble. Says Desai: “Debt-led life can often spiral downwards. With low economic growth and fraying social cushion, consumers’ ability to absorb shocks in difficult times will be limited. Debt distress will go up.”
Startups such as Cred, founded by Kunal Shah in 2018, are offering help by bringing in some transparency. Cred members, who have good credit history, get access to attractive offers and reward points. The app helps them keep track of their credit card spends, payment dues and charges accrued in one place while helping businesses access creditworthy customers.
Meanwhile, in Kolkata, a generational war is raging between Das junior and senior. “I want to buy a car (on a loan). My father would not let me. He hasn’t even bought a bicycle in his life. How do I convince him?” the son asks, in exasperation.
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