Empowering Dreams: The Lending Boom in India 💡

Recently, the surge of startups entering the lending space has caught my attention. Notable examples include Cred's acquisition of Creditvidya, Paytm's showcasing of profitability through its lending business, and PhonePe's attempts to acquire ZestMoney and its announcement to venture into lending.

As per Inc42’s State Of Indian Fintech Report Q1 2023, the lending tech opportunity is estimated to be valued at $270 billion & is expected to reach an impressive $1.3 trillion by 2030. Moreover, digital lending is poised to dominate the Indian fintech market, accounting for 60 percent of the total sector by 2030.

This lucrative potential has attracted numerous startups, prompting them to venture into lending services, particularly after establishing their brands through other offerings such as payments or wealth management.

This shift is partly driven by revenue challenges in the fintech sector. Regulatory interventions have impacted the viability of UPI for payments apps, while credit card-related fintech services face obstacles due to a slow-growing base of credit card subscribers. Paytm's improved financial situation in Q4 FY23 may have influenced other firms to adopt a lending model.

Data shows that credit cards have become key drivers of card transactions. With 250 Mn card transactions for merchant payments in April this year, credit cards overtook debit card swipes, which stood at 220 Mn. In terms of value, credit cards accounted for INR 1.3 Lakh Cr of all swipes compared to INR 53,000 Cr for debit cards. Interestingly credit card usage has jumped 20% YoY, while debit card usage has dropped by 31% since last April. India currently has over 85 Mn issued credit cards, up 10 Mn in the past year and more than double the number of issued CCs in 2020.

In the fintech lending domain, there are four major models: Buy Now Pay Later (BNPL), Peer-to-Peer (P2P) lending, co-branded credit cards, and personal loans. These startups primarily earn revenue through interest fees. However, to provide loans, they need to obtain an NBFC license, creating an advantage for larger players with licenses and established user bases.

In the ever-evolving world of fintech and lending, various models have emerged to cater to the diverse financial needs of consumers and businesses. Among these models, personal loans stand out as one of the most well-understood and widely utilized options. The approval and disbursal processes for personal loans are largely similar to traditional bank loans, making them a popular choice for borrowers seeking financial assistance.

Moving beyond traditional lending practices, another rising trend in the fintech lending space is the "Buy Now, Pay Later" (BNPL) model. For sellers, BNPL platforms charge an interchange fee, typically ranging between 2% and 8% of the purchasing amount. This fee allows sellers to offer their customers the option to pay in installments, increasing customer engagement and driving higher sales volumes. On the customer front, BNPL platforms charge interest on the outstanding amount based on the individual's credit score and repayment tenure. The interest rates for BNPL can vary widely, ranging between 10% and 30%, with an average rate of around 24%.

Co-branded credit cards represent yet another revenue model adopted by startups in the lending industry. In this approach, startups partner with banks to offer co-branded credit cards to customers. The startups earn a distribution commission from the banks for acquiring new customers, while the merchant pays a Merchant Discount Rate (MDR) to the bank. This setup benefits banks as it reduces their manpower requirements while relying on startups for activation and engagement of credit card users. However, the success of co-branded credit cards as a revenue source hinges on the offering platform's reach and scale. Only when startups have a wide user base can co-branded credit cards become a significant boost to revenue generation.

On the other hand, Peer-to-Peer (P2P) lending introduces a different lending paradigm, connecting individuals who want to lend money with those in need of funds. P2P lending platforms serve as intermediaries, facilitating the borrowing and lending process between individual investors and borrowers. While P2P lending presents opportunities for borrowers to access credit outside traditional financial institutions, it also carries inherent risks due to the largely individual borrower profile.

For depositors and investors on P2P platforms, the risk assessment of borrowers becomes paramount. Without robust risk assessment procedures and adequate systems for recovering bad debts, P2P lending loses its investment value proposition. The success of P2P lending depends on building trust and confidence among investors, highlighting the importance of transparency and risk management.

Cultural attitudes towards loans are changing, reducing the stigma previously associated with borrowing leading to myriad use cases and target audiences. Small and Medium-sized Businesses (SMBs) and Micro, Small, and Medium Enterprises (MSMEs) seek working capital and agricultural loans. Millennials and Gen Z individuals are interested in education and travel loans, as well as payday, auto, home, and personal loans due to their perceived low risk and steady income.

However, in the lending business, risk and recovery considerations are crucial. Sustainable success relies on a substantial number of users consistently taking and repaying loans on time. This focus on risk management is vital for building a thriving lending venture.

Increased lending in India can have both positive and negative consequences.

Pros of Increased Lending in India:

1. Boosts Economic Growth: Increased lending provides businesses and individuals with access to capital, fostering economic growth, and supporting entrepreneurship and innovation.

2. Financial Inclusion: Expanded lending can bring more people into the formal financial system, promoting financial inclusion and reducing reliance on informal lending sources with higher interest rates.

3. Job Creation: Access to credit enables businesses to expand their operations, leading to job creation and a positive impact on employment rates.

4. Consumer Spending: Easy access to credit can stimulate consumer spending, driving demand for goods and services, and supporting various industries.

5. Infrastructure Development: Lending plays a crucial role in financing infrastructure projects, which are vital for the country's development and progress.

Cons of Increased Lending in India:

1. Risk of Overindebtedness: Increased lending may lead to borrowers accumulating excessive debt, resulting in loan defaults and financial distress for individuals and businesses.

2. Credit Quality Concerns: A surge in lending can raise concerns about credit quality, leading to higher non-performing assets (NPAs) for lenders and impacting their financial stability.

3. Systemic Risk: Rapid lending growth can pose systemic risks to the financial sector, potentially leading to financial crises if not managed prudently.

4. Impact on Interest Rates: A significant increase in lending can put pressure on interest rates, potentially leading to higher borrowing costs for consumers and businesses.

5. Regulatory Challenges: Regulating the lending industry becomes more complex with increased lending, requiring effective oversight to ensure fair practices and consumer protection.

6. Asset Bubbles: An influx of credit can lead to speculative bubbles in certain asset classes, creating vulnerabilities in the financial system.

7. Inflationary Pressure: Increased borrowing and spending can contribute to inflationary pressures in the economy.

To reap the benefits of increased lending while mitigating its potential drawbacks, it is essential for financial institutions and regulators to maintain prudent lending practices, conduct thorough risk assessments, and strike a balance between promoting credit expansion and ensuring financial stability. Additionally, financial education and awareness programs can help borrowers make informed decisions and manage their debts responsibly.