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Is Indian lending following USA's footsteps?
I was going through some reports on Statista about the lending space in India and US, and two things surprised me:
The total value of retail loans in India in 2022 was about USD 410 billion
The value of total consumer credit outstanding in USA as of 2022 was USD 4,600 billion!
USA is a 10 times larger lending market compared to India. Isn’t that insane?
But here’s the thing - I think we as a country are also moving towards a lending-heavy economy.
Here are a few reasons why.
Growth of the lending market
Retail loans given by NBFCs are expected to grow at 12-14% this year, primarily driven by unsecured loans (On the other hand, loans given to industries have declined in FY 23)
Personal loans account for 31.2% of total credit. Yeah, almost a third of the total loans disbursed are personal loans
Now, this data shows that consumer loans are only going to grow.
Reduction in defaults
There’s a metric called GNPA ratio, which stands for Gross Non Performing Asset ratio.
Simply put, GNPA ratio = (Total value of loans not repaid by borrowers/Total value of loans disbursed)
So lower the GNPA ratio, better it is for the lender.
Now, RBI’s recent report showed that this GNPA ratio was improving. And this means that a higher percentage of borrowers are financially healthy and are repaying their loans.
This is very encouraging for banks and NBFCs, and they’re likely to lend more money because their risk is now lesser.
Regulation #1 - cKYC
If you remember having done a KYC on a digital app, the process, although better than a paper-pen process, is still quite cumbersome.
You need to enter your name, date of birth and other details, then enter your PAN number (which you most likely remember), then fetch your Aadhaar card (well, because who remembers their Aadhaar number?) and enter that.
After that, you take a few selfies etc, depending on the company’s KYC process, and THEN your KYC is completed.
Now, there is a central database that stores all these KYC records, called a central KYC (or cKYC) registry.
Until some time back, RBI was silent on whether companies can just use this database to fetch your KYC details instead of asking you to enter these details in the app.
But recently, RBI issued a circular saying that cKYC pull will now be recognised as a mode to fetch KYC details (although such a consumer will be treated as a high-risk consumer - but that’s for a different newsletter)
So as a lender, you will now be able to fetch the cKYC records directly from this registry to complete the KYC, without having your user to go through the entire process of entering all details.
This makes the KYC process pretty smooth and quick (although increasing the risk). And while banks may not want to opt for this mode due to the increased risk, a lot of fintechs will love this - which means that the onboarding process for customers will be much faster, reducing friction in lending to them, thus increasing the number of potential borrowers.
Regulation #2 - Loss sharing
RBI also recently allowed a 5% FLDG arrangement between banks/NBFCs and Fintechs.
Is “FLDG” Greek or Latin to you? Don’t worry, just read on 😁
FLDG stands for First Loss Default Guarantee. This means that a bank and say, a Fintech, can co-lend to a consumer, and in case there is a default by the consumer, the fintech can absorb 5% of the loss.
Now while there are different points of view on this, the fact that RBI has come up with a guideline for this, means they’re recognising this arrangement.
And this again, only means that the industry will keep growing, because there are more parties who can take the risk of loan default.
So where do we go from here?
All in all, with high demand, reducing NPAs and newer regulatory frameworks, could we see more loans being disbursed?
I think so..
And in that case, could we be on our path to being a credit-heavy economy, like the US?
While I think that’ll happen too, whether I’m right or wrong, only time will tell.
Till then, we can only wait and watch!
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