Small-ticket personal loans loans (STPL), which were a plague of the same segment’s crises ten years ago, are making a comeback. This time, software used by financial businesses and fintechs to approve and distribute low-value loans based on analytics is driving them. Small-ticket loans now account for over half of all personal loans disbursed in the last two years. These loans accounted for only 12.9 percent of all personal loans disbursed in 2017-18, but by March 2020, they had risen to nearly 60%.
Retail loans are not currently a problem.
- STPLs are credit lines of less than Rs 50,000 in the personal loan category, and it is this platform that has been boosting growth, with a 162 percent increase in the number of loans given in 2019-20.
- The STPL loan sector is expected to be worth over Rs 12,000 crore, up 77 percent in value terms over the previous financial year as new app-based lenders entered the market.
- Small-ticket loans, by the way, have experienced the most stress among borrowers, accounting for 9.4 percent of all loans by value. In the last two years, the share of tickets with a value of less than Rs 50,000 has increased roughly fivefold.
- Finance businesses and neo-age lenders are aggressively targeting young, low-income, technologically savvy customers with small-ticket and short-term loan needs but no or limited credit history, according to a report by credit bureau CRIF High Mark.
- The extraordinarily high rate of interest, which hovers around 15% per month, is one of the characteristics of payday loans (repaid when salary is credited). This allows borrowers to continue operating even if late payments are around ten percent.
Further Key Takeaways
- Delinquencies in the STPL market were in the low single digits. Although the bank employed software to provide small-ticket loans, they were only made to existing customers with a track record of cash flow. Unlike banks, lending apps use data taken from borrowers’ bills to run analytics.
- “While the portfolio is growing, the average ticket size has been steadily decreasing over the last two years, falling by 18% year over year by March 2020. According to the CRIF High Mark study, the average size increased by 5% from March to August 2020.
- According to rating agencies, lenders have not yet encountered any difficulties as a result of retail lending. In October 2020, ICRA reported that collection efficiency (repayments) in the loans it monitors remained stable. However, current collection efficiency remains below pre-lockdown levels, ranging from 81 to 95 percent across all retail loans.
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