The last year has seen a profusion of companies that are looking to give consumers loans of amounts smaller than those doled out by banks, other companies looking to improve the credit ratings of consumers unable to secure loans, and still others trying to speed up the process by which electronic payments are made, and thereby incentivising consumption.
In doing so, these companies are bolstering the one leg of the economy that is emerging as a prime driver of growth — personal consumption.
The Bharat Microfinance Report 2016 by Sa-Dhan, the self-regulatory body for the microfinance industry in India, found that the vast majority — 61 per cent — of the non-income generating microfinance loans given in fiscal 2016 went towards financing consumption.
Housing segmentThe second-highest segment was housing, at 18 per cent.
Private Final Consumption Expenditure — the measure of how much is spent on food, clothing, footwear, electronics, etc. — worked out to 55 per cent of India’s GDP in the first quarter of this financial year. It’s been around that mark for a while now, which shows how important private consumption is to the economy.
In order to facilitate this consumption, a number of micro-lending companies that cater to those people looking for small loans that banks are not typically ready to give have sprung up.
One such company is Moneytap, which recently unveiled an app that provides a credit line for consumers through the company’s partner banks, allowing consumers to take a small loan at any point by simply using the app.
“A credit limit is issued by a bank partner,” Kunal Verma, Founder, Moneytap, told The Hindu .
“This allows a person to open their app and borrow from that credit line into their own personal bank accounts instantly. For example, if I have a Rs.5 lakh credit line, then I can borrow any amount within that, and the interest is only charged on what is borrowed, not the entire credit line.”
Instant loansWith the loan tenures ranging from as little as two months to three years, and interest rates between 1.25-1.5 per cent per month, the app allows customers to instantly receive a loan, importantly, even outside of banking business hours.
“We see multiple use cases,” Mr. Verma explained. “Wherever a consumer has to have a pool of money and then has to pay in staggered amounts, like a wedding.
“Money can be taken out in chunks when the right time comes, and only then is interest charged on it. In addition, there also regular use cases, like Diwali season, buying an LED TV, iPhone, gifts, etc.”
And then there are companies like LoanTap Financial Technologies, which raised $3 million in August to expand its business. The Mumbai-based company, aimed at salaried professionals, makes it easy for them to receive credit.
Logging inA potential borrower simply has to log on to the website using a Facebook or LinkedIn account, fill in the regulation KYC forms, and provide electronic bank statements.
So far, the company has disbursed loans worth Rs.70-75 lakh with an average borrowing amount of Rs.2 lakh for a duration of five years.
Rupeelend, yet another micro-lending company, was started in August 2015.
Occupying an increasingly competitive market, the company has sought to create a niche as an avenue for short-term emergency loans.
While this helps in meeting emergency medical expenses and tiding over salaries that suddenly fall short towards the end of the month, such services also help in servicing EMIs, according to the company’s CEO.
“Many of our clients use our service to pay for their EMIs for their house, or car,” Siddharth Ravindran, CEO of Rupeelend said. “So, in that way, you can say that such loans are fuelling consumption.”
Credit WorthinessApart from access to credit, another problem facing a large number of people is the matter of credit-worthiness.
A large segment of the population does not know about credit scores, let alone how to improve them so that loan applications are not summarily rejected by banks.
A number of companies have emerged to address this need as well, with some looking to help customers improve their credit scores and others trying to move past the conventional credit bureau scoring systems to ascertain the true credit-worthiness of a person.
“In India, many borrowers without credit history, collateral or active bank accounts remain ‘unbankable’ for lenders,” according to Index Advisory, a company aiming to bolster the credit bureau system.
“Thousands of people are deprived of medical expenses as they can’t qualify for loans. Many more are left homeless as they can’t get loans from the banks,” it said.
The company has introduced a psychometric test that, along with credit scores, can accurately ascertain a borrower’s willingness to pay back. Ideally, this can then be used to provide loans to those who do not have a credit score.
‘New concept’“It’s a new concept for the BFSI sector,” Yogesh Mariwala, Executive Director, Index Advisory said.
“The test promises to considerably reduce risks borne by BFSI sector by assessing various parameters like intention, stability, integrity, business acumen, risk taking ability of the borrower.
“These tests out-perform screening based on personal interviews, biographical data, and past performance on loans taken.”
Companies like Credit Sudhaar address the same problem using different tools.
The reason banks are so wary of giving loans to those with no credit histories is, of course, the risk of default. If they don’t know anything about the potential borrower, then how can they be sure that he will repay the loan?
Social data“Using concepts like big data, social data like LinkedIn, Facebook, psychometric tests and behavioural tests, we differentiate intentional defaulters and situational defaulters who just did not know,” Arun Ramamurthy, co-founder, Credit Sudhaar said in an interview.
“If an individual tells us that he works for, say, the Tatas, but his Facebook profile names some other company, then that is a red flag,” he said.
On the other hand, if all the tools point towards the reliability of the potential borrower, then the bank can be more confident lending to him even though his credit score is poor due to lack of awareness, he added.Finally, there are companies like Trupay that, in easing bank transfers, makes the whole kirana ecosystem far easier to manage.
“Kirana stores and local shops often have a concept of udhaar (credit).
“So, using the app, they can keep a track of such instances and send the customer a consolidated amount at the end of a week or fortnight,” Mr Vivek Lohcheb, the company’s co-founder, said. “In addition, consumers can make payments much easier, using only their phones,” he said.
The risksHowever, while all of these companies are making it easier for consumers to spend their money, such easy access to credit comes with its own dangers, according to industry watchers.“I don’t think it is a good thing,” D.K. Srivastava, Chief Policy Advisor, EY India, told The Hindu .
“Lending is done at a certain interest cost. So if it is done for consumption then it could generate a lot of NPAs since the loans are not being put to income generation uses,” Mr. Srivastava said.
