5 Personal Loan Trends That Will Make India Ready For the Future Technology has simplified the banking process to a large extent and this ease of banking and availing financial services has also reflected on the borrowing behavior of Indian customers

Over the past decade, the banking and finance sector has transformed radically with the industry incorporating cutting-edge technologies into its day-to-day operations. Increased internet proliferation and smartphone usage have paved the way for a paradigm shift in the way people and financial institutions interact with each other. Technology has simplified the banking process to a large extent and this ease of banking and availing financial services has also reflected on the borrowing behavior of Indian customers. One of the most significant changes witnessed has been in the personal loan market.

According to data from the RBI (Reserve Bank of India), there has been a 26.9% increase in the number of personal loans in the past year. Like other financial services, the personal loan segment has been augmented with the help of digital services and the rise of instant loan startups. Since the onset of the pandemic, much like other segments, the personal loan market, too, has undergone a massive transformation, albeit in a positive way.

Just as the country began crawling towards recovery post the first wave and subsequent lockdowns, a disastrous second wave of the pandemic has struck. The decline in economic activities and lockdowns imposed in several states yet again have left numerous people turning to instant loans to ensure they don't experience a financial crunch. Even as this scenario continues, the personal loan market is witnessing the emergence of multiple trends that are bound to shape the segment's future and make India future-ready. Here are 5 of them.

Increased demand for digital lending channels

As touched upon earlier, technology has been instrumental in driving the change in the personal loan segment and platforms have jumped on the digitization bandwagon. Given the convenience that digital platforms offer, there has been a massive spike in adoption, especially over the past year. Lending platforms are already leveraging technology and the increased internet penetration to create fast, secure, and easy-to-use applications/infrastructure, thereby digitizing the entire loan application, and approval process.

Unlike traditional institutions and processes, digital lending platforms follow an approach that is seamless and risk-free for both the borrower and the lender with features such as KYC registration, digital credit history, etc. Soon, lending will be revolutionized by the digital transformation in the low-income segment where the true potential of technology will be unleashed, enabling people to avail personal loans through platforms that are full-stack in nature.

The rise of NBFCs

Up until recently, it was traditional financial institutions such as banks or informal sources of credit that people turned to for availing personal loans. The issue, however, is that banks require extensive paperwork to be filled and the loan approval process can take a long time – even months in some cases. Besides, when it comes to personal loans, banks often require borrowers' monthly/yearly income to be above a certain level, making it challenging for those in the lower-income segment of the population to avail loans from banks. When it comes to informal sources of credit, for example, money lenders, borrowers are often charged unreasonably high rates of interest, ultimately leading them to fall into a debt trap. With NBFCs, especially instant loan apps, however, the scenario is different.

NBFCs cater to the lower-income segment of the population, charge reasonable rates of interest, have a transparent process, and also offer small-ticket personal loans. The past few years have seen NBFCs in the country rise to the top of the personal loan market with their market share improving from 22.68% in March 2018 to 44.92% in March 2020 according to the Credit Information Bureau. With convenience, seamlessness, and transparency, NBFCs have managed to expand their borrower base rapidly in a short period.

Speaking of NBFCs, it is important that we don't overlook an emerging category of financial service providers – neobanks. A completely digital bank without any branches, neobanks are a wide umbrella of financial service providers that beseech today's digitally-savvy customers. Neobanks take a less confrontational approach in positioning their offering vis-à-vis traditional banks and are rapidly gaining traction for faster customer acquisition and consumer appeal. While neobanks are still at a nascent stage in India, it is projected that they will soon become a go-to solution offering multiple services including personal loans under a single umbrella.

Lenders to adopt new-age underwriting

Today, in addition to the financial and credit history, lending platforms have adopted new-age data collection methods such as the borrowers' digital footprint, mobile data, etc., to guage detailed insights into their repayment capacity and behaviour. This enables them to bypass conventional data points or even process loan applications when conventional data is insufficient.

Furthermore, today's lenders use advance AI and ML-powered underwriting models as opposed to erstwhile human-driven pen and paper underwriting that relied on the subjective assessment capability of the human underwriter vs. new-age models that are more objective and robust. Although this conservative appetite will prevail in the short term, the long-term outlook on the Indian lending segment is still bullish given the massive credit penetration gap.

Increased preference for non-tier-I markets

Given the surge in digital adoption, people across the country, especially those in tier-II, tier-III, and tier-IV cities, and even the hinterlands are able to access digital lending channels. In fact, a recent report released by the Internet and Mobile Association of India (IAMAI) and Nielsen showed that rural India had slightly more internet users as compared to urban India, further facilitated by highly affordable data prices. And since lenders can now access customers in these areas, the focus will be on non-tier-I markets since these markets have demonstrated good credit repayment behaviour historically, making them lucrative and facilitating wider reach for lending platforms.

Extensive range of loan products

Erstwhile, the standard personal loan was the only product available. However, with changing times and the rise in digital payments and financial services facilitated by technology, credit cards came into play. Then came checkout financing and virtual credit cards and line-based products. Furthermore, the personal loan segment also witnessed the introduction of use case-specific products such as school fee financing, etc. With the consumption in the personal loan segment set for explosive growth, there will be more credit products added in the future.

The lending landscape has evolved greatly over the years and applying for a personal loan is now a quick and easy process that will see the money deposited in your account within just a few hours. With growing technological adoption and rising competition in the market, the personal loan segment will continue to evolve and adapt to the changing scenarios.

Besides these, there is yet another element that has gained immense traction in recent times – cryptocurrency. Over the next decade, crypto will become a defining trend in the FinTech sector and we will be witnessing the dawn of novel credit products such as cryptocurrency-based loans over the next 5-10 years. In fact, portals such as Aave, Compound, and Yearn in the western market have already introduced this concept. The aforementioned trends are likely to continue for the foreseeable future, thereby charting the course for the personal loan market.