New Normal Retail Loans

BE/RBI/64/2020

With private consumption in India falling dramatically by a third to INR 21.7 lakh crore in the first quarter of 2020-21 from its pre-COVID level of ₹32.5 lakh crore in the third quarter of 2019-20, the demand for retail loans has been tepid despite the Reserve Bank of India (RBI) slashing interest rates by 115 basis points since late March.

Retail loans in India fall under the larger umbrella of credit given by financial institutions to consumers for their financial needs such as buying a house, paying for college education, owning a vehicle and personal loans that are short-term in nature.

In its Monetary Policy statement earlier in October, the RBI outlined the muted state of urban consumption reflected in the subdued movements in household credit in the form of credit cards outstanding, vehicle loans and other personal loans data.

The share of private consumption stands at 57.1% of India’s nominal GDP as of June 2020 and the onus of promoting lending to consumers is on financial lenders such as banks, non-banking financial companies (NBFCs) and other financial institutions.

Let’s look at what the new normal for retail loans in India looks like amid the coronavirus pandemic and what consumers must keep in mind before seeking a retail loan.

Face-to-Face Out, Digital In

The most prominent change that has come about is in the customer engagement models that relied on face-to-face interactions to provide loans. As the pandemic struck, these models automatically were deemed unsafe and financial institutions had to adapt to digitization overnight.

Focus Now On Robust Financial Digital Infrastructure

In India, retail lenders traditionally relied on in-person interactions during the lifecycle of the loan process, right from sourcing to disbursal. This has had to change.

For instance, Edelweiss Retail Finance had to digitize its customer journeys and realign its processes such as:

• Use of contactless processes to receive loan applications and further process thereof.
• Use of machine learning-based banking analysis, verifying customers via video know-your-customer and voicebot-enabled collections.

These integrations also lowered the company’s per file processing costs, the company said.

Retail bankers understood the importance of investing in digital infrastructure, which “isn’t cheap”, they say.

Nirav Choksi, CEO of supply chain financing fintech platform CredAble, feels the “staggering rate” at which the adoption of online distribution of retail loans has happened compensates for the “significant amount of capex required” for retail lending infrastructure to be built.

For example, HDFC Bank, India’s largest bank by assets, partnered with Adobe for its “experience cloud solutions” that are artificial intelligence-driven solutions for marketing, analytics, advertising, and commerce, with the aim of personalizing the digital journey of its customers.

The bank said its customers could now look forward to applying for loans digitally from home 24*7 and using any device of choice for their end-to-end transactions, among other things.

Customer Are Having to Adapt to Digital Means

Experts believe consumers will be choosy about how they spend their time interacting for banking purposes as the pandemic ushers in a new normal.

Till date, traditional banking, also known as physical banking, has been the most used and accessed form of banking in India. With most banks having adopted technology, or in the process of adopting technology, consumers have had to consider banking digitally seriously.

The increased use of digital banking pushed for digital deliveries and adoption to grow even among the most “digitally-resistant” customers, says Mehernosh Tata, the CEO of Edelweiss Retail Finance.

He experienced early adopters preferring end-to-end digital lending while the majority preferring a “phygital” or hybrid approach to lending.

Mohit Joshi of Infosys and Markos Zachariadis of University of Manchester say the pandemic has accelerated most banks’ digitization initiatives and this time round, it is more about delivering real change for which a phygital strategy may work.

According to them, the true essence of this phygital strategy would be based on banks offering specific, high value, physical interactions that can complement a digital banking core and digital technologies that make services faster, more secure, and more convenient.

Window of Opportunity Wide Open For Fintech Companies

The Indian fintech space has been growing with increased investment being pumped in the last five-six years. The coronavirus pandemic too saw solid investment in H12020 led by $239 million investment in digital lending app Navi Technologies and $185 million acquisition of personal loans startup PaySense by Netherlands-based PayU, among others.

A report by MEDICI India FinTech Report 2020 states India’s 338 lending startups are able to serve as alternate platforms for credit owing to the Aadhaar authentication, eKYC, and unified payments interface (UPI) platforms to offer quick background checks, credit scores, and instant loans to the urban, rural, and underserved populations.

Multiple forms of lending that fintechs can aid in include:

• • Marketplaces that connect borrowers with both institutional and non-institutional lenders.
  • Peer-to-peer lending.
  • Instant loans.
  • On-book lending by NBFCs.
  • Crowdfunding for microloans.

• The fintech market in India is expected to reach INR 6,207.41 billion by 2025, expanding at a compound annual growth rate of 22.70% during the 2020-2025 period from a valuation of INR 1,920.16 billion in 2019, according to the Fintech Market in India Report 2020.
• The report credits increased adoption of the internet and improved digital infrastructure for driving the fintech market in India, which fintech startups in India say is true.
• The CEO of instant loan startup StashFin, Tushar Aggarwal, says borrowers now want attractive deals that provide them credit on tap that is sachet-size, ubiquitous and contactless instead of being at the mercy of credit score-focussed traditional lenders.
• He endorses credit line cards as a means of lending for borrowers to pay interest only on the amount used through monthly repayment options instead of paying interest on the whole loan amount from the time disbursal.
• For instance, fintech startups such as Capital Float have tailor-made their personal loans product called Walnut Prime to be a replenishable credit facility that enables consumers to make multiple drawdowns without the need to reapply.
• Other fintech players such as InCred, Vivriti Capital, MoneyTap, True Balance and Faircent are customizing their offerings based on the changing needs of a pandemic-struck country to grab a larger piece of the retail loans pie.

Two things that are working in the favour of fintech companies are:

1. IndiaStack

IndiaStack has played a catalytic role in India’s digital foundation and evolution. says the MEDICI India FinTech Report 2020.

The report says two recent progressions will favour open banking, which allows third-party financial service providers access to information from banks and financial institutions by the use of APIs, in India:

1. The ambiguity that prevailed on Aadhaar usage for onboarding has now been cleared with regulated financial entities allowed to use eKYC, which allows businesses to perform the Know Your Customer(KYC) verification process digitally, and unregulated entities allowed to use offline XML-based KYC.
2. The Reserve Bank of India (RBI) clarified in January 2020 that it permits video-based customer identification process as a consent-based alternate method of establishing the customer’s identity, for customer onboarding. This move changed the rules on digital KYC and DigiLocker, which is a digital platform for issuance and verification of documents and certificates that eliminates the use of physical documents.
3. To complement a customer’s complete digital journey, IndiaStack enlists the eKYC, the eSign, which has an open API to facilitate an Aadhaar holder to digitally sign a document and the DigiLocker, key in making granting loans based on more reliable security measures possible.
4. Account Aggregation framework, overseen by the RBI, is expected to go fully operational in the latter half of 2020 with seven account aggregators and large banks and non-banking financial companies (NBFCs) launching consent-based data sharing.
5. The Account Aggregation framework will be India’s first foray into consent-based financial data sharing and is expected to usher in a new kind of digital data model, says the MEDICI India FinTech Report.
6. Account Aggregator refers to a non-banking financial company that undertakes the business of an account aggregator, for a fee or otherwise. Account Aggregators act as data access fiduciaries between users/entities who are the primary owners of data, and banks, NBFCs and financial institutions that maintain & manage it.

2. Democratization of Credit Bureaus

1. The report says with access to more data for credit scoring such as transaction, behavior, app-based data, location information, social data, and more, new lending models aim to increase the traditional banks’ threshold of approving loans by an additional 10–15% from a range of 25% to 40%, which is a huge market opportunity.
2. “In consumer credit, the urban population is likely to leverage fintech lending services to avoid heavy documentation. The rural population (which is new to credit) can benefit from alternative credit scoring mechanisms to avoid loan sharks,” says the report.
3. Choksi of CredAble says the democratization of credit bureau data for aiding consumers to apply, get approvals and get loans digitally all under 180 seconds has been a key highlight of the pandemic.

Bottom Line

As India adapts to digitization, both at the banking institutions-level as well as at the customer-level, the new normal for retail loans will be based on trust and openness to change.

Adapting to this new normal that the coronavirus pandemic has brought about will help India take giant leaps towards a more mature economy with wider participation of its citizens in the financial sector.

By:  Aashika: Editor of Advisor India