Getting an unsecured personal loan has become easier than ever in India.
Lending practices have eased over the past two or three years, experts say, due to three reasons: more banks pursuing retail customers as corporate loans turn soar, proliferation of non-banking financial companies (NBFCs), and the advent of online lending platforms (fintech companies) catering mostly to urban millennials.
A low credit score is no longer a major bugbear for lenders as they vet applications from potential borrowers. “What is striking is the huge proportion (20-25%) of high-risk-profile customers (with CIBIL scores below 650) in the personal loan, credit card, and consumer durable credit segments currently,” said a recent report by Edelweiss, an Indian financial services company.
The observation was based on figures from the Credit Information Bureau India (CIBIL), which maintains the largest data base of credit profiles in the country. Its scores were once treated as the benchmark for lenders while gauging a customer’s creditworthiness.
It is no longer a make-or-break factor anymore.
Traditionally, banks have shunned customers with CIBIL scores below 750 (on a scale of 300-900). A higher score also fetched a borrower lower interest rates.
“Everyone was chasing high-rated customers, working in the top 100 multinational companies, with a monthly salary above Rs50,000 ($718). But there are only a limited number of such people,” explained Sreemoyee Mukherjee, vice-president of BankBazaar, an online financial market place.
Now, times have changed. The segment catering to customers with high credit scores is saturated as more banks are vying for them.
More importantly, NBFCs and fintech firms are chasing borrowers with low scores to widen their customer base, added Mukherjee.
It is also a lucrative segment for these lenders. “For NBFCs and fintechs, the cost of raising funds is higher than for traditional banks. Hence, they like to tap customers with lower credit scores as they are willing to pay a higher rate of interest due to their higher risk exposure,” said Manu Sehgal, business development leader at Equifax, another credit bureau.
In the past 10 months, due to a crisis brewing in India’s shadow banking sector, the cost of raising funds for NBFCs and fintechs has gone up further. Therefore, they need to widen their customer base and protect their margins.
How is it happening?
As they look to woo more customers, the new-age lenders are aided by a wealth of data that go beyond credit scores.
For instance, if you have never borrowed from a bank or used a credit card, then it is likely that you may not even have a CIBIL score. “Banks may not want to lend to customers living in a rented accommodation, or someone who has changed jobs frequently, or does not have adequate address proof,” said Sehgal of Equifax.
On the other hand, fintechs use a host of data points, from customers’ social media activity to the cost of their mobile phones, to form their own credit scores. Fintech players promise loan approval in less than a minute and disbursal within 48 hours.
“Customers who want smaller credit say for buying consumer durables or for cell phones, which are just entry-level loan products, end up going to these online companies,” said the head of retail banking at a foreign lender, requesting anonymity.
Is it dangerous?
Market players and industry experts are taking heart in the fact that there are no warning signals triggered yet, due to the unrestricted lending.
“While there are no fundamental challenges per se and lead indicators do not show any red flags, we believe financiers should closely watch out for leverage and delinquency trends across retail segments,” added the Edelweiss report.
Despite this, the fear of a 2008 financial crisis-like situation, which was caused by reckless lending, looms large. The Reserve Bank of India had also warned banks against the risks of relaxed retail lending.
However, considering there are no signs of stress, the industry is not worried at this point in time. “Just because a customer has a low credit score, doesn’t mean he will default, all it means is that there is a higher risk of that, which the players try to make up for by pricing the loan higher,” added Mukherjee.
For now, analysts are in wait-and-watch mode.