The rise of small-ticket loans in times of COVID

The outbreak of COVID-19 in 2020 has impacted borrowers' behaviour patterns, particularly in the consumer segment, which has continued into 2021. 

Consequently, between March and May this year, small-ticket loans have risen between two to seven times, mainly driven by high millennial demand.
 
Much of the demand is due to short-term expenses linked to COVID and buoyed by the easy availability of credit. The severe second wave has triggered a slew of fresh reasons for availing of small, short-term loans. These include job losses and salary cuts, unexpected medical emergencies, top-up plans or the purchase of new health insurance policies, upskilling course fees, rent deposits and the like.

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Dynamic Trends

The changing patterns are reflected by the drop in demand for travel-related loans and a spike in those for medical emergencies. Where short-term loans are concerned, the average ticket size stands at Rs 25,000 while for BNPL (buy-now-pay-later) products it is under Rs 5,000. Nonetheless, such loans are now being scrutinised because further stress in the economy could cause higher defaults.
 
Conversely, the monthly disbursement of loans has touched pre-COVID levels. Both in the metros and non-metros, there is equal demand for new loans as the ongoing financial stress is affecting city people too.
 
Considering the evolving demand and risk profile of consumers, interest rates have turned more dynamic to factor in these parameters. According to a report by TransUnion CIBIL and Google, in Q42020, the origination of more than 60% of all personal loans was under Rs 25,000 in size.
 
Attesting to the diversity of borrower profiles in 2020, 49% of first-timer borrowers were under 30, 71% were from non-metros and 24% were women. Highlighted by searches such as 'phone on loan' and 'laptop on EMI', the under Rs 25,000 small-ticket loans had risen from 10% in 2017 to 60% in 2020.
 
Another reason for a surge in small-ticket loans was that people now prefer spending on low-value transactions. Additionally, as technology promotes greater digital access, it helps fintech lenders in locating, reaching and engaging with these new customers.

Moreover, first-time borrowers such as Gen Z and millennials have virtually no credit history. As a result, these cohorts find it most challenging to procure large-ticket loans from conventional lending sources like banks and older NBFCs, which are wary of lending to applicants with zero-credit history because of their perceived higher risks.

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Since legacy lenders rely heavily on in-person engagement with customers and formal credit history, including bank statements and ITRs, those lacking the same turn to digital lending platforms. 

Unlike conventional credit channels, fintech lenders do not depend solely on formal credit records, and instead, assess risk using alternate data sources such as bill payments, usage of other apps, bank transaction history, etc. Thereafter, loan disbursements happen swiftly and seamlessly.
 
Immediacy and Loyalty
 
The TransUnion CIBIL-Google report notes that since the speed of disbursal and convenience remain the hallmarks of such loans, 97% of all personal loans given by digital-native lenders are under Rs 25,000, accounting for the largest share in this segment. 

Besides, the report notes a perceptible uptick in the demand for credit from non-metros - acting as the origins of 77% of all retail loan enquiries in CY2020, including tier-2 regions and beyond. Of these, 70% of the total enquiries emerged from existing credit borrowers.
 
This is a major reason why tech-savvy cohorts, including millennials, prefer approaching fintech lenders for short-term or immediate requirements. 

Indeed, fintech players are known to offer instant approvals and immediate disbursals due to their entirely digital on-boarding system. What's more, technology-backed fintech lenders are rewarding the positive repayment behaviour of borrowers.
 
Meanwhile, although consumer borrowing behaviour was already changing in recent years because of digitalisation, the pandemic has hastened the trend. 

Taking a two-year timeframe into account, small-ticket disbursements have soared five times, as per a report by CRIF India. 

During the last two financial years, 41% of consumers availing of personal loans fell in the 18-to-30 age group. 

Barely two years ago, this age group comprised only 27% of borrowers. Incidentally, most borrowers availing loans of under Rs 50,000 hail from low-income families.
 
Given these trends, new-age NBFCs and fintech start-ups prefer to target the young, low-income but digitally-savvy consumers with small-ticket, short-term credit requirements, having limited or zero credit history. 

Finally, thanks to their higher propensity to be loyal to their favourite lenders, the relationship between millennials and new-age lenders is a winning proposition for both sides.
 
(The writer is CEO & Founder - mPokket.)