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Why Small-Ticket Loans Are Gaining Momentum In Today’s Scenario
As a liquidity crunch and adverse market conditions impact individuals, microloans are gaining popularity in tiding over their short-term needs.
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Today, as the economy stands disrupted, liquidity is one of the biggest challenges. Meanwhile, the sceptre of loan defaults and rising NPAs (non-performing assets) are unnerving lenders. A recent report by S&P Global Ratings states that NPAs in India could rise by at least 2%. As a result, despite multiple mandates from the authorities to increase lending, especially to MSMEs and other small borrowers, lenders remain reluctant to comply.
Given the above scenario, the time is indeed ripe for lenders to deploy the sachet model, as a PwC India report notes. The report mentions that though financial institutions have made immense investments in increasing the last-mile connectivity of products, adoption is low. Commoditisation of loan products is cited as a key reason. Driven by cost economics, loan products are typically offered in predefined slabs. When customisation occurs, it isn’t innovative enough.
To boost offtake of loan offerings, it stresses these should be small-ticket, short tenure and contextual or need-based. Here is where small or sachets loans can make a difference. Indeed, they are already attracting attention as well as consumers in greater numbers.
The case for small is big. Remember, products in small packages or sachets helped in transforming multiple sectors. These include telecom, DTH (direct-to-home) and FMCG (fast-moving consumer goods), among others. Decades ago, some small companies made it big by marketing products in one-rupee, two-rupee and five-rupee sachets, boosting market penetration in non-metros and smaller towns.
It is the same with loans. When there are adverse market conditions, such as those prevailing presently due to the COVID-19 pandemic, there is a natural tendency for lenders to develop higher risk aversion. Similarly, consumers become reluctant to spend. Except for essentials, people have now reduced all discretionary spends.
In such situations, individuals or institutions find it difficult to avail of small loans too. Simultaneously, the mind-set stays focussed on affordable and available products or services. Be it MSMEs, individuals or students, their current need is to access easily available credit in small amounts for the short term to meet immediate expenses.
Such sachet financial services can succeed depending on their convenience, speed, easy availability, data security and customisation of offerings as per customer needs. In essence, lenders should change their approach from push-based products to pull-based ones providing need-based loans.
Besides, considering social distancing and other restrictive guidelines, cash is no longer king. Instead, digital lending serves as a safe option for both lenders and loan seekers. No doubt, there was a shift towards digital even before the coronavirus outbreak. Nonetheless, this was gradual. But COVID-19 has driven an overnight dash for digital, which would otherwise have taken a decade.
For instance, traditional retailers have suddenly adopted a digital-first approach as brick-and-mortar stores have had a precipitous drop in footfalls. Thereby, digital payments have also accelerated. In tandem, online entities such as stores, pharmacies, tutorials, gaming and utility bill services have all witnessed an unprecedented surge.
Diverse Digital Drivers
Moreover, since COVID-19 is likely to be a long-term threat, even after lockdown restrictions are lifted completely, social distancing norms will largely remain in force. With the WHO warning about airborne as well as contact transmission of the virus, cash will continue being viewed with wariness.
Backed by these drivers, digital is witnessing sustained momentum. Furthermore, many consumers have been hit hard by a cash crunch. As almost all industries are affected in some way or the other, job losses, furloughs and salary reductions are growing.
Since disposable incomes are affected due to delays in salaries and reimbursements, consumers are seeking micro-credit options that provide them temporary relief. The total interest outgo on such loans is low due to the short tenure. What’s more, once the eKYC norms are fulfilled, digital loans are can be disbursed almost instantly.
Thereby, customers can pay utility and other bills in time and avoid attracting fines that can compound their problems. For small loan seekers, such swiftly disbursed microloans are a blessing because they may anyway not be eligible for loans from conventional credit sources due to lower credit scores or lack of one. Banks also avoid lending to small borrowers since the cost economics are unviable for small, short-tenure loans.
But digital lenders serve such customers as they deploy AI, data analytics and social media mining in verifying prospective borrowers’ reliability or creditworthiness. Digital verifications are also relatively inexpensive compared to conventional means. Big data analytics also play a pivotal part in minimising the risk of fraud or delinquencies by drawing insights from direct as well as surrogate data.
Increasingly, digital loan providers are deploying data-tracing tools that track digital footprints and online profiles while also resorting to geo-tagging and mobile data scraping. Consequently, the low costs and speed of disbursal of small-ticket loans are making these viable for both lenders and loan seekers.
Thanks to these factors, small-ticket loans are poised for greater penetration and faster offtake in big cities and smaller towns. Despite the uncertain economic landscape, small-ticket loans represent a ray of hope for cash-strapped customers and India’s lending industry.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.