Digital Lending in India

Are you a young salaried individual? Even better, are you aspirational and spend more than you earn? Loan startups have just the sinful cocktail for you – a salary advance. Get yourself a cushy debt-trap. But mind you, when you strike a deal with an eager lender, you have to pay the price.

“Young Indians are not just spending on necessities, they are increasingly spending on luxuries. Lifestyles are changing,” said Akshay Mehrotra, Co-Founder of Early Salary, a leading provider of salary advance. “We aim to provide cash flow at the end of the month. Young people aim to live life to the fullest and enjoy. A salary advance can easily help you sponsor that road trip you’ve been planning,” he added.

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But what is a salary advance?

Getting a personal loan is still a challenge for many people. Without the requisite CIBIL score and collateral, securing one remains an arduous task. To address this gap, many fledgling startups have emerged which offers short term loans in a fashion similar to a salary advance.

Popularly known as a ‘payday loan,’ the lender disburses a small amount to an applicant within a day. There is an understanding that the loan will be repaid once the applicant receives their salary.

How to Apply

The application process for a salary advance from a digital lender is fairly simple. The applicant needs to download the mobile app and start an application. The necessary documents for KYC and credit verification need to be submitted online in a soft copy format. The lender processes the application through an automated credit underwriting process and disburses the funds to the applicant’s bank account. Most instant lending firms complete this process in a few hours if not a few minutes. The rate of interest charged is quite high and can go up to 36% p.a. However, lenders emphasize that since the amount is supposed to be paid back in a few months, the full burden of the interest does not fall on the applicant. Another reason for high interest rates is that it is unviable for lenders to charge a low interest rate on a loan with a short tenure. “Our goal is to help young people get small loans which they can repay in a manner of 20 days. 50% of your take home salary is our maximum loan limit. The loan is disbursed in just 10 minutes. Our underwriting process is automated. This ensures that we are able to provide a large quantity of loans in a frugal and expansive manner.” said Akshay.

Raksha Pandit, a BPO employee said, “I took a loan from one of these instant credit startups. I took it to make some purchases. Getting the loan was easy, but repayment was tough. I raised some issues, though they were never resolved. I ended up paying extra charges as penalty.

“These digital lenders are fine if one needs a small amount, say up to ₹10000. For a large amount, I would prefer a bank. The biggest advantage of taking a loan from an instant credit startup is that they can provide money easily during a time of emergency,” Raksha added.

Recent reports indicate that unsecured credit in India has seen a 27% rise in the last four years. The main culprits – 21 to 28 year olds. Rising e-commerce sales and an easy proliferation of products have fuelled this credit boom. A 2017 report by Boston Consulting Group suggests that if the current growth rate in consumption continues, India will be the world’s third largest consumer market by 2025.

“Early Salary is India’s largest salary advance app. We provide nearly 35,000 unsecured loans a month. We have already disbursed around 75 crores. Our underwriting process is automated as it is done with the help of A.I. This ensures that we are able to provide a large number of loans in a frugal and highly scalable manner. On an amount of ₹10000 we charge interest of just ₹9 per day.” said Akshay.

Where’s the money?

A major factor that can be attributed to the rise of these instant lenders is that the younger generation does not mind going into debt to finance purchases. A rise in online shopping and disposable income has made it acceptable to borrow money in order to finance a certain lifestyle.

Traditional banks, however, are not worried about losing customers as they have begun digitization of most services. Ashish Kumar a relationship officer at Axis Bank says, “Young professionals frequently want to avail personal loans. We offer personal loans starting at ₹50,000 with an interest rate ranging from 11.5 %- 24 %. The only documents we require are CIBIL score and proof of employment with a reputed organization.”

“We are increasingly focusing on digitization and have launched an app that allows users to avail instant personal loans on the same day. A credit card charges around 10-16 %, a personal loan is also offered at a similar interest rate. Therefore, it is up to the customer to decide what works best for them,” Kumar added.

While banks and credit card companies are optimistic about growth in credit, instant credit startups are not far behind. Pratish Gandhi, CEO of Credy, said, “We provide credit to salaried as well as self-employed people. The demand is high since we provide loans starting from ₹10000 while most banks don’t provide personal loans for an amount less than ₹50,000. This ensures that young people can take a loan.”

The benefits will accrue to borrowers in the form of lower interest rates, faster disbursal time and attractive repayment schemes.

Are you credit worthy?

Instant credit startups are well aware of the risks of lending unsecured loans to customers. In this regard Akshay said, “We mostly target young people who are yet to build their CIBIL score since it’s their first job. The age range is 21-30 with an average age of 25-26. We evaluate their ‘social worth,’ that is, their social and financial parameters.”

“Our machine learning platform evaluates over 2000 variables to predict an applicant’s ability and willingness to pay. Our foolproof process ensures that even small things like fidgeting too much on the app or sounding strange on a phone can get an applicant rejected. We have a delinquency rate of just 1%.” With regard to measuring eligibility, Pratish said, “To assess an applicant we require their KYC details and bank statements for the last six months. The statements help us understand the spending habits of our customers. We also pull their CIBIL scores from credit bureaus. Our rigorous process has ensured that our non-performing loans are just 2 % of total loans disbursed.”

Conclusion

There has been a lot of concern over whether these instant credit startups are similar to the infamous loan sharks in the west. However, in India these startups conduct a rigorous background check and are unlikely to disburse funds indiscriminately just to build their loan book. The ‘terms and conditions’ from finance companies are notorious for being opaque. This is why borrowers must exercise due diligence before taking a loan and should be certain that they can pay it back in the stipulated time frame.