Cautious lending by debt-laden banks is a boon for India's growing digital credit sector

India's online retail loans market is projected to reach $1tn by 2024, as more people start borrowing from digital credit start-ups

Labourers unload sacks of pulses in Kolkata. True Balance, an online lending platform is offering loans to people in India who do not necessarily have a credit history. AFP

Aysha Khatoon was eager to repay the money she had borrowed from friends and family when the administration worker from Ghaziabad in north India was in a tight spot. The answer to her credit woes came from an unexpected source: a digital lending platform.

She registered on the app of Florence Capital, which lends exclusively to women in India, and applied for a nine-month loan of 25,000 rupees ($342). To her surprise, the approval for her application came in about a day.

“The level of convenience is really high,” says Ms Khatoon. “Plus, because I wanted a smaller amount, using an app felt like the right choice.”

However, such services are cheap. Ms Khatoon is paying an interest rate of 2.25 per cent a month and she does not think the rate is unreasonable.

Like Ms Khatoon, many Indians are turning to the burgeoning online lending sector to meet their credit needs. There are more than 1,200 digital lending start-ups across India, trying to grab their share of this growing market, according to data from Inc42, a focused media and information start-up-focused platform.

Fuelling the growth of the sector are factors including rapidly increasing smartphone ownership and low credit card penetration in India. There are about 120 million formally employed people in Asia's third-largest economy who do not have a credit card, according to Inc42.

Prime Minister Narendra Modi government's push for a “digital India” has contributed to the growth of the online credit industry. Banks in the country are already struggling under the weight of high loan losses and in recent years have tended to remain cautious in terms of extending new loans. That has opened up an avenue for online credit start-ups that are also riding the wave of India's online transaction boom during the pandemic, analysts say.

India's digital retail loans market is projected to reach $1 trillion by 2024 in terms of total disbursements, according to Boston Consulting Group.

“If you put all of these building blocks together, it creates a very fertile land for lenders who are looking at consumers in whatever fashion – be it personal loans [or] business loans,” says Yogi Sadana, chief executive of CASHe, which offers digital loans starting from 1,000 rupees up to 400,000 rupees to salaried professionals, used for everything from discretionary purchases to education and health care expenditure.

“India is poised at this point to be one of the leaders in terms of credit pick-up, driven by strong fundamentals on demand and consumption,” he says.

The rapid growth of the sector has grabbed the attention of technology companies such as Facebook and China's Xiaomi. Local, regional and international conglomerates have tried to establish a foothold in the niche market and grab a share as early as possible.

Facebook last month joined with online lender Indifi to launch a small business loans initiative in India, offered to companies that advertise on the social media platform. These loans range from 500,000 rupees to 5 million rupees at rates of between 17 per cent and 20 per cent.

Chinese electronics maker Xiaomi also plans to foray into loans and credit cards in India through partnerships with banks and online lenders, according to news agency Press Trust of India, which cited the company's India head, Manu Jain.

“Digital lending has, in many ways, served as an extension of the banking industry and regularised the non-formal credit infrastructure by extending credit to the unbanked and the underbanked,” says Utkarsh Sinha, managing director at Mumbai-based Bexley Advisors, a technology sector-focused boutique investment bank.

The scale of the opportunity in India's digital credit sector is huge and so is the interest to invest in it.

“There is a lot of interest among the Indian and overseas investors in the growing digital lending space,” says Charlie Lee, founder and global chief executive of True Balance, a platform offering digital loans in rural areas where many have never taken out credit through formal channels.

Softbank-backed True Balance has also raised $15m last month from investors in South Korea and India, in the second round of debt funding it raised this year to add more muscle to its digital lending operations. The company, a wholly owned subsidiary of Korea's Balancehero, launched its phone app in 2016 but moved into online lending after securing a licence from the Reserve Bank of India in 2019.

Its 6.7 million loan customers to date, “are the people who are mostly gig-workers and migrant labourers with low or zero credit history who don't really have a chance to get loans from mainstream financial institutions”, says Charlie Lee, chief executive of Balancehero's India operations. “The focus for us is to reach customers who are likely to use payday loans or borrow from unregulated community lenders.”

The company has developed its own credit-scoring system to understand the financial profile of a customer to decide on the loan amount and interest rate that can be offered to them.

Mr Lee admits that there are significant risks when it comes to digital lending, although he says that instances of defaults “are few for us on our platform”.

“The risk of digital lending lies in the fact that it is collateral-free,” he says.

However, a report by Inc42 says that non-performing assets for lending tech start-ups were already on the rise before the pandemic hit and may worsen.

Analysts say that there is still work to be done to develop a robust regulatory framework for the sector.

“Consumer protection will be key, as will be the monitoring and curbing of usurious lending practices that can widen the credit net but push unsuspecting individuals into deep cycles of recursive debt,” says Mr Sinha. “The changes in this space are happening faster than the regulators' ability to anticipate and regulate them, which essentially [means they are] playing catch-up.”

Despite risks and not enough regulations to govern the sector, online lenders are pushing for expansion and are seeing a rise in demand.

CASHe said that it is profitable partly because of Indians making more purchases online because of the pandemic. Expansion in its range of loan products for customers has also contributed to the rise in its income. Its loan disbursements now total $22m to $25m a month, up from about $10m a month before the pandemic hit.

Mr Sadana believes there is room for several more players in the country of more than 1.3 billion people.

“You can imagine the number of people who are looking for credit but have no instrument to do so,” he says.

Bhavin Patel, the founder and chief executive of LenDenClub, a peer-to-peer lending platform in India offering personal and small business loans, says his company in the past three financial years until March 2021 has reported seven to 10 times growth annually.

In the last financial year, the company turned profitable on tenfold growth, with disbursements reaching 6bn rupees.

Both LenDenClub and CASHe are integrated on Google Pay, which has helped the companies to scale their business.

Mr Patel says there was initially a negative impact of the coronavirus pandemic during the nationwide lockdown imposed in March last year, as consumption took a knock. There was a six-month moratorium on loans imposed by the Central Bank, however, by September, “there was a huge uptake in loans”, he says.

Piyush Rautela, a public relations professional from New Delhi, says that he started using digital payments company Paytm's postpaid service a year ago to borrow money to pay his utility bills.

“It helped me to maintain liquidity during the pandemic,” he says, explaining that as long as he repays the borrowed amount in 30 days, he is not charged any interest.

Despite the risks that digital lenders face, the returns are highly lucrative amid India's rising and still highly untapped demand for credit.

However, when it comes to the lending sector, be it digital or otherwise, “the success of the business is not how much you can disburse, but how much you can collect”, Mr Sadana says.