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About $350 billion loans disbursed digitally in India; FinTechs emerge big lenders in last two years

A recent analysis found that digital lending in India had skyrocketed, with almost $350 billion having been disbursed digitally to date.

According to Experian's research "Fintech Led Digital Lending: Coming of Age," 36% of borrowers are credit-first timers.

The market has expanded thanks to the widespread use of digital Know Your Customer (KYC) processes, underwriting algorithms, electronic mandates for collections, and instant disbursements enabled by digital banking.

Over the past two years, fintech lenders have made significant advancements as they have adjusted to the new environment post-pandemic. The analysis finds that by 2023, FinTech lenders will have captured 47% of the personal loan market, up from 13% in 2018. FinTechs' market share is expected to reach 73% by 2023, up from 45% five years ago. This trend is especially noticeable for loans with ticket sizes of less than Rs 1 lakh.

In addition, the data shows that the highest rates of growth in loan disbursements have been seen in smaller towns like Alwar (Rajasthan), Gorakhpur (Uttar Pradesh), and Barpeta (Assam). Nearly 18.3 million loans were disbursed by fintechs in the fourth quarter of 2023, while the rest of the lending ecosystem only managed 6 million. Notably, the median ticket size for fintech loans is only Rs 2,000, whereas it is Rs 22,000. This is a significant difference from the norm in the business.

FinTechs have been crucial in closing the country's credit gap, but they still must overcome obstacles. The paper notes that collections and other in-person post-lending procedures have lagged behind the expansion of digital lending. The upshot is a higher default rate and smaller roll-back for fintech lenders, which poses a greater credit risk. Fintechs source a larger percentage of their funding from sub-prime consumers (those with credit scores below 700) than the industry average (19%). Many of these clients still fall under the "sub-prime" category.

Clientele of NTC

FinTechs have a higher proportion of new-to-credit (NTC) consumers than either NBFCs (24%) or banks (22%), with 36% of their portfolio made up of NTC borrowers. The percentage of the market for personal loans under Rs. 1 lakh that is held by fintech and fintech-enabled enterprises has increased to 47% from 13% in FY18.

On the other hand, the paper acknowledges that FinTechs face greater delinquencies and "deep delinquency risk" than conventional lenders. Due to their transient nature, they also have trouble being properly represented in archives. That's why they need to use risk-based pricing and hike interest rates on loans to keep their profit margins healthy. FinTechs are collaborating with lenders on non-competing goods in order to generate more revenue in light of their increased funding costs.

Fintechs are growing popularity despite these obstacles, with many repeat borrowers working with the same fintech lender or someone else in the fintech ecosystem. Furthermore, the sanctioned amount exceeded Rs 20,000 for 29% of 'Buy Now, Pay Later' (BNPL) transactions, demonstrating a growing trend in high-value purchases.

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