India is now the 5th largest economy in the world with a financial landscape that is quickly being digitized and a population that is becoming incrementally aware of non-traditional banking tools. Unsurprisingly, this potential extends to the availing of credit.
According to an industry report, the number of credit cards in use in India is expected to follow a slow, but steady increase of 42.16-42.86 million in 2022-23 to 45.43 million by 2028 (Source). It seems clear therefore that while credit cards may plateau, credit itself in India will continue to rise over the coming years due to the myriad smart financial instruments being offered by fintechs and NBFCs.
This is not altogether surprising as all smart-credit instruments have a few qualities that traditional credit cards simply don’t. They are very easy to access online and as apps, they are well-suited to providing short-term and small-ticket funds, and they are more accessible in terms of their credit history and documentation requirements. These qualities allow digital lending platforms and fintechs to serve the fast-growing niche of Indians who would like to use smart services for casual or aspirational purchases, while reserving banks for the major milestones that benefit from traditional credit.
Here are some of the major digital lending tools that are raising the scope of smart credit in India:
Microcredit: Transactional/microcredit is a type of loan that is provided to low-income individuals, small business owners, and entrepreneurs who are unable to access traditional banking services. These loans are typically small in size, ranging from a few hundred to a few thousand dollars, and are provided for short-term purposes. Microcredit loans are processed quickly, and funds are disbursed within a few days. This enables individuals to access finance quickly and address their immediate cash needs. Microcredit loans are flexible, and borrowers can use the funds for any purpose, such as purchasing raw materials, paying for operational expenses, or investing in their business.
Multi-tenured loans: Multi-tenured loans are long-term loans provided to individuals or businesses for financing large capital expenditures, such as purchasing real estate, equipment, or vehicles. These loans have a long repayment period ranging from a few years to several decades and are secured by collateral, making them low-risk for lenders. Multi-tenured loans typically have low interest rates, and the interest rate is determined by the borrower’s creditworthiness, collateral, and repayment capacity. These loans are usually obtained from banks, financial institutions, or private lenders and are an important source of financing for businesses and individuals looking to fund long-term projects or investments.
Payday Loans: A more situational smart credit instrument that is often reserved for emergencies is payday loans. Digital payday loans are short-term loans that are designed to provide borrowers quick access to funds to cover unexpected expenses or to bridge the gap between paychecks. Such loans are typically unsecured and can be availed of very quickly. With many lenders providing same-day or next-day funding. Digital payday loans in India are often available to borrowers with limited credit history or low credit scores as lenders use alternative data sources and machine learning algorithms to assess creditworthiness, which can make it easier for borrowers to qualify for loans.
In spite of these plus-points, payday loans are often preferred as back-up credit instruments due to their high interest rates and the potential for getting into debt cycles if one cannot repay them by the given due-date (typically a few weeks). Having said that, with the introduction of clearer digital lending guidelines by the RBI in India, there may be considerable scope for improvement across all digital lending avenues including payday loans.
All in all, the future of credit in India looks promising as the financial landscape becomes increasingly digitized, and smart credit instruments gain more traction. The steady rise of digital lending platforms and fintechs is expected to offer a range of credit options for both the short-term and long-term needs of the people. With clearer guidelines for digital lending in place, there is ample scope for improvement across all lending avenues, including financial tools which benefit borrowers with limited credit history or low credit scores. As the Indian economy continues to grow, the increasing accessibility of smart credit instruments will empower individuals and businesses to achieve their financial goals and drive progress in the country.
Views expressed above are the author’s own.
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