How much digital credit is too much digital credit?

The Pattern #134

How much digital credit is too much digital credit?

Mayank Jain

Head - Marketing and Content

Jul 28, 2023

Hello everyone,

Welcome to the 70th edition of The Pattern. It’s your space to understand the latest rumblings in the world of finance, technology as well as the broader economy. Let’s get started.

The lede: To lend or not to lend

Does eating chocolate cause cancer or prevent it? The answer depends on how you frame the question in your Google search. There’s enough and more scientific studies in the world that can help one argue that chocolates are good for health or that they’re catastrophic.

Digital lending in India is much the same.

It’s a growing sector with way more ardent followers than detractors. And yet, the detractors have a point. Just two weeks ago, we wrote about how the RBI is worried about unchecked growth in personal unsecured loans in the country.

The numbers are stupendous. There’s been a consistent double digit growth in unsecured loans over the last three years, at the least. At this point, more new loans are given to individuals than to the industry. The state is indeed alarming.

But, is unsecured credit a reason to cheer the cause of financial inclusion or a reason to worry? Let’s find out.

For Bajaj Finance - the consumer finance gorilla - this unchecked growth is worrisome. The company recently put hold on lending in certain segments such as rural consumers due to upticks in delinquency rates. Even as its larger portfolio is intact and healthy, the company says that this kind of growth might be an indicator of over-leverage among individuals.

"We are a little troubled about the level of leverage in the system. The amount of personal loan growth is troubling us," Rajeev Jain, managing director at Bajaj Finance, told analysts in a conference call on Wednesday.

Bajaj Finance has more than Rs 2.7 lakh crore worth of assets under management - largely consumer loans across durables, securities, personal needs, and overdraft among others.

While the industry giant is waving red flags, the regulators are inundated with customers doing the same.

A recent report stated that the complaints against digital lending apps have more than doubled to 1,062 complaints during FY23. A caveat here is that this number is not strictly comparable to last year and rising complaints can also be attributed to increased awareness.

However, the problem of digital lending appears to be few bad actors (both borrowers and lenders) spoiling the entire industry’s image and reputation. Hence, regulators are forced to take tough steps to rein in usurious lenders from misusing borrowers’ financial need or their data for profits.

While these steps are warranted, they are often limiting to the growth of even good businesses and stifle innovation before the eventual market-driven regulatory correction happens.

Final word

One can debate endlessly whether the ends justify the means or if the envious growth of credit is going to lead us to a trainwreck we can’t fully foresee yet. However, there’s no disputing the fact that the growth of digital credit is a watershed movement and that’ll do more good than harm in the long run.

And, we’re only getting started. There’s Jio Financial Services readying a war chest to enter the fray and shake up the incumbents. In fact, the company has found itself the biggest partner of them all in BlackRock investments to run the AMC business.

Even as Jio tries to disrupt the financial services space, PolicyBazaar Chairman Yashish Dahiya believes that fintechs trying to do insurance or wealth management should instead focus on credit as the margins are better here.

Before he could finish saying the word, it seems the microfinance industry heard it. The largely-offline and physical touch heavy industry is set for a makeover as it immerses into a wave of digitization, according to Arohan Finance MD Manoj Nambiar.

Whether the digital credit industry survives the regulatory guardrails or the whiplash caused by Jio is anybody’s guess. We’ll keep a close watch. Meanwhile, it’s certainly worth closing this piece with one of my favourite quotes from historian David Pilling.

I will see you next week. As always, leaving some reading recommendations below.

Between the digits

395: RBI’s Digital payments index rose to 395.5 in March 2023. This index tracks the proliferation of digital payments and infrastructure and is set against a base of 100 for March 2018.

Rs 7,000 crore: IDBI Bank is set to invest more than Rs 7,000 crore in building a large digital lending business. The bank expects to lend to personal and education loan segments through co-lending, fintech tie-ups, and more.

45%+: Attrition rates in the BFSI sector, especially private banks at lower levels are climbing way past the comfort zone. A recent report suggests that attrition is as high as 46% and 34% at Kotak Mahindra Bank and HDFC Bank respectively.

Reading List