Lenders widen their credit exposure with increased unsecured personal loans

How have lenders disbursed loans in the last quarter of the calendar year 2018 and what has changed in the loan disbursement pattern over the last one year

A shift in the lending pattern of unsecured personal loan in India

Loans worth Rs. 3.29 lakh crore were disbursed by banks, non-banking financial companies (NBFC) and fintech-NBFCs in the fourth quarter of the calendar year 2018. This was a significant increase compared to the corresponding quarter last year when it was Rs 2.47 lakh crore. These numbers, released by CIBIL, indicate the increase in the risk appetite among lenders who are now disbursing more and more loan to customers with lower credit score. It is observed that the liquidity crisis, the competition among fintech lenders and the use of advanced data analytics are the reasons behind this change in disbursement pattern.

Prime and prime-plus customers constitute 73% of the loan disbursed during the aforesaid period, a fall of 2% from last year’s 75%. The exposure to riskier customer bases has however increased during the same period. Loan to sub-prime customers increased from 7.2% to 7.6% while the same for near prime category increased from 17.7% to 19.3%. 

Yogendra Singh, Vice President of data science and analytics, TransUnion, CIBIL, observes that smaller NBFCs and Fintech NBFCs are targeting riskier customers because of the increase in the cost of credit since last September. The costs have increased largely due to the IL&FS defaults which dwindled market confidence. On the other hand, traditional lenders have been able to improve their credit exposure by partnering with Fintech NBFCs to expand their books. And NBFCs have raised money through public issuances and riskier short-term commercial papers.

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What is the cause of liquidity crisis and how is it affecting the economy?

Infrastructure Leasing and Financial Services (IL&FS) had borrowings close to Rs 63,000 crore according to its 2017-18 balance sheet, owed largely to banks and NBFCs. However, this major infrastructure lender has been defaulting in payments since August last year and has created a liquidity crisis among its lenders. 

This liquidity crisis is making banks and financial institutions ease their credit flow. On a more macro level, the air is tense between the government and the RBI over this crisis. 

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What are the different type of lenders discussed here?

Banks are traditional financial institutions which offer a wide range of services, including loan disbursement. Their simple business model is accepting deposit from the public at a low cost (lower savings account interest rates) and lending to customers at a higher rate through secured or unsecured loans. 

NBFCs are the next biggest lender after banks. They generally specialise in the financing of a particular asset class or classes. Fintech NBFC or Financial Technology NBFCs are technologically driven lenders who are flexible in their products and service methods. They concentrate on speed, user experience and innovative offers. For example, Fintech Company Credy offers fast personal loans with instant approval and cashback of up to Rs. 5,000 if you refer your friends to use the services of Credy.

Related: Know your EMI's in-and-out. Are you paying more than you should?

How does a credit score work?

The credit score ranges from 300 to 900. The higher a person’s score the better is his or her credibility in terms of loan repayment. And better the score, the easier it is for you to get a loan application approved. A score of 750 or above is considered to be healthy. Below 700 the loan options start to reduce and if it is below 600, the approval of loan is in doubt.

Experian, TransUnion CIBIL, Highmark and Equifax are the four credit information companies recognised in India. While all these companies except Experian follow the 300-900 range, Experian itself follows a 330-830 scale for credit rating.  If you want to study about different types of personal loans available based on your needs. Read this. 

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