Now boarding: Is India on the cusp of a tectonic shift in retail credit?

First-time customers are emerging as a huge catchment area for retail finance, but dangers lurk in the nooks and crannies

Is India on the cusp of a tectonic shift in retail credit, which the financial services industry can tap into for decades to come? According to a recent study by TransUnion, a Chicago-based consumer credit reporting agency, 31 million Indian consumers debuted with credit products through the first nine months of 2022, over and above the 35 million that did so in 2021. Millennials (those born between 1980 and 1994) accounted for 42 per cent of fresh credits, and Gen Z (those born between 1997 and 2012, according to the Pew Research Centre and the US Census of 2022) came in next at 29 per cent.
 
This audience, known as new-to-credit (NTC), or those with no credit history, has always existed, but unlike earlier, lenders now have the technology to reach out to them. What we are seeing is the emergence of NTC as a big catchment area for retail finance (and retailing in general). This explosive growth, coming at the tail-end of the Covid-19 pandemic, may even be an indicator of a virtuous demand cycle emerging for India Inc.
 
While it may still be some distance away, Rajesh Kumar, managing director and chief executive officer of TransUnion CIBIL (a TransUnion group company), says that “our study shows that by further empowering this segment with timely and customised credit opportunities, institutions can help fulfill their aspirations while driving profitable business growth, strengthening customer loyalty, and supporting economic development.”
 
NTC offers a reason for cheer but comes with pitfalls — over-exuberance can lead to a bad-loan pile-up; and given the small-ticket sizes, recoveries are too costly to make it worth any entity’s while to pursue. NTC is largely the turf of fintech firms flush with private equity money and select non-banking financial companies, but the pain if things were to go awry will be no different from that experienced by mainstream banks which hawk loans to a more creditworthy pack — those with a credit-bureau score of at least 700.
 
It pays to be cautious. Not surprisingly, the big spurt in banks’ retail credit in recent years is on the Reserve Bank of India’s (RBI’s) radar — it has asked a few banks to submit data on their retail book for the past five years with a segmented break-up. In recent years, the retail exposures of some banks grew at an annual rate of more than 60 per cent; and the share of retail is more than 50 per cent now. If this trend were to hold — and given the lucrative nature of the business, there is a good chance it will — retail credit will make up the lion’s share of loans at the systemic level.
 
And, now there is NTC in the picture as well. The party has just begun.
 
Situating NTC
 
The exponential growth in NTC may at one level have its roots in the Pradhan Mantri Jan Dhan Yojana (PMJDY) launched on August 28, 2014 to facilitate financial inclusion. Some 478 million bank accounts have been opened so far. The reimagining of the business correspondent model, the maturing of the micro-finance business, fintechs, and technology in the decade since has made it possible for the NTC phenomenon, building on the PMJDY foundation.
 
It must be qualified that while no direct linkage can be made between PMJDY and NTC, the debut in a financial relationship is not to be discounted. “If we look at PMJDY, around 67 per cent of the accounts are in rural and semi-urban areas, with women’s share at 56 per cent,” says Rishi Gupta, managing director and CEO of Fino Payments Bank. “Credit has traditionally been branch-centric, but Covid-induced disruptions led to digitalisation of credit-related processes and repayments, including offers such as door-step credit facilities. This has led to increased credit usage from rural areas, especially by women.”
 
The TransUnion study notes that lenders providing an NTC borrower with their first account (credit) may benefit from customers’ loyalty. Of the NTC consumers who opened a personal loan as their credit product, 63 per cent signed up for the next with their first lender in a wallet. Of these, 79 per cent are keen on opening additional credit products within the next three to five years, and one in two would expand credit usage with better credit offers, clarity on fees and credit education.
 
This, in effect, may also settle the quibble that mere deposit-account opening is a mirage: rather, it’s a very good starting point for financial inclusion — whatever may be the state of activity in that account, or the size of balances maintained. For the NTC or otherwise, a bank account is a must for credit; it doesn’t matter that its opening coincides with the latter.
 
“The retail credit market has continued to grow during the pandemic, and this suggests that it’s a resilient and adaptable sector,” says Raj Khosla, founder and managing director of MoneyMantra.com, one of India’s largest financial marketplaces, with over 10 million customers across 200 cities and 120-plus banking partners. For instance, credit card spends in FY21 were Rs 6.3 trillion; in the first nine months of FY23, they were Rs 10.5 trillion.
 
“It’s important to monitor the risks associated with this growth, such as higher levels of debt and the potential for defaults and non-performing loans,” adds Khosla. This ties in neatly with the fact that the RBI is sniffing around bank retail portfolios, and explains why banks are not hooked into NTC in a big way.
 
“As a bank, we are strict in underwriting and on-boarding customers. Millennials with a credit score that matches our risk appetite are fine. But when banks get to see how the NTC perform over time, they may become future customers,” points out Chitrabhanu K G, senior vice-president and country head (retail assets and cards) at Federal Bank.
 
Fashion vs sustainability
 
It must be said in favour of NTC that it’s not a business to be taken lightly, despite the risks involved. Senior bankers who had helmed retail banking operations in the 1990s recall that when Citi, Standard Chartered Bank (StanChart) and HSBC made their foray into credit cards (plastic mimics NTC — in the unsecured segment), they waited for years before the business stabilised.
 
It’s another matter that there are now just two foreign banks which hawk credit cards in India — StanChart and HSBC (and American Express, but it doesn’t have a bank in its fold now). The message from these bankers is that, like the credit-card business, NTC is being evangelised by new-age players which can lay the foundations for a much bigger retail play.
 
But then, the RBI has noted in its Report on Trend and Progress of Banking in India 2021-22 that there are risks even for legacy players. The report says that in recent years, Indian banks appear to have displayed “herd behaviour” in “diverting lending away from the industrial sector towards retail loans”.
 
The report went on to explain that when entities which are not systemically important behave in a way that is similar to market leaders, they get exposed to common risks; this could amplify systemic risk, “even though individually (as banks), they may focus on reducing their standalone bank risk through portfolio diversification”. If this is a point of concern for banks, which typically lend to better-off customers, does the NTC factor amplify the risks?
 
Unfair advantage
 
According to Vishal Gupta, managing director and India partner at Bessemer Venture Partners (which has $20 billion in global assets under management, and expects that by 2030 India’s credit market will double to $5.5 trillion), “lending is not attractive as a venture-funded business — banks and NBFCs have an unfair advantage on cost of capital. What I am saying is that the model depends on the ability to leverage debt; and you can’t rely on burning capital beyond a point to build book size.” Return on equity will become an issue, he says. “And that’s why a Bajaj Fiserv or the new-age Five Star Capital has very good valuations.”
 
Madhusudan Ekambaram, co-founder and CEO of KreditBee, a platform that facilitates loan transactions between borrowers and personal loan providers, reckons that “going ahead, I also see a shakeout among lending fintechs due to the regulatory changes; and it’s possible that only a few will survive this phase. But there is no doubt that NTC will be a catchment area for future retail.” It helps that his firm is backed by Advent International, Premji Invest, TPG-NewQuest, Mitsubishi UFJ Financial Group, and ICICI Bank.
 
Is the NTC model sustainable? V Raman Kumar, founder and chairman of CASHe, an app-based lending platform that offers short-term personal loans to young salaried people, believes that “at this point in time, you have a big untapped market, even as we focus on the prime part of NTC.” He admits that CASHe would have to go public like a Bajaj Fiserv, before which it will have to bulk up to Rs 5,000-8,000 crore in loan disbursals. “At which point, I can list the company and have enough equity to be able to service the lower interest-bearing secured portfolio.”

Another variable at play in the buzz over NTC is jobs. Abhishek Sharman, founder and managing director of Carpediem Capital — which is raising capital for a fund with a corpus of Rs 500-600 crore from domestic and global investors, says that “the number of people who are temping, or in the gig economy, has to be factored in.”
 
Hopefully, the new-to-credit phenomenon will not be just another gig.