From smartphones to smart loans: Gen Z, millennials boost digital lending

The share of digital loans has increased from 1.8% of total retail loans in FY22 to around 2.5% in FY24, revealed a report by Redseer Strategy Consultants

India’s retail lending landscape is on the brink of a revolution, with digital lending emerging as a major force. A recent report by Redseer Strategy Consultants projects that digital lending will comprise 5 per cent of all retail loans by FY28. This shift is primarily driven by the tech-savvy Gen Z (aged 18-25) and millennials (aged 26-38), who are rapidly changing how borrowing works in the country.

The study reveals a tremendous potential for credit growth in India, with Millennials and Gen Z not only as users of financial services but as key players in reshaping the market. 

These generations show a clear preference for digital lending solutions, reflecting a broader generational shift towards online platforms, the study highlighted.

 

 

India’s retail credit market
 

India’s retail credit market is poised for substantial growth, especially when compared to developing economies like China and Brazil. With household debt per capita at $900, India offers a significant opportunity for lenders to expand their reach and services.
 

Rapid Growth in digital lending
 

Digital lending in India is experiencing an impressive surge. The share of digital loans has increased from 1.8 per cent of total retail loans in FY22 to approximately 2.5 per cent in FY24. Projections indicate that by FY28, digital lending will double to around 5 per cent of total retail loans, with a compound annual growth rate (CAGR) of 40 per cent. In FY24 alone, Gen Z borrowed Rs 3.5-4 trillion, while millennials accounted for Rs 25-28 trillion of the total Rs 62 trillion in retail loans. The preference for digital platforms is driven by the convenience and speed they offer.

Diverse borrowing patterns
 

Borrowing patterns vary significantly across different income groups. Affluent households, earning over Rs 20 lakh annually, and well-off households, with incomes between Rs 12-20 lakh, have high credit penetration rates and are usually catered to by traditional banks. Middle-income households, earning between Rs 3-12 lakh annually, actively use both traditional and digital lending services. Low-income households, earning less than Rs 2.8 lakh annually, are emerging as new credit customers, primarily served by digital lenders. The non-bankable segment within low-income households remains largely untapped, presenting a vast growth potential for digital lending.

Gen Z and millennial borrowing habits
 

Gen Z and millennials exhibit distinct borrowing habits. For Gen Z, personal loans make up about 40 per cent of their borrowing, often used for experiential expenses like travel and tech upgrades. Millennials, in contrast, have a 21 per cent share of personal loans, reflecting different life stages and financial needs. Credit card spending is more significant for millennials, accounting for about 30 per cent of their retail loan disbursals, whereas for Gen Z, credit cards are the second preferred financing option after personal loans.

Future of borrowing in India
 

The future of digital borrowing in India appears promising, driven by the younger generation’s enthusiasm. Gen Z individuals account for 20-25 per cent of total digital loans disbursed. The proportion of credit-active Gen Z individuals in India, currently at 15-20 per cent, has significant growth potential compared to countries like South Africa (35-40 per cent), China (40-45 per cent), and the USA (75 per cent). This presents a tremendous opportunity for lenders to offer tailored products that evolve with the changing needs of these borrowers.

“Gen Z and millennials are at the forefront of transformative change across various sectors, including the retail lending market. In India, retail credit presents substantial growth potential, driven by these younger generations. They are not just consumers of financial services; they are actively shaping and redefining the market's direction,” said Jasbir S Juneja, Partner at Redseer Strategy Consultants.

“As Gen Z continues to mature and millennials advance in their careers, the demand for diverse credit products will likely expand. The younger generation’s familiarity with digital platforms will drive further innovation and competition in the lending market,” he said.