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Consumer Lending

In India
Growth &
By Siddharth Misra
Dec, 19
Siddharth Misra

Consumer Lending in
India Siddhart.misra@gmail.com
India’s Macro Story
Demographics Urbanization
78% of the population is in
working age group of below 45 69% of India’s population which
years. The median age in India is lives in tier 2 and tier 3 cities
expected to rise from 27 years in contributes 54% to the total retail
2015 to 30 years in 2025, which consumption, which indicates
makes it attractive from significant purchasing power
consumption point of view

Disposable income Consumer Credit

In 2018, middle income households While consumer credit is expected
with annual income between ₹ 5- to reach US$1.2 trillion by 2025,
20 lakhs contributed more than India continues to remain credit
50% of ₹ 110 lakh Crores annual starved country where getting
consumption in India. And, access to affordable credit is a
Consumers more open to taking severe issue for majority of the
loans population

Consumer credit excluding agriculture is INR 13.9 trillion, or 17.63% of total bank credit, and is growing
rapidly at 15.8% per year. Within the retail segment, the top three products were credit cards, housing
loans and personal loans.
Consumer Credit Demand Interest Rate Interest Rate
10-18% 25-60%

Banks & NBFCs 16-36%

MFI/ Informal
Digital Lenders PayDay Lending
ent Afflu Aspir Next Strug
ent es Bn. glers

Amount outstanding (Rs. Trillion) CAGR

Segments FY14E FY19E FY24P FY19 - FY24

Personal loans 1.1 3.9 10.5 22%

Credit cards* 0.3 1.2 3.3 23%

CD loans 0.07 0.24 0.62 21%

Two wheeler loans 0.2 0.5 1.1 16%

Top 8 cities has 35% , followed by 14% from the next 20 cities. Top 50 cities has 56% demand (FY19E)
Lending products as part of a bigger package.
Indian digital-lending space has two kinds of players
Fintech journey with lending Forayed into lending
They tied up with Lenders to lend to
Digital-lending players follow two their customers (wallets) and
types of business models — business merchant base; point-of-sale (PoS)
to consumer (B2C) and business to companies such as Pine Labs and
business (B2B). They are trying to Mswipe that went for PoS
create a niche, with some targeting transaction-based lending for their
working-capital needs of SMEs or merchant partners; and online-
enabling EMI financing of gadgets for payment gateway companies that
millennials. partnered with financial institutions
to facilitate loans to their merchant

Lending is monetisation for businesses

who want to make money with their
core product(s)

Added-value lending is a convergence trend, which means that we stop regarding lending as a product and start
thinking of it as an ongoing service
Consumer Lending Value Chain
Customer Docs Credit Processing Credit Decision
§ Kyc DSA Agents Verification
§ Income Proof
§ Bank Statement RCU
§ Form 16 Risk

Customer Loan Disbursement Pre- Disbursement

Management § Welcome letter
§ Amortization Documentation

Better screening at the front end prevents the problem at the back end, collections, defaults
Siddharth Misra

Digital Consumer
Lending Siddhart.misra@gmail.com
Who is Addressing the Digital Lending Market?
Examples Revenue Economics
Model Key Features
& Scalability

Lending Online aggregators of 1%-3% on success or Generate leads for Cost of digital acquisition is
Aggregators/ Financial Products and fee per lead financial institutions. And normally 4%-5%. It’s tough
Infomediary Services act as a loan comparison to become unit positive

P2P Connecting individual 3% from borrower and Risk taken by the With P2P regulations in
Lending borrowers with ~2% from lenders investors/lenders India, they are
individual lenders struggling to achieve

Marketplace Connecting Borrowers to ~3% on loan origination, Lender takes on the Cost of acquisition could
Lending with Institutional Lenders + additional 1-2% on loan credit risk, after be high but is made up by
Own Credit credit scoring + fulfilment completion FLDG (if any) the ability to cross-sell

Direct or Balance ~3-9% (NIM) Focus on digital interface Scale is related with the
Sheet Lending + 1.5-2% & alternative underwriting funding. Hence, raising debt
processing fee models regularly and at low costs is

Offer advance credit scoring Fee per ping Offers real-time Under constant
Fintech-tech credit automation, NPL decisioning, and credit pressure to innovate
management and regulatory underwriting solutions while cutting down
monitoring/ reporting time to market
Marketplace Lending with Own Credit Policy

Application + Credit Application +

Lender is Appraisal Drawdown Customer is
seeking: OTD seeking:
Performance Data Notifications
New Segments &
Repayment NTC, thin-file
Experiment: Convenience:
Test phase Fast & frictionless
This model is also known as Originate to Distribute (OTD),
they have a Risk sharing arrangement with Lender Affordability: Cost,
Fee & Loan Pricing

Challenges: (a) Getting the Loan policy & Risk-based pricing approved, (b) pool of lenders to match their expansion
03 plans with the pre-defined risk and cost, and (c) how to ensure that it’s their customers not of lender
How Checkout Financing work?

Cart Pay Cardless EMI

Please complete the payment within 09:55 m Credit limit gets assigned

Amount: 9,999 Show details

Cardless EMI Choose your EMI plan
Get credit without credit and
buy your favourite products

Your Zest account will be

12 3
created with

abc@gmail.com Rs.9999
Steps to activate:
1. Share your Aadhar, PAN 9 6
2. Use Netbanking
3. Setup repayment to use

EMI: Starting only from Rs.850

for 12 M
Complete Purchase
Checkout Get Started

03 Challenges: (a) dependency with the Merchant partner (b) balancing act of No Document Lending
Digital Lending: Business Models
Digital Consumer
Business Model Key Players
Lending Model
• loan to purchase items online and offline
• Bajaj Finance has historically served this purpose in the offline space
Point of Sale • Players such as Zest Money addressing this market on the online front by tying
Financing / Checkout up with eCommerce players like Flipkart, Amazon, PayTM etc.
Financing • Disburse loans leveraging consumer history on the platform to offer ultra-small
ticket loan and thereby intend to increase the usage

• Flexible loan products: personal loans, advance salary loans, rental deposit
loans, EMI-free loans to young salaried professionals

Salary Finance • Target segment is typically underserved by banks / NBFC as they are NTC
customers with no to little prior credit history
• Leverages technology to deliver fast and flexible loan solutions to tech-savvy
millennial population

• Personal loan, home loan, auto loan etc. to unorganized workforce or segments
underserved by traditional formal lending institutions
Consumer Lending • These players leverage alternative-data based underwriting methods and use
digital methods throughout the lending chain starting from sourcing,
authentication to loan disbursal

Advancements in risk decisioning, account acquisition and relationship management are transforming the credit growth
Siddharth Misra

Digital Lending: How
and for Whom? Siddhart.misra@gmail.com
What ‘Most of the New Age Digital lenders are doing’? (1)
1 GTM STRATEGY 2 Customer Profile 3 Use cases

urban salaried millennials

• Smartphone user • Credit line that increases with
• Age-group of 20-30 every transaction
• Young Salaried, Earning 2.5 to 6 • Facility of Buy Now | Pay Later
lacs per year ($3,700 to $8,000) • Consumer durable purchases e.g.
• Have a Bank A/c. laptop, smartphone
Digital Footprint • Might be Living in rented • Educational courses
accommodation with other • Travel / Experiences
graduates. • Emergency contingencies e.g.
• Prime/NTC or Near prime unforeseen medical expenses
• Mostly Runs out of money nears • Repay old debt
Willingness No credit month-end, due to aggressive • Life cycle events
score consumptions • Marriage
to take debt • Formal banking doesn’t provide • Funeral
credit facility • Festivals

‘Credit line’ is often a clear winner among borrowers with one time approval and seamless subsequent drawls
What ‘Most of the New Age Digital lenders are doing’? (2)
4 The BlackBox
Maker = Machine
Checker = Hybrid of
Credit Data Human and Machine
BaseLine Data Output
1. Demographic – pincode, gender, age,
city, work email, employment etc Pre-Qualifications Score: Eligibility
2. Credit Account Information (CIBIL) check (Intent)
3. Bank statements, transactions,

Alternative Data Affordability & Ability to pay

1. Device Data: make, model, price, age Checks: Assigns Credit limits
on handset , IMEI, GeoTag
2. Utility bills & Tax documents Your Text
3. SMS reading
Risk Based Pricing: exposure based
on current risk policy
Fringe Alternative Data
1. Social Media profiling
2. Psychometric test
3. Biometrics Data
4. Spend pattern obtained via third party

Lending is a BET, i.e lots of decision-making under conditions of uncertainty over time, probability and risk
Lifecycle of the ‘Most of the Digital Lenders’?
A. Insightful decision
oriented reports on
A. Reminder & follow-ups past performance
B. Repayment reconciliation
Repayment 9 B. Real time monitoring
of portfolio
C. Delinquency follow-ups
C. Predictive analysis
D. Registration of repayment instrument of future trends

A. Enroll partner bank accounts Fund

B. Fund transfer to listed accounts Disbursement 7 Reporting
C. Post transfer reconciliation
10 & Analytics

A. Credit decisioning based on

risk policy Credit AI
B. Credit line assignment Underwriting 5 i ng+ Borrower
A. Loan literacy

r n 8 Education
B. Product awareness
e C. Program benefits
A. Establish identity
c hin
B. Establish Borrower
3 Ma
financial Risk A. Study market trends
parameters On-boarding 6 Pricing B. Establish risk based pricing
C. Complete
A. Identify relevant parameters
Credit B. Create model based on machine
Borrower 4 Scoring learning and statistical techniques
Origination 1 C. Formulate risk policy

A. Identify go-to markets Lender A. Engagement & On-boarding

B. Get customers attention
2 Origination B. Risk & Functional discussions

C. Provide on-boarding C. Technology integration

Siddharth Misra

Challenges for Digital
Lenders Siddhart.misra@gmail.com
Risks / Challenges with Digital Lending
RBI lending
regulations such as
P2P lending limits

FLDG is a cost, hence

Business visibility is Regulations need more capital
questionable as
default rate increases
Default Rate FLDG
Limited understanding
of consumer behavior
(user vs. borrower vs.
Borrowing Cost and Funds/Partnerships Underwriting spender)
managing the
relationship with How to detect fraud,
Banks or NBFCs is Flagging potentially
very critical CAC Dilemma of ML/DS fraudulent transactions
and documents

Digital is costly, Overestimating the ability of data
Traditional (DSA/Connector) is science leading to concentration and
manpower intensive & Digital lenders are not into collecting adverse selection. Naming
B2B play takes time to mature + money. Micro size consumer lending is a 'Hypothesis' as 'Algo'
dependency risk gr8 idea.

Success in lending = (LOW) cost of Acquisition, Fund & Operation and Delinquency
Siddharth Misra

Risk Management
Risk as a Process
Risk Appetite Framework Debt Recovery Plan

Risk Mapping & Monitoring

Risk Roadmap: Setting of

Reporting/Hind sighting

Business and Support Lines

the Risk Appetite




New product Approval Policy (Credit Risk Limit)

Creation of Credit Scoring Model & Credit Policy

Risk Management in lending is an evolving process of these activity in a loop: (a) Identify the potential risks at the start
(b) Analyze & Monitor the performance, (c) Action based on the performances
Siddharth Misra

Fraud Preventions &
Collections Play Siddhart.misra@gmail.com
Lending Approval & Fraud Preventions

Verification &
Email & Mobile is FaceMatch & Dedeup is done
Physical Loan Disbursed
Verified via OTP Dedupe checks
BS (PDF) is Verified Documents collected

Underwritin Pre
g Disbursment
Loan Offer is sent
1) Mobile No., Email & Address Signature (NACH/CHQ)
2) Negative Area Verification
KYC and Bank Statements
3) Device is checked with TrustDB Geo-location Verification

Onboarding KYC Docs, Credit Bureaus & Financial Disbursement

Lending is high-risk. Reduce credit default rates by preventing fraudulent customers.

Proactive Collections
Good Bad Ugly
1. Automated 1. These folks Won’t
Communications pay, follow the
Bucket 1-2 Bucket 3-6 Bucket 7+
2.How the customer stringent approach:
cohorts are • Legal notices
behaving, feedback 1. Soft 1. Focus on 1. Focus on: • Police case
so the future loans Collection Stabilisation legal action, filing
can be rightfully sms/email
Effort- Greed & door-
priced and fear Normalisatio knocking, 2.Collection Scorecard:
3.Early Warning 2. Getting the n approaching How the customer
System PTP 2. Waive off the collection cohorts are behaving,
3. Minimize roll late payment agencies feedback so the
forward for fees 2. RPC & Skip future loans can be
these 3. Greed (of Tracing rightfully priced
4. Deposit PDC fresh loan) 3. Settlement
(if available) and fear (of Payment
5. Reminders bad CIBIL) Plan

Inhouse Collection Efforts Inhouse Collection Efforts Recovery Efforts

Creation of the customer cohorts: Good (Performing asset), Bad (Underperforming) & Ugly – (Nonperforming)
Siddharth Misra

The way Ahead
Global Lending Industry Trends.
1 2 3 4

1 Companies targeting specific need


2 Educational content that unlocks

additional benefits
FarmDrive is a US based SOFI has Canadian fintech US based Affirm lets
Kenyan-based career and salary help you with your you shop stress-free
Fintech that advice and content expenses budgeting, at thousands of
connects unbanked on top of a Also let you monitor Planning and Tracking: Spending,
stores, with no late 3
& underserved your credit score for Creditscore, etc
farmers to credit traditional product. fees

E-commerce purchase financing

has become an entirely self-
sufficient lending category

New Lending Models = understand my situation + tailor my offers + help keep track = keep me out of trouble
The way Ahead
Share of digital lending 5 key Focus Areas
Access to a variety of
sources of funds at Focus on analytics,
competitive costs customer segmentation
and geographical
Engagement with
customers through
multiple channels
Strong Collection Play

Reasonable share of
relatively higher-
margin retail loans

Customer on-boarding
Within unsecured loans segment consumer
durables has highest share of digital

Loan structuring &

Credit assessment
lending followed by credit cards and

Risk Monitoring
personal loans

“We're in the business of risk. Lending is not an issue, but until the
customer has paid the last instalment, the company is not making money.
My margin lies in the last instalment” - Rajeev Jain, Bajaj Finance