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The credit of below Rs. 50,000 is considered a small-ticket personal loan and is primarily offered by NBFCs (Non-Banking Financial Companies) and Fintech startups. 

As per a report by the CRIF India, the disbursement of small-ticket personal loans during the last two years has jumped almost 5 times. The share of small personal loans shot up close to 60% by March 2020 from 12.9% of the disbursed amount during 2017-18. Software deployed by finance companies and Fintech to approve and disburse instant loans based on analytics is the key driving force behind this jump in loans. The report suggests low-income borrowers are applying for an instant loan to meet their daily requirements rather than emergency purposes. 

Source: Times of India (CRIF)

New-age lenders and Fintech players are using modern technology to disburse this type of loan to target low-income as well as tech-savvy customers who need cash to meet short-term financial needs and have no or limited credit history. In the financial year 2020, the proportion of loans disbursed to individuals with income below Rs. 3 lakh per annum has increased over the three years, reaching 69% in new loans. Also, customers whose application is turned down by the traditional lenders are going for small personal loans. 

Loans of Rs. 5000 or less contribute to more than 50% of volume share in small personals as of March 2020. This suggests that payday loans and the concept of checkout finance are gaining popularity among customers. The disbursal trend indicates millennials and young borrowers in the age group 18 – 30 years have increased from 27% to 41% in the last 2 years.   

Among lenders, NBFCS continue to expand, doubling their market share in the last two years. It has been observed that the current market share of NBFCs in the small-ticket loan market is 42 percent as of August 2020. Whereas, public sector banks and private sector banks have been losing share in the small loan market over the last 2 years.

The average ticket size has reduced continuously during the last two years, despite the growth in the portfolio, declining by 18% by March 2020. 

Rating agencies say that there is no problem for lenders due to retail loans. According to rating agency ICRA, the collection (repayments) of the loans has remained steady in October 2020. However, the current collection efficiency continues to remain below the lock-down level, in the range of 81-95% across retail loans. 

In the financial year 2020-21, disruptions due to COVID-19 pandemic have led to an increase in the number of mature borrowers as compared to young borrowers applying for small-ticket personal loans. 

During the last two years, the personal loan disbursal has grown by around 40% annually. However, due to the Coronavirus pandemic, the personal loans book stood at Rs. 5,07,684 crore having increased by only o.57% from March 2020.  

The personal loan segment needs credit below Rs. 50,000 which is considered as a small-ticket personal loan (STPL). In 2019-2020 this segment has been driving the volumes with growth as high as 162% in terms of loan disbursement.  

The STPL Loan business is estimated at Rs. 12,000 crore after getting a 77% rise in value terms during the last financial year as several app-based lenders available in the market. Incidentally, small-ticket loans have seen the maximum stress among the borrowers at 9.4% of the loans.  

Bottom line

Infusion of technology in finance has made it simples and faster for lenders to disburse loans. It is a cost effective and seamless process, which helps new-age lenders to issue loans instantly with minimal verification and operations charges. Since the loan amount is small, there is low risk for lenders, hence they offer credit to individuals with limited or no credit history. As small-ticket personal loans are offered for short repayment tenure, salaried borrowers who run out of cash can easily get a personal loan to meet their financial requirements and repay the loan once their salary is credited.