As the ongoing COVID-19 pandemic unleashes a worldwide public health crisis, people across the length and breadth of the country are also bracing themselves for the economic crisis triggered by the disruption to the global economy.
Subsequent lockdowns to contain the spread and a decline in economic activities have left consumers grappling with layoffs, loss in pay, furloughs, and a reduction in savings. Even as the economy reopens slowly, consumers are struggling to regain control over their finances and are cutting back on discretionary spending.
What does the future of lending look like in this scenario? How will the demand for consumer loans change in the aftermath of the pandemic, if at all? Will the current liquidity crunch result in an increase in borrowing?
Reason for borrowing will change
With the economic growth severely impacted, discretionary spending across families has reduced drastically. A disrupted supply chain is further responsible for dampening consumer demand. In the post-pandemic world, as we recover from the economic fallout of COVID-19, the need for borrowing will change.
Earlier, customers would borrow out of necessity or to fulfill aspirations of travel, dining, experiences, luxury acquisitions, and other indulgences. As spending on travel, tourism and hospitality has come to a grinding halt and economic uncertainty looms large, demand for personal loans for guilt-free indulgences has dropped. Want-based borrowing will soon make way for more need-based borrowing. With the possibility of job loss and salary reductions, no significant economic revival in sight, and a decline in disposable income, most consumers will exercise caution about borrowing and will take loans only out of necessity such as education, medical emergencies, and other essentials.
Smaller ticket size loans will be preferred
In the future, there will be a lower appetite for large ticket sized loans. In the wake of economic distress triggered by the coronavirus pandemic, most people will prefer small ticket sized loans, for emergencies or for financing immediate requirements. First-time borrowers will further drive the demand, especially millennials and Gen-Z, with no credit history, who will find it difficult to obtain larger ticket sized loans from traditional sources of credit like banks and NBFCs.
Lenders will exercise more caution
Despite the uptick in demand for personal loans and credit cards, lenders are becoming more cautious, given the prevailing economic uncertainty.
With growing concerns over the increase in non-performing assets, risk-averse lending channels like banks are increasingly tightening the norms. They are depending more on information like borrower credit history and repayment behavior details to approve loans.
The recent loan moratorium announced by the RBI to extend economic reprieve to struggling borrowers has been mistaken for complete loan waivers by many debtors.
In the event of non-receipt of interest from borrowers, banks will also struggle to pay their customers interests on their deposits. Thus, the banking industry as a whole will need to ensure an improvement in loan repayment behavior. This might push the unprecedented demand for loans in certain segments, accentuated by word of mouth.
In the post-pandemic era, lenders will increasingly become more conservative, despite a growth in the demand for credit from both retail and institutional customers like SMEs and MSMEs.
Digital lending channels will be in demand
Incidentally, the dependence on formal credit history information by traditional lenders will drive more people to digital lending platforms.
Already, during the pandemic, digital payments platforms have witnessed a massive spike in adoption, with products like PPI wallets, digital credit cards enjoying immense popularity among consumers.
In the future, more and more online lenders will leverage the high mobile and internet penetration in India and adopt the latest cutting-edge technology to create a secure, fast and easy-to-use infrastructure and digitise the process of loan application.
Unlike traditional credit channels, these fintech lenders will depend less on credit history details, bank statements, tax returns, physical engagement with customers, and create an ecosystem where the loan disbursal process will be quick, seamless, and risk-free, for both the lender and the borrower.
Soon, retail lending will be revolutionised by digital transformation of financial processes as more and more people, as well as financial institutions, will realise the true potential of shifting online and availing services that are full-stack digital in nature.
(The author is CEO, KreditBee)