Why fintechs are turning to secured loans

With the tightening of norms around unsecured lending, fintechs are increasingly transitioning towards secured lending. The Reserve Bank of India (RBI) recently raised risk weights on unsecured personal loans, requiring banks and non-banking financial companies (NBFCs) to allocate more capital against such loans. This regulatory shift aims to mitigate risks in a segment that saw rapid growth, particularly after the COVID-19 pandemic. The move has made companies to diversify their portfolios and explore secured lending avenues to maintain growth and profitability.

“The company is planning to diversify its lending portfolio by moving into secured products. Alongside unsecured personal loans, it is launching secured products to reduce its reliance on personal loans,” said Upasana Taku, co-founder of MobiKwik.

One such product that the company is introducing is a secured credit card, designed for those without access to traditional credit cards. The product allows customers to earn interest income on fixed deposits while experiencing the convenience of a credit card. For instance, users can invest an amount, as low as Rs 5,000, into a fixed deposit (FD) via the app. This card, which works on UPI and offers rewards particularly beneficial for individuals with limited or no credit history, enabling them to build a credit score without the usual barriers of prior credit history or complex documentation.

Paisabazaar, a marketplace for consumer credit and free credit score platform, is also focussing on scaling its home loans and other secured loan products, with an aim to take the share of secured loan disbursals to 50 per cent of total disbursals through the platform.

Typically, secured loans, like home loans and Loan Against Property (LAP) contributed 13-15 per cent of disbursals through Paisabazaar till last financial year. Both home loans and LAP have a massive market, with disbursals at around Rs 14 lakh crore on an annualised basis, according to Paisabazaar’s internal estimates.

Naveen Kukreja, Co-founder & CEO, Paisabazaar, said, “The overall macros for India’s consumer credit market remain strong and conducive for long-term growth. For us as a business, while unsecured credit would continue to be the backbone of our growth, we also recognise a big opportunity to go deeper and scale secured loans, especially home loans. Since home loans as a category is largely offline and last-mile-driven, our focus is largely on building our distribution and fulfilment capabilities. Our strong brand and large scale would also be key drivers for us in strengthening the secured business.”

Paisabazaar is setting up its presence where the consumer is physically present, to provide end-to-end assistance in what usually is a long and complex process for a large set of consumers. “We saw the industry come together to build end-to-end digital processes for unsecured loans post Covid. The onus now lies with the industry to focus on building digital capabilities for secured loans. For instance, the industry should digitise the sanction process for home loans, while the property evaluation and documentation can continue to be offline,” said Naveen.

Along with scaling up its home loan and LAP businesses, Paisabazaar is also focussing on setting up and building new secured categories like Loans Against Securities, Loans Against Car and Gold Loans that would have a strong digital play.