A Future with Credit for Everyone (#67)

Bridging the private credit gap in India and exploring pathways to take credit to everyone

Welcome to the 67th issue of Unit Economics. In this article, I opine on the ambitions for ubiquity of credit in India, and share thoughts on the structural gaps that need fixing to realise a future with credit for all. Dive in!

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Come to think of it, credit is quite ingenious.

For centuries, before public and venture equity were commonplace, credit fuelled the greatest of individual, business, and government projects. It allowed builders to think beyond their means, to believe that their ambitions would eventually justify the luxury of debt. It made fractional reserve banking possible, a way for money to exchange hands more quickly between public and private actors. And it continues to drive the economic output of nations, from private consumption to investment returns and net exports.

The ability for credit to power big goals is not lost on informed institutions. And if we were to zoom in on the micro picture, we see that credit purposes similar, important ambitions for individuals and families. It offers a chance for better education, more family trips, the dream car, a home, and the dream wedding, among other aspirations.

It makes sense then that we, the builders of our age, believe in a tomorrow where access and leverage to credit can be ubiquitous.

But with the low, flailing exposure of private credit in India today, would it be rationally optimistic to believe in that vision? Especially when, even in the public conscience, the idea of credit remains murky, and often, filled with fear of debt trap.

Traditionalists, especially long-time bankers, would scoff at the thought. They have burnt their hands in many a credit cycles and learned to be cautious the hard way. The industry, equally, continues to operate likewise for good reason.

Poor underwriting approval rates & high servicing costs

The risk-fraud approvals during underwriting continue to hover at less than 40% for most lenders for unsecured credit and go as low as 10-20% for large scheduled banks. A good proportion is rejected due to lack of bureau record, location unserviceability, or for not meeting the risk policy cut-offs. Another proportion, while creditworthy, may simply be deemed not profitable enough to underwrite, given their imputed income and requested ticket sizes would fall short when measured against the trade-off of servicing costs.

Lack of reliable, predictable alternate data

Further, while the risk teams welcome any additional alternate data on customers, the attempts to fill significant approval gaps using such data have popularly lacked reliability, seamlessness, and predictability in providing underwriting advantage. Understandably, any such new attempt by a fintech company often goes through a testing cycle of a year or two before it can be adopted at any noticeable scale for underwriting, and few have found any luck yet.

Absence of product innovation in credit

Thirdly, while the pace of distribution of retail credit has increased with NBFCs, and fintech companies at the forefront, driving the acquisition and servicing costs lower for lenders, the innovations in the quality of underwriting, collections, and product construct for unsecured credit have not kept up with the resulting demand for credit.

For instance, retail unsecured credit continues to operate at two extremes today, offering either long-tenure, interest-based personal loans, or 30–45-day interest-free credit card lines.

Result: supply bottlenecks, poor funnel conversions, and most products targeting the same existing-to-credit, carded customers.

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However, if we were to be a bit foolhardy and imagine a hypothetical future where everyone could relish in the power of credit, what would it take for us to get there? I look at three areas that may suggest hope for a future with credit for all.

Use existing banking, and digital footprint for higher approval rates

With a credit gap of 700Mn+ underserved and unserved customers in India, the existing ~200Mn bureau records are likely insufficient to serve the majority. Instead, the opportunity gap for profiling customers, on paper, is more closely met with the widespread digital footprint on payments or marketplace applications. Could the account aggregator perhaps expand the scope to bring all that under one umbrella? Could a fintech company figure out a way to sandwich it together?

If it were to happen, the relevancy of such alternate data to assess creditworthiness would continue to remain a point of debate.

Is there a whiter space, then, to improve approval rates for credit?

With over 700Mn+ Existing-to-Bank (ETB) customers, defined as customers with an existing account-based relationship with banks, can tapping into the large ETB pool unlock higher approvals and distribution?

The answer is not quite clear. But while the banks attempt to up-sell their credit products to their large ETB customer base, could there perhaps be merit for banks to partner with Fintech companies and allow them to target the ETB customers on their behalf? Worth a debate.

Product innovation to reach sub-sections

Fintech companies offer all too common unsecured credit cards and loan products, in hopes of engaging and improving average revenue from their existing, often creditworthy, customers. Consequently, most end up serving the same, overlapping segment and fight to be top-of-wallet through an endless war on rewards and pricing.  

Few, including Slice, Scapia, and Uni have attempted to break the monotony, but the regulations and bank approval rates are yet to allow any of these to breakthrough.

Over the next year, the clutter towards the traditional co-brand credit cards and personal loans will only heighten, and in this rumble - I wonder whether the long-term success may be reserved for those that (a) build on a powerful need and insight of a vertical segment, and (b) control a good portion of the value chain to command sustainable revenue share. Can the fintech companies find the use cases to reach greener, vertical sub-sections away from the clutter? Perhaps beyond early wage access?

Further, it may be time for many of us to move away from viewing credit cards and credit lines as novel, no-cost products for customers, as attractive and customer-first as that may sound. The business opportunity may equally lie in expanding access to credit cards and lines that come with a monetary cost, as this may allow more comfort to banks for partnerships.

Regulatory approvals for agile lenders, and more support for fintech collaboration

While the regulators, led by the Reserve Bank of India (RBI), have been incredibly customer-first and proactive towards payments and digital lending, I imagine that an India where everyone can access credit will greatly depend on the following advances:

• The allowances provided to the Small Finance Banks (SFBs) and Non-Banking Financial Companies (NBFCs) to issue credit cards, credit lines, and loans, by the RBI.

• The flexibility for co-creation that permitted lenders may offer to Fintech partners for product innovation, distribution towards their ETB customers, and provision of TSP services. An organised approach to such co-creation would be ideal.

• More transparent, use-case basis interventions and more certainty in the certification & approval processes from regulators. This would be significant for the more agile lenders and lending service providers.

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I believe that we are still only a few chapters into the Indian credit story and that taking credit to the next billion will need a great degree of product innovation, bank partnerships, and regulatory optimism.

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If you are excited by this topic and are interested in chatting or building in this domain, drop me a message here.

In case you feel your friends or family would be interested in reading about payments and lending, feel free to share the blog with them as well. Back again in a few weeks!