From small-ticket loans to fund online purchases to easy non-collateralised credit approved online with only as much as a KYC process is an area that fintech companies are betting on to kick-off the credit super-cycle in India, with internet firms in the financial services space like Amazon, Paytm, PayU, and Ola providing these digital lending features.
At the heart of these credit products, however, is not the conventional verification system to establish creditworthiness of a customer, but hundreds of different datasets being analysed by tech firms to understand the consuming and paying pattern of a person.
“We look at data points such as how soon a customer pays his electricity bill, how long is he paying the electricity bill at the same house — indicating he owns that house — how much does he spend on various non-essential items, to understand whether this person can be extended a small loan and whether he will repay back on time,” a top executive at a fintech firm told The Indian Express.
While the lending ultimately happens through a bank, a non-banking financial institution or a micro-finance institution, technology companies like Paytm and Amazon, facilitate the data analysis part and pass on the information of creditworthiness to lenders.
For example, Paytm has tied up with Clix Finance India Pvt Ltd for its postpaid service, Amazon Pay has partnered Capital Float. Entities such as PayU, however, that are registered with the Reserve Bank of India as systematically important non-banking financial companies, offer these services on their own. PayU offers services under the LazyPay banner.
“If you take the case of Paytm, which is a payments bank, it cannot do the lending on its own, so it has tied up with a lender and passes on the information of a person who is creditworthy to its partner. From this, Paytm stands to make a commission. That’s the business model. Once the lending partner realises that these are high quality customers that are much less likely to default, they will come back with better commission. In fact, a company like Paytm is not looking to get into providing Rs 1,000 crore loans to 100 corporates but Rs 10,000 loans to 10 million people,” a source said. However, institutions focussed on providing non-collateralised loans to the unbanked have run into problems with the loanees defaulting in large numbers. While this may be on account of stress in the economy due to factors like Covid, it exposes an inherent risk in the business model, when macroeconomic factors are under duress.
Additionally, high penalties and fees for non-repayment of dues imposed by these digital lenders has also attracted ire. Last month, the Delhi High Court pulled up the banking regulator for its claim that it had no power to regulate digital lending platforms that were charging exorbitant interest rates. This was during hearing on a public interest litigation, seeking regulation of these platforms. The petition stated that there were instances of overcharging of exorbitant interest rates, and cited reports pertaining to cases, where online platforms charge as much as over 500 percentage points on an annualised basis.