UPI plays the catalyst & interest rates make the battlefield competitive
The micro financing is bound to grow. Couple of years ago, just before the pandemic the statement by an industry leader declaring the year 2020 as the year of lending, would not have hold true owing the circumstances that were followed. However, with business and industry settling to normal the lending is increasing becoming a crowded marketplace.
The fast growing UPI transactions are the clear proof for the ease of usage & adaptation of digital payments in the country. Undoubtedly, UPI is the main driver for opening of digital payments and fueling the lending too. Both, the traditional lenders to large FinTech vie for customers in the ever growing market. The most important and so to say ‘Caution’ is in trying to achieve a high volume, asset books quality can suffer. It is extremely important to deploy the best practices in evaluating the credibility. And that’s where the data driven Artificial Intelligence technology comes in the picture.
UPI 2.0, launched in August 2018, allowed linking of overdraft accounts with the platform. That was seen a way to offer credit if a customer avails an overdraft facility on their savings or current bank account linked to UPI. At the same time, not many customers opted for linking their bank accounts with an overdraft facility under UPI 2.0. Hence, it is going to be a boon for many fintech companies who offer short-term loans online to the customers who find it difficult to avail an overdraft facility as they are also required by banks to pledge their overdraft loan against collateral, such as a fixed deposit or their salary. Also, the UPI credit users are typically the borrowers who are new-to-credit or maintain low-balance accounts.
UPI credit is a digital credit card where an individual or a merchant can download the mobile application of an online loan service provider, furnish the required know-your-customer details, and use a pre-approved credit line instantly to make payments. While credit card usually takes 15-20 days to arrive at a customer’s doorstep after getting approved, but the same customer can use a UPI credit line within 15 minutes.
The demand for UPI credit is rising. The share of small-ticket loan disbursals of up to Rs 25,000 has gone up among all kinds of personal loans to 60% in 2020 from 10% in 2017, data from a June 10 report by Transunion CIBIL and Google showed. Nearly 70% of disbursals, the report said, happened outside tier 1 cities, with 78% of customers aged 25-45 years. About half of the new-to-credit retail borrowers were less than 30 years old.
What is making the marketplace a battlefield is the interest rates offered. And that is making the borrowers start exercising their freedom in selecting the terms of loan and lender. The entire collection of microfinance is also via digital mode and majority of customers are reporting good credit behavior too. And these are the good signs for the growth of micro finance market, especially for the business and merchant segments. Since their requirement is short term, typically working capital funding types.
The real game winner in this ever expanding microfinance market will be the one who can scale up with best asset book quality. And that can be attained with apt deployment of AI, technology and robust finance backing.
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