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In the Age of AI, Retail Loans Peak

Last night, I was doing the most dreadful task of them all, going through my finances. After recklessly scanning QR codes without giving it much thought and scratching credit cards right, left, and center, you can imagine how terrifying it is to check your bank balance in the last week of the month. So keeping a brave face, I checked my balance and with not much of a surprise, I was down to my last penny. 

The ‘Pay-Later’ Burden 

I know for a fact that all of my friends and many young adults like myself are prey to these credit cards and after-pay schemes that help you splurge on new shiny things, without thinking about where the money will come from because that is the future “you’s” problem, let me enjoy this moment. Haven't we all been there, living our lives in the present? Not only paying online has become easy and convenient but so has taking personal loans or loans in general.

Many payment platforms also let you take hassle-free personal loans with no major paperwork. Tech has made our lives easier, but a lot of paperwork and rigorous processes force you to think thoroughly if you want to avail a loan or if you could go without it. But, many feel that because everything is just a click away and so easy, so why not just take that loan.

Hassle-free Financial Hassles 

Did you know that the amount outstanding on credit cards in India rose by 28% and stands at 2.10 Lakh crore from 1.64 Lakh crore in 2022, which further implies that defaults increased almost at the same rate as the loans being disbursed.  There could be many reasons behind this, one of them being mass layoffs and unstable market conditions. 

Adding more fuel to the fire, retail loans reached the 50 trillion rupees milestone in November 2023. Push by banks, increased demand, and merger of HDFC bank are the major causes. Retail loans meaning small personal loans grew at an alarming 19% year-on-year growth

While corporate loans which historically have always surpassed personal loans have recorded only 6.6% year-on-year growth. The reason behind such a sharp decrease in corporate loans could be that companies are not sure about large project commitments and are pulling from their finances for smaller expenditures. 

In the decade of firsts, retail loans have surpassed 79% while corporate loans grew at a measured 28% in the last three years from November 2020 to November 2023. Digitization and cross-selling are the culprits behind this. The pandemic helped shine online platforms like Paytm, and Mobikwik and they cross-sold personal loans which are easy to apply for and pay for.

A July report by TransUnion CIBIL has revealed that 40% of the retail loan demand comes from younger customers of the age group 18 to 30. This could become a big problem because more than half of India’s demographic is aged below 30. It is interesting how experimental and risk-taking this young demographic is but things can go haywire if not done cautiously. 

App-based Loans: Dangerous Gamble? 

While fintechs provide easy loans they also charge higher interest rates, however, what attracts the customers more is the less amount of time taken to loan money to reach the borrower’s account. These platforms payout loans as fast as half an hour which implies that the due diligence is not being done and banks are feeling pressured to payout loans. The Reserve Bank of India (RBI) has warned these institutions to take some time and assess the situation, do the due diligence and not feel pressured to give out loans.  

The banks in India are still secure as they have a long-standing relationship with the customers and can do background checks more efficiently than fintech companies. The problem with fintech is that new players are entering the market. And it doesn’t end here.

The RBI’s working committee on digital lending in 2021 found that 1100 apps that allegedly gave out personal loans available to Indian users were illegal. These apps charge hefty interest rates and employ aggressive debt collection techniques or misuse personal data. 

Experts warn that unsecured lending could lead to jeopardizing the whole financial system if platforms take shortcuts. There have been many cases where the platforms have shown negligence in KYC and credit bureau checks. 

The easy availability of loans can do wonders for our financial system and may increase financial inclusion but lenders must be cautious with disbursing loans and borrowers should be cautious with the amount they borrow and make the most of digitalization and not misuse it. 

(Author: Karishma is a content writer at TechDoQuest. She gives fresh and youthful perspectives on whatever she writes about.) 

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