Lending opportunity in Bharat
Lending is the holy grail for most of the consumer-facing fintechs. To this end, a few weeks back, I saw someone high up in Piramal Finance post a short note on the lending opportunity in Bharat that tons of apps and banks are vying for.
I went through it to create a summary of a summary :)
So here it is:
A key story that goes around is that Indian consumers don’t borrow from formal sources (read: documented) as much in the US. Our Debt to GDP ratio (a key metric to judge the credit penetration) is ~ 40% compared to ~80% in the US
However - that doesn’t mean that there’s no borrowing going on. In fact, in the last 12 months, ~ 35% of Indians have borrowed from informal sources (family and friends) compared to ~10% of the population in the US
It doesn’t help that despite the massive work done to increase the banking infra deep inside the country, accessibility remains a challenge and more importantly, banks find it harder to provide credit to a huge population
Why so, you ask?
a) Because the wallet size of the average Indian consumer is still quite low. We spend ~1500 USD annually on household expenses on average compared to say US - where it’s ~ 40000 USD annually.
Yes, 1500 USD annually for a household - not an individual. That’s the price of an iPhone 14 give or take. So it becomes quite hard for a bank to service the folks deep inside Tier 3 and other rural areas in an economically viable way.
b) The second aspect is the type of employability of a massive set of population. ~ 80% of the working population in India is self-employed and a huge majority of them are 1-person shops or micro SMEs. Income is volatile and banks find it hard to gauge their creditworthiness.
c) Hardly 5-6% of people pay taxes so that’s a dead end to finding creditworthiness. However - the new-age lenders to Bharat are giving a shot and making headway because of high penetration of banking over the last decade.
In the early 2010s, hardly 50% of the adult Indian population had a formal banking account. Yes, you read it right - half of the population didn’t even have a bank account. So there’s some data point for the bank to look into.
An anecdote here from personal experience - I got my first bank account around 2009 as well in a Tier 3 city in India. It was a straining experience as it required 4-5 trips to the bank and filling out maybe a dozen forms. And don’t get me started on the process of availing of a loan.
Now - you can visit a branch and get an account in a few hours. More comfortably, neo-banks like Jupiter, Fi, and others can do so online within a few minutes. Minutes!
A far cry from how things used to be just a decade back and in a positive direction.