Digital, co-lending to drive credit biz this festive season

Less intense rate cuts, higher volumes on digital platforms and co-lending arrangements would set this festive season apart for lenders when compared to the precovid period. And while most loan products remain similar across lenders, the differentiator that will attract customers would be quality of service and quick turnaround time.

Thanks to the huge liquidity infused in the system to manage the economic impact of the pandemic, the interest rates are at an all-time low, leaving little room for price wars. The average lending rate for fresh rupee credit was 9.77 per cent in July 2019; it is about 200 basis points lower around 7.80 in June 2021, according to Reserve Bank of India (RBI) data.

Says Rajkiran Rai G, managing director and chief executive, Union Bank of India, and chairman, Indian Bank’s Association, “Interest rates are rock bottom, and there is little arsenal left with lenders, save some rebates and waiver of processing fee.”

However, the heavy investments made to strengthen the digital structure over the last few years will enable prompt response and a hassle-free interface with lenders. There is a huge shift towards business being conducted without meeting customers but based on stringent credit appraisal. This would be 35-40 per cent this year — up from 8-10 per cent prior to the onset of the COVID19 pandemic.

Ambuj Chandna, presidentconsumer Assets, Kotak Mahindra Bank, says digitally sourced loans would see a three to four time increase as compared to pre-pandemic days.

Harshad Solanki, general manager and head, Mortgages and Retail Assets, Bank of Baroda, agrees.

This time, there is far more emphasis on digital channels of communication and processing on digital platforms, he says. There would be incentives like reduced interest rates on credit on digital platforms, he adds.

This festive season is also expected to see greater lending business being conducted through co-lending arrangements with fintech and Non-banking finance companies (NBFCS). NBFCS and micro finance institutions (MFIS) have last-mile reach, with robust mechanisms for collections.

The RBI had revised norms last year to bring clarity in risk sharing and credit underwriting in colending tie-ups.

Senior State Bank of India official said this is just the beginning. Such an arrangement will bring in more business in southern and eastern states where the penetration of NBFCS and MFIS is significant. Bankers are hedging bets on the kind of pace loan growth would gather during the festive season. Like others, lenders, too, are cautiously optimistic about the growth in retail loans — home, vehicle and personal credit — though there is expectation that pent-up demand and gradual rise in economic activity would give the much-needed push to lending.

Bank executives said the pace of growth would be better than what was witnessed in 2020 but it will still be a notch below the pre-pandemic level (15.5-16.5 per cent in 2019) as they weigh the risks of a possible third wave of COVID-19.

Retail loans registered an accelerated growth of 11.2 per cent in July 2021 as compared to 9 per cent a year ago, primarily due to higher growth in “loans against gold jewellery” and “vehicle loans”, RBI data showed.

According to CRISIL Research, not accounting for the impact of a possible third wave, retail lending is expected to show a healthy pickup on pent-up demand and there is expected to be a preference for personal mobility in the automobile segment and better affordability in housing.

The upcoming festive demand is expected to add to the demand growth, further driving financing activity in Q3 FY22. CRISIL expects a 12-14 per cent growth in retail lending, both by banks and NBFCS — more or less similar to that seen in FY21, which had recorded a pickup in the last two quarters.

Of the two, banks are expected to see a faster growth — continuing from trends in FY21 — and gain share from NBFCS as they are better placed in terms of asset quality and liquidity.