Why Indian lenders give loans to risky clients with poor credit scores

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Getting an unsecured personal loan has become easier than ever in India.

Lending practices have eased over the past two to three years, experts say, for three reasons: more banks pursuing retail clients as business lending soars, the proliferation of non-bank financial companies ( NBFC) and the advent of online (fintech) lending platforms aimed mainly at urban millennials.

A no credit check loans is no longer a major scarecrow for theenders as they review applications from potential borrowers. “What is striking is the enormous proportion (20-25%) high-risk clients (with CIBIL scores below 650) in the personal loans, credit cards and consumer credit segments, ”says a recent report from Edelweiss, an Indian financial services company.

The observation was based on figures from Credit Information Bureau India (CIBIL), which maintains the largest database of credit profiles in the country. Its scores were once considered the benchmark for lenders while measuring a client’s creditworthiness.

It is no longer a deciding factor.

Change of hours

Traditionally, banks have avoided clients with CIBIL scores below 750 (on a scale of 300 to 900). A higher score also allowed a borrower to get lower interest rates.

“Everyone was chasing high-rated clients, working in the top 100 multinational companies, with a monthly salary of over 50,000 rupees ($ 718). But there are only a limited number of those people, ”said Sreemoyee Mukherjee, vice president of BankBazaar, an online financial marketplace.

Now times have changed. The segment that caters to customers with high credit scores is saturated as more and more banks are fighting for them.

Most important, NBFCs and fintechs are chasing low-scoring borrowers to expand their customer base, Mukherjee added.

It is also a lucrative segment for these lenders. “For NBFCs and fintechs, the cost of fundraising is higher than for traditional banks. Therefore, they like to appeal to clients with lower credit scores because they are willing to pay a higher interest rate due to their higher risk exposure, ”said Manu Sehgal, Business Development Manager. sales representative at Equifax, another credit bureau.

In the last 10 months, due to a crisis that is brewing in the shadow banking sector in India, the cost of fundraising for NBFCs and fintechs has increased further. Therefore, they need to expand their customer base and protect their margins.

How’s it going ?

As they seek to attract more clients, new era lenders are aided by a multitude of data that goes beyond credit scores.

For example, if you’ve never borrowed from a bank or used a credit card, chances are you don’t even have a CIBIL score. “Banks may not want to lend to customers who live in rented accommodation, or to someone who has changed jobs frequently, or who does not have proper proof of address,” said Sehgal of Equifax. .

On the other hand, fThe intechs use a multitude of data points, from customer activity on social media to the cost of their cell phones, to form their own credit scores. Fintech players promise loan approval in less than a minute and disbursement within 48 hours.

“Customers who want smaller credit, for example to buy consumer durables or cell phones, which are just entry-level loan products, end up going to these companies online,” said the head of a foreign lender’s retail bank, on condition of anonymity.

Is it dangerous?

Market players and industry experts are delighted that no warning signals have been raised yet, due to unrestricted lending.

“While there are no fundamental challenges per se and leading indicators show no red flags, we believe financiers should closely monitor debt and delinquency trends across segments. retail, ”the Edelweiss report added.

Despite this, the fear of a situation similar to the financial crisis of 2008, caused by reckless lending, is very present. the Reserve Bank of India also warned banks against the risks of easing retail lending.

However, since there are no signs of stress, the industry is not worried at this time. “Just because a customer has a low credit score doesn’t mean they’ll default, it just means there’s a higher risk, which players are trying to compensate for by setting a higher price for the customer. ready, ”Mukherjee added.

For now, analysts are in wait and watch mode.

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