Tuesday, March 5, 2024

Need tighter regulations as India’s middle class turns to biz loans

The annual survey by Home Credit on how India borrows unveils some disturbing trends in 2023. When juxtaposed with RBI data, the report indicates rising household debt. But there are also some encouraging trends. Though Indian borrowers are not very savvy money-wise, they are concerned about privacy and wish to become financially literate.

“How India Borrows Survey 2023” was conducted across 17 cities with 1,842 borrowers aged 18-55 years having an average income of 31,000 per month.

Only 18% of the borrowers said they understand data privacy rules and many have only a superficial understanding of finances. Over 60% are worried about how personal data is collected and used and 58% feel lending apps collect more data than needed. GenZ (those born between 1990 and 2005) showed higher concern about data privacy and 70% of borrowers wanted a more transparent communication on data usage. 

Consumer goods, mostly smartphones and household appliances, accounted for nearly 44% of loans, while 19% was for launching or expanding businesses. 

There’s strong and growing acceptance of online and digital channels. Around 29% of borrowers opted for online loans and another 51% showed interest in digital borrowing going ahead.

Loans initiated through tele-calling rose to 19% in 2023 from 16% in 2022, but loans through POS transactions or via bank branches saw a decline from 56% to 51%. The survey also reveals widespread comfort with online transactions, with 48% engaging in online shopping and over 50% preferring app-based loan applications. Around 51% said they would prefer to complete entire loan applications on an app without any physical interactions.

EMI on cards is the preferred loan format for 49% of borrowers. The RBI’s stringent regulations on (Buy Now Pay Later) and PPI (Prepaid Payment Instruments) have impacted loan availability.

The RBI has repeatedly expressed concerns about household borrowing and recently increased risk weights on many loan categories. The latest RBI data shows households are borrowing more, and saving less. 

Financial assets (which include bank savings, cash, and investments), shrank to 5.1% of GDP in 2022-23, down from 7.2% in 2021-22. This is the lowest level in almost 50 years. Also, household debt relative to income increased by 5.8% in FY23.

While there are obvious dangers to high indebtedness and lower savings, it’s encouraging that a significant portion of borrowing (19%) is for businesses. It indicates a risk-taking, entrepreneurial spirit within the middle class.

Growing acceptance of online and digital financial processes is part of the formalization of the economy and aligns with the “Digital India” policy thrust. But it also flags concerns due to poor privacy understanding and low financial literacy. Borrowers who don’t understand data privacy are more vulnerable to online scams. If they aren’t financially savvy, they may not understand the fine print in loans, which opens the door to mis-selling.

Many respondents, particularly Gen Z, though wish to learn more about finances. About 39% of borrowers said they would like a reputed organization to educate them about finance-related tasks over the internet.

The RBI and other regulators need to build on this attitude, perhaps by designing courses on financial literacy or certifying programmes run by the private sector. This could be an opportunity for startups to offer courses on financial literacy and data privacy.

Borrowing for business can accelerate future macro-economic growth. Regulators should not discourage this but rather attempt to prevent malpractices in this space.

Borrowers need to be protected from online scams, and misleading marketing by lenders who charge high interest rates on loans without clearly stating terms upfront. The collection and use of personal data should also be strictly monitored and data protection laws enforced.

Along with hiking risk weights, the RBI must enforce tighter norms to ensure transparency in the retail credit market and complement it with financial education, which is the need of the hour.

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