Fintech Revolution: Key Driver in Personal and Business Loan Market

Experian India's white paper reveals fintech firms dominate 52% of the personal loan market, with significant growth in states like Bihar, Tamil Nadu, and Uttar Pradesh. Business loans surged notably in Karnataka and Uttar Pradesh. Innovations like AI and blockchain have improved loan processes, though challenges in asset quality remain.

Experian India's latest white paper reveals that fintech companies now command a significant 52% market share in personal loans, offering credit access to previously underserved individuals. The report highlights notable growth in the penetration of personal loans, with an increase of 24% in Bihar, 21% in Tamil Nadu, and 20% in Uttar Pradesh for FY'24 compared to the prior year.

Business loans have experienced remarkable growth, with Karnataka seeing a 133% rise, 118% in Uttar Pradesh, and 67% in Bihar, showcasing the transformative impact of fintech on financial access in rural and semi-urban regions. Fintechs have disbursed over Rs 2,48,006 crore in personal loans and Rs 28,607 crore in business loans as of March 2024, according to the report.

Typically under Rs 50,000, these loans have primarily reached new-to-credit individuals, thin credit file holders, and sub-prime borrowers, highlighting fintech's capacity to serve high-risk and unbanked segments. Despite this growth, the report addresses challenges fintechs face in managing asset quality. Loans from fintech companies have higher non-performing asset (NPA) ratios than the industry average, reflecting the inherent risks of lending to underserved and overleveraged customers.

To mitigate these risks, the report suggests fintechs strengthen their risk management frameworks using advanced data analytics and improved credit scoring models. It attributes technological innovation as the main catalyst behind the fintech revolution. Tools like artificial intelligence (AI) and blockchain have significantly streamlined loan approval times and enhanced transparency, with blockchain playing a crucial role in reducing fraud and improving process efficiency.

The report also notes fintechs' leadership in sectors such as green finance and agri-finance, offering essential financial support to millions of small-scale farmers across India. Initiatives like Digital Public Infrastructure (DPI) and regulatory sandboxes have provided fintech companies with the framework needed for innovation while ensuring regulatory compliance.

Additionally, the introduction of account aggregators and open credit enablement networks (OCEN) has empowered fintechs to offer more personalized financial products, further driving financial inclusion. The report forecasts that if fintechs continue to innovate and tackle current challenges, they could potentially double their customer base to 200 million within the next three years.

The paper also suggests that fintechs could learn from successful non-banking financial companies (NBFCs), particularly in secured lending, and explore new market segments to maintain growth. According to Manish Jain, Country Managing Director at Experian India, maintaining a balance between innovation and responsibility is crucial. He emphasized the importance of a strong risk management framework, especially with the use of technologies like AI and machine learning.

Jain added that collaboration between fintechs, traditional financial institutions, and regulators would be key to sustaining momentum and creating a more inclusive financial system. The white paper serves as a valuable guide for all stakeholders, offering a roadmap to navigate the future of lending in India.

(With inputs from agencies.)