One of the foundational elements of a modern, expanding, and thriving economy is financial inclusion, which comprises giving all people and organisations access to financial services and products that are suited to their requirements and available at reasonable prices. India is on track to accomplish this feat by meeting the rising demand for credit from all facets of society. With rising consumption, demand for consumer loans is growing as Indian consumers are availing loans to fulfil their desires, including lifestyle adjustments, travel, electronics and education, among other things.
The demand for credit in India has grown steadily over time due to the country's financial sector developing at an unparalleled rate. According to RBI data, non-food bank credit registered a growth of 16.9% in September 2022. At the end of FY22, the total credit market in India stood at Rs. 174.3 lakh crore (US$ 2.14 trillion), a growth of 11.1% YoY. Retail loans and the economy's growing use of credit cards are the main factors driving this growth.
Different Types of Credit
In the past, formal credit was only available for financial products like personal, auto, and home loans. Banks and financial institutions (FIs) have lately shifted their attention to products such as credit cards, buy now, pay later (BNPL), and consumer durable loans (credit EMIs). Traditional banks and new startups are concentrating on attracting new clients by granting the unbanked/underserved population access to credit.
India has traditionally always been a market for debit cards. Over the past ten years, the increase in credit card issuance has altered this narrative, and credit cards are now widely utilised. Innovations such as simplified onboarding processes, unique card products, individualised offers and rewards, and improved mobile apps have proven to be very advantageous to current customers and have drawn in plenty of new ones.
Credit card issuance has grown significantly over the last 5 years, growing at a CAGR of 19.8% between FY17 and FY22. Even during the Covid-19 restricted years of FY21 and FY22, credit card issuance still grew at 7.46% and 18.66%, respectively.
Credit card PoS spending has also increased over the past few years. In September 2017, the monthly PoS transactions stood at 112.63 million with the total transaction value being Rs. 37.46 thousand crore (US$ 4.6 billion), while in September 2022, the monthly PoS transactions stood at 131.71 million with the total transaction value being Rs. 45.28 thousand crore (US$ 5.56 billion), indicating a CAGR of 3.18% and 3.86%, respectively.
The majority of the overall revenue collected by card issuers comes from interest; interest income, which is paid by roughly 15-20% of the revolving consumers, accounts for 40–50% of card earnings. Depending on the product they are using, the issuer charges consumers interest in the range of 18-42%. The remaining revenue comes through a variety of fees and charges, including joining and yearly fees, over-limit fees, late payment fees, cash advance fees, bounced checks and NACH fees, EMI conversion fees, and foreclosure. The issuer also receives income through interest assessed on various transactions, balance conversion, loans that exceed or remain within predetermined limitations, etc.
Buy Now Pay Later (BNPL)
Due to the emergence of e-commerce and digital payments and the rapid growth of Fintech companies, Buy Now Pay Later (BNPL) is a rapidly developing loan tech sector in India. Over the past couple of years, BNPL has become more than just a straightforward payment method; by providing free EMIs, it essentially lessens borrowers' financial stress. BNPL has been especially popular among GenZ consumers, young millennials, and first-time credit borrowers, who are typically overlooked or underserved by traditional banks. A few features of BNPL are:
Consumer Durable Loans
Due to the growing urban population, rising consumption income, and availability of low-interest credit, credit EMIs, also known as consumer durable loans, is another category of formal credit that is expanding at a fast pace. Consumer durable loans are anticipated to increase in value at a CAGR of 21% from Rs. 84 billion (US$ 1.03 billion) in 2020–21 to Rs. 205 billion (US$ 2.51 billion) in 2026–27. A few key features which make consumer durable loans popular are:
The entry of fintech companies into the credit market has caused disruption and brought forth a lot of new activities, product offers, and innovation. These advances are introducing the credit business to new, untapped consumer categories, new product lines, and a variety of new credit channels and payment options like online and offline payments. These reforms have greatly benefited the credit card, BNPL, and credit EMI sectors.
The RBI, in its Payments Vision 2025 document, announced plans to link credit cards and credit components of banking products to UPI. The RBI is also planning to increase India's card acceptance infrastructure to 250 lakh touchpoints, which will further boost the number of card transactions. The dynamic and rapid expansion of India's payments ecosystem, made possible by greater adoption of technology and innovation, will make the country a force to be reckoned with in the global payments market in the coming years.
Note: Conversion Rate Used: 1 US$ = Rs. 81.40