Personal loan credit by banks and NBFCs has almost tripled in the past six years to Rs 51.7 trillion, forming 30.3 per cent of the overall loan book as of March 31, 2023, as against Rs 18.6 trillion or 21.5% of the overall loan book as on March 31, 2017, said a report by rating agency CareEdge.
Overall Credit Market Size for Personal Loans (Credit of Banks+ NBFCs): CareEdge
The rate of growth of personal loan books (which typically signifies consumption loans) is almost double of the rest of the banking sector lending (business lending)
During the fiscal years 2017 to 2023, personal loan credit grew almost 1.5 times the overall credit growth observed in both Banks and Non-Banking Financial Companies (NBFCs).
Unsecured Personal Loan Growth Outpacing Overall Retail Loan Growth:
Within personal credit (which typically signifies consumption loans), unsecured personal loans outpaced the overall expansion of the personal loan book and constitute nearly one-third of the total personal loan segment loans at Rs 41 trillion as of March 31, 2023, noted CareEdge.
This trend has been further facilitated by the advent of Fintech and Digital channels, contributing to increased origination volumes.
Loans less than Rs 1 lakh constitute 85% of loans in FY23
The emphasis on smaller ticket-size loans by NBFCs has been a significant driver of volume growth in the unsecured personal loan segment. Loans with a ticket size below Rs 1 lakh constituted over 85% of loan originations by volume in FY23. Loans with ticket size below Rs. 50,000 hold the majority share in origination volume, witnessing a more than two-fold increase in origination value in this segment over the last two fiscals that ended March 2023.
What led to this increase in demand for personal loans?
“Several factors have contributed to the substantial increase in the demand for unsecured personal loans, encompassing demographic shifts, the formalization of the economy, elevated purchasing power, the evolution and prominence of FinTechs, widespread access to the Internet/broadband and feature phones, the adoption of digital payment systems, the influence of India stack and information collateral, and broader coverage of credit bureaus, etc,” said the CreditEdge report.
The transformation in consumer behaviour has emerged as a pivotal driver behind the upsurge in loan unsecured personal loan demand, particularly within consumption-driven growth patterns.
Notably, a perceptible shift in mindset is particularly evident among the younger demographic, who now embraces the idea of borrowing for consumption, contrasting significantly with perspectives from the past decade. “The significant evolution in loan processes, greatly influenced by the digital infrastructure, has significantly enhanced flexibility and convenience for consumers, especially the younger demographic. This evolution stands as a key facilitator in the consumption-driven growth witnessed today,” the report added.
Consumption-driven growth resulted in household savings dipping to 47-year low
However, this consumption-driven growth has also led to an increase in overall household financial liabilities. As per the latest report on household savings by RBI, Household savings in India hit a 47-year low at 5.1% of GDP in FY23. This was mainly on account of the increase in household financial liabilities indicating that people are becoming more dependent on borrowing to cover their consumption demands.
Household Savings in India as a % of GDP
The decline in household savings was witnessed especially post FY21 with pent-up demand post covid leading to higher consumption. Further borrowings would have gone up probably as a result of the difficulties brought on by rising inflation.
” While high household debt need not necessarily be a worry if there is adequate income to back, but a rising share of loans by people with weak earning profiles could lead to loan repayment problems in the unsecured retail lending segment which has been highlighted by RBI as well,” said the report.
Impact of latest RBI move to deter growth of personal loans
Strong signals from the Reserve Bank of India (RBI) could act as a deterrent to the growth of unsecured personal loans, potentially causing a partial slowdown in the immediate to near term. The impact on NBFCs is expected to be twofold, according to CareEdge:
RBI’s directive to increase risk weights by 25% for advances to AAA to A-rated Non-Banking Financial Companies (NBFCs) is likely to prompt banks to adjust loan pricing.
Additionally, RBI has raised the risk weights on NBFCs’ unsecured personal loan exposure by 25%. This adjustment is expected to impact the capital buffers of NBFCs. Consequently, there may be a slowdown in lending.
“Although the asset quality has remained stable, there is a need for vigilant monitoring, particularly on small ticket size loans; furthermore, given that each player focuses on specific sub-segments, this may lead to divergent credit cost trends in the unsecured retail portfolio of these players,” said the report.
FAQs
While personal loans may be helpful in several situations, they can also come with high interest rates and major repercussions for your credit score. Even so, the benefits of these loans may outweigh the risks—especially if you qualify for a competitive rate and need quick access to cash.
What credit score do I need for a $3,000 loan? ›
While some personal loan lenders allow you to apply with a very low credit score, many require a minimum credit score of 660 or 700 to be considered for a $3,000 personal loan. Generally, the higher your credit score, the less interest you will pay.
How to get $500 instantly? ›
Where to get a $500 loan: 5 options and alternatives
- Cash advances. A cash advance is a short-term financing solution different from a personal loan. ...
- Personal loans. ...
- Credit card cash advance. ...
- Credit builder loans. ...
- Payday loans. ...
- Credit score. ...
- Income. ...
- Active bank account.
Yes, it's possible to get a $5,000 loan with bad credit or no credit history. But getting a loan with no credit or bad credit won't be as easy as getting a loan with good credit. You'll have to seek out lenders who specifically work with borrowers who have bad or no credit.
What is a personal loan risk score? ›
The personal loan score effectively assesses whether an applicant is likely to default on a personal or consumer loan post 91 days within the next 12 months.
What is considered a risky loan? ›
High-risk loans can come in several forms: Secured loans: These loans require you to put up an asset, such as your car or house, as collateral to secure the loan. If you stop making payments or default, you can lose that collateral. The value of the collateral can vary widely, depending on the loan amount.
What is the easiest loan to get approved for? ›
Personal loans with essentially no approval requirements typically charge the highest interest rates and loan fees, although they may deliver funds fast. Some of the easiest loans to get approved for if you have bad credit include payday loans, no-credit-check loans, and pawnshop loans.
How to get a loan when no one will approve you? ›
Getting a personal loan with a co-signer that has a strong credit score and a solid income can boost your application. Your co-signer – ideally, a family member or close friend – will apply alongside you, and you'll both be responsible for repayment of the loan.
What is a good credit score for a personal loan? ›
Others give a range of approved applicants' scores: Avant says people who receive loans usually have credit scores between 600 and 700, but that you may qualify with a score as low as 580.
How can I borrow money and get it instantly? ›
If you need to borrow money immediately, the most common options are personal loans, cash advances online, payday loans, pawn shop loans, and banks or credit unions.
If approved for a loan, the process is easy: Select your loan amount. Maximum loan amounts vary based primarily on your PayPal account history. Choose the percentage of your future PayPal sales that you want to go toward repayment of the loan amount and the loan fee.
How much will Dave let you borrow? ›
Get up to $500 in 5 minutes or less¹
Once you're approved, you have options when it comes to how much you take. We aim for amounts you can pay back without setting you back.
How much would a $5000 loan cost per month? ›
What is the monthly payment on a $5,000 personal loan? The monthly payment on a $5,000 loan ranges from $68 to $502, depending on the APR and how long the loan lasts. For example, if you take out a $5,000 loan for one year with an APR of 36%, your monthly payment will be $502.
Is Credit Ninja legit? ›
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Applying for an online loan may worry you. After all, the FTC has received over 5.7 million reports of identity theft and fraud. Rest easy knowing that CreditNinja is a legitimate website.
How big of a loan can I get with a 550 credit score? ›
How big of a loan can you get with a 500 credit score? Lenders specializing in bad credit score loans may be willing to approve loans up to $50,000. These loans will typically have much higher interest rates and origination fees.
Is getting a personal loan a bad idea? ›
If you're not careful, it can be tempting to rack up more debt rather than focusing solely on paying it off. Although taking out a personal loan can help you consolidate high-interest debt, it can cause you to go deeper into debt if you don't address bad spending habits.
What are the disadvantages of a personal loan? ›
Cons of Personal Loans
- Accrue High Interest Charges. While the most creditworthy personal loan applicants can qualify for low APRs, others may encounter higher rates up to 36%. ...
- Come With Fees and Penalties. ...
- Lead to Credit Damage. ...
- Require Collateral. ...
- Result in Unnecessary Debt.
People with debt are more likely to face common mental health issues, such as prolonged stress, depression, and anxiety. Debt can affect your physical well-being, too. This is especially true if the stigma of debt is keeping you from asking for help.
Is it a bad idea to take out a loan? ›
If that's your goal and you have a solid repayment plan, taking out a loan may not be a bad idea. But, if your credit needs work, you may be considered a risky borrower and your lender may charge a higher interest rate than if your credit is good.
