Why savers are borrowing: Rise of convenience credit

MUMBAI: The old joke about bankers was that they would lend you an umbrella when the sun was shining. Following the pushback against the surge in unsecured loans, that is what banks are doing, lending to customers who already have the resources. However, many customers are taking personal loans despite having savings, given the convenience and the desire to keep long-term savings separate.

“The profile of the customers who are actually borrowing is shifting slightly. It is going towards more mass affluent and affluent categories rather than only limited to the needy category,” said Amit Pathak, head of personal loans and consumer lending at Kotak Mahindra Bank.

The shift also comes in the wake of wariness among the regulator and lenders over small-ticket personal loans, which proliferated through digital lenders but saw increased delinquencies. “Banks have tightened underwriting for personal loans a lot; they will not give an unsecured personal loan to a new-to-credit borrower or issue a credit card unless they have a relationship with the bank,” said Aditya Chatterjee, MD, Equifax Credit Information Services. But bankers are finding that the instant nature of these loans is helping to draw even borrowers with sufficient savings because of the convenience.

“Rather than dipping into investments, people have started borrowing and started meeting those needs. That’s a very strong emerging trend,” said Pathak. According to him, personal loans are no longer seen as taboo, and savers would rather keep their long-term savings in mutual funds and fixed income intact than break the piggy bank for expenses.

According to Pathak, borrowing is for expenses such as home renovation or education, both of which are now seen as investments adding value. They are also borrowing for “experiences” like international travel, and marriages continue to remain a key reason for borrowing.

One of the reasons why people are going for personal loans is that the decision is almost instantaneous, as the lenders’ underwriting software connects directly to the credit bureau. “The API connection (the software bridge with the bank) provides the bureau report within two seconds, and the entire flow is 10–15 seconds,” said Chatterjee. Also, for someone who has a large relationship value with the bank, lenders are willing to provide personal loans at single-digit rates—just two percentage points more than home loans.