Fintechs take a fancy to small loans against stocks, mutual fund units, FDs

PhonePe, Mobikwik, Flipkart's super.money and Paisabazaar are among the fintechs that have partnered with non-bank lenders to offer such secured loans. And they are relying on digital networks to keep the costs down by eliminating the need for physical checks and branch visits, while targeting customers who otherwise relied on collateral-free loans.

“We are uniquely positioned to revolutionize the secured lending landscape by offering distribution of fully digital secured products like loan against mutual funds at a massive scale," said Hemant Gala, chief executive officer-lending at PhonePe, citing its experience of providing vehicle loans by “minimizing the need for physical touchpoints".

The focus on lending against collateral coincides with slower growth of unsecured credit—down from 20% in March to 15% as of June—after the banking regulator’s multiple tweaks, including hiking the risk weights, to check exuberance in high-risk consumer loans.

To be sure, about 70% of all bank loans—worth ₹169 trillion as of 23 August based on latest Reserve Bank of India data—are backed by collateral, industry experts said, with unsecured lending to consumers and small businesses making up the rest. Home, auto and gold loans are the traditional segments of secured credit where non-bank financial companies such as Bajaj Finance, Tata Capital, Shriram Finance, Manappuram Finance, Muthoot Finance and IIFL Finance dominate the market.

While small-ticket loans against property, gold or securities have existed for a long time, the captive market for these has been small due to limited offerings and lack of easy access.

“Despite advantages such as lower interest rates (11-14%) and reduced risk due to collateral, small-ticket secured credit products remain underdeveloped," said Prakash Sikaria, founder and CEO of Flipkart-backed super.money, which offers credit through the Unified Payments Interface. “Innovation in this area has been limited, but this is beginning to change as more players recognize the opportunities."

Quicker disbursements aided by technology has led to an upsurge in a newer section of consumers that didn't consider secured products a viable option earlier, he said.

Super.money last month partnered with Utkarsh Small Finance Bank to introduce a new co-branded RuPay credit card—superCard—that is issued against a deposit starting ₹100.

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PhonePe, owned by Flipkart’s parent WalMart Inc, also offer loans against mutual funds, gold and property, besides traditional categories of car, two-wheeler, home and education loans. According to a report by ICICI Securities, the firm has partnered with Tata Capital, L&T Finance, Hero FinCorp, Muthoot Fincorp, DMI Housing Finance, Home First Finance, Rupyy, Volt Money, and Gradright. PhonePe plans to increase the number of lending partners from 15 to 25 by the quarter ended September, the report said.

Last month, MobiKwik launched its first secured co-branded credit card with SBM Bank India against a minimum fixed deposit of ₹5,000. Like peers Cred, IND Money, Jupiter and Fi, MobiKwik too plans to leverage its financial planning and wealth management services to offer customized small-ticket loans to customers.

What is helping the fintechs is the surge in household investment into capital markets over the past four to five years, resulting in record demat accounts and mutual fund (MF) folios at more than 170 million.

“This means the overall addressable market where we can give loan against securities or MFs has also gone up," said Sahil Arora, Chief Business Officer (secured lending), Paisabazaar. In addition to home mortgages and loans against property, Paisabazaar offers small-ticket credit against shares, mutual funds, cars, and secured credit cards against an FD.

According to Sikaria, current offerings only address the needs of less than 20% of Indians who seek to borrow for consumption, and secured credit will help bring the next 20-30% of the population into the fold of formal credit. Timing, product-market fit, and digital access is driving renewed interest in secured credit products, he said.

Still a long way to go

According to RBI’s latest report, ‘other secured loans’—including credit against gold, shares and fixed deposits—stand at ₹2.6 trillion, up 23% on year. But the share of this category in overall loans is still tiny.

The unsecured loan market is estimated to be around ₹80,000 crore worth of monthly disbursements, according to industry experts. By comparison, secured disbursements are around ₹1 trillion. While loans against property contribute around ₹25,000-30,000 crore, small-ticket advances against mutual fund or stocks make up about ₹1,500 crore.

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“The process is not that smooth right now," said a senior official at an NBFC, adding that lenders had to rely on third-party repositories like KFinTech and CAMS for mutual fund statements. But with MF Central providing more consolidated investment statements, the addressable market is growing and the returns on these products are also good.

The average rate of interest on a big-ticket secured loan is around 9.5% and about 10.5-11% for small-ticket credit. On the other hand, unsecured loans are priced much higher, starting from 12-14% for prime customers and going up to 20% for sub-prime customers, given the higher risk in the absence of a collateral.

The unsecured loan segment is currently growing at around 15%, with small-ticket personal loans and credit cards seeing an annual growth of 25-30%. However, small secured loans are expected to grow around two-fold, owing to the low base and the entry of several new players, experts said.

Yet, the category faces multiple barriers.

“The challenge is, India can’t expect a lot more of secured credit because there are real-world problems in terms of property titles, ability to create charge on property -- These are all real issues," said Hardik Shah, managing director and partner, BCG. “That’s why secured credit hasn’t taken off as much as unsecured credit. Mortgage penetration is still very low in India compared with other nations."

Given that a large number of small businesses and self-employed borrowers are still not part of the formal financial ecosystem, lenders and fintechs are offering secured products to such customers who may otherwise be ineligible for unsecured loans.

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“If potential borrowers can’t get unsecured loans because of their credit score or income, but they possess some asset, be it property or gold or car or have investments in MFs, securities or insurance or deposits, we can increase our width in terms of creating a number of product that we can offer to these customers," said Arora of Paisabazaar.

But he agreed that the category is still in the “evolution stage and so, it is not directly competing with unsecured products because the small-ticket secured market is still just about 5% of the unsecured market".