Credit Where It's Due: India's Retail Finance Revolution
The past decade for credit cards can be split into two phases. Over FY13-16, there was modest growth in the number of credit cards outstanding (8% CAGR) as most banks focused more on corporate lending credit bureaus were still evolving, and banks did not want to add users who did not have a prior relationship with them. However, post FY16, there was a sharp surge in the number of cards and card spending. The number of credit cards has grown at 20% CAGR while spends has grown at 26% CAGR, over FY16-22. There are currently > 100Mn credit cards in India compared to 75Mn in 2022, while three years ago there were >60Mn credit cards. Credit card spending and transaction volume are also rapidly rising. In FY24, credit card spending reached INR 18 trillion with 3.5 billion transactions, compared to INR 14 trillion and 2.9 billion transactions in the previous fiscal year. (Image Source: Ambika Pande Substack)
India’s household credit remains low with household credit to GDP just at ~15% as of March’23 (CIEC Data) as compared to ~30% average for emerging economies and +80% for developed economies. Further, CIBIL data (2021) suggests that > 420mn customers had a credit score (~30% of the population), but only 170mn had an active loan (12.3% of the population); Unique credit card customers in comparison are only 45mn — forming ~4% of the population compared to > 30% of customers having a credit score. Unique credit card customers are just ~40mn as compared to ~67Mn EPFO (Employees' Provident Fund Organisation) subscribers (FY23).
For top private sector banks as well, only 20-30% (adjusted for open market sourcing) of their liability customers (debit cards outstanding adjusted for RuPay cards) do own a credit card while a large part of the customer pool remains uncarded. Credit cards are just ~12% of debit cards in force (excluding Rupay cards) in India, leaving a large cross-sell growth opportunity.
As per RBI data, the average credit card spend per transaction in April 2023 was INR 5,120, with an industry-wide average monthly spend per card of INR 15,388. Comparatively, in April 2022, the average spend per card was INR 14,070, and the average transaction amounted to INR 4,731. Notably, credit cards have experienced rapid growth in outstanding balances, exceeding 30%+ YoY growth. (Source)
OTOH, compared to the USA and China, India has a smaller credit penetration, and its retail lending AUM stands at approximately ~US$500 billion with less than 10% of the retail loans being disbursed digitally (RedSeer, 2021). Thus, given the market conditions, the Indian retail lending space has significant room to grow both digitally and traditionally. The use of ML-based underwriting, rising adoption of small-ticket personal loans, and cross-selling loans within the consumer internet ecosystem are poised to help digital lending grow in India. There is also a large, secured lending space (home loan, LAP, etc) that is underpenetrated by digital players. Indian digital lenders can solve the customer pain points in unsecured lending through better user experience, faster loan processing, and disbursing loans using alternative risk underwriting models. (Infographic Source: Navi DRHP)
The retail lending market in India is skewed towards Metro and Tier-1 cities as compared to Tier 2+ cities due to a lack of capability and reach of traditional lenders in these regions. In India, the retail lending AUM is majorly concentrated in Metro and Tier-1 cities as compared to other cities due to a lack of capability and reach, which provides a significant market opportunity for digital lenders in India.
Semi-urban and rural areas are highly under-penetrated in terms of credit, as 65% population in India is based in these regions and accounts for only about 40% of loans outstanding implying a large credit supply gap in rural areas due to a lack of reach. In India, unserved consumers account for more than half (63%) of the country’s total adult population, while in comparison, underserved consumers in India represent 19% of the adult population (Source: TransUnion CIBIL)
CC-UPI Linkage & Credit-on-UPI
Riding on the stack and the widespread adoption of the UPI, India now has the biggest volume of real-time digital payments worldwide, accounting for more than 40% of all such transactions. This has enabled the formalization of the economy through increased financial inclusion and created a market opportunity for entrepreneurship, as evidenced by the increasing start-up ecosystem. Today, customers prefer mobile-based, contactless payments over card-led payments. UPI credit will provide an easy and convenient way for consumers to make payments, eliminating the need for cash or cheques. This will in turn turbo-charge customer satisfaction & loyalty.
In 2022, the Reserve Bank of India (RBI) announced the linkage of RuPay credit cards to UPI to provide a seamless and digitally enabled credit card lifecycle experience to RuPay cardholders. Customers can link their UPI ID on either Bharat Interface for Money (BHIM) or other UPI apps with the help of the registered mobile number which is linked to their credit card account. Credit cards on UPI can help reduce the amount of time and cost associated with processing payments, which will benefit both financial institutions and merchants. It will provide earnings to payment facilitators by charging a merchant discount rate (MDR) to merchants for all UPI transactions made through credit cards and also provide merchants with an additional payment option, which will help attract new customers and increase sales. This presents an opportunity to tap into the P2M small ticket-size transactions being transacted through credit cards and further grow credit card spending. Credit on UPI is highly likely to replace customers’ usage of account balance and is expected to become a stepping stone for upgrading to a credit card.
Market Tailwinds
Despite all the recent developments, including but not limited to the RBI’s Master Direction on Debit and Credit Card Issuance and Conduct Directions, Digital lending guidelines, and the increased risk weights on unsecured consumer loans, etc, the growth story of the Indian credit cards industry is intact as the market remains largely underpenetrated. As of March 2023, there are ~8Mn PoS terminals, growing by 28% YoY, and BQR terminals stand at ~6.1Mn, growing by 24% YoY. Significant growth of PoS and BQR terminals enables usage at touchpoints, creating a strong positive momentum for the industry.
In recent years, the Indian government and regulatory bodies have been heavily focused on expanding access to credit for individuals and small and medium-sized businesses (SMBs). This priority has become even more prominent following the successful implementation of the identity (Aadhaar), banking (Jan Dhan Yojana), and payments (UPI) stack, which have laid a strong foundation for financial inclusion in India. The emphasis on credit expansion is driven by the understanding that access to credit is a crucial driver of economic growth and development. By providing individuals and SMBs with the necessary financial resources, the government aims to stimulate consumption, investment, and entrepreneurship, thereby fostering overall economic prosperity. (Source: Infographic sourced via our portfolio company, CheQ)
Despite the rapid expansion of India's consumer base, a significant portion of the population remains excluded from formal credit markets. This exclusion is particularly pronounced among lower-income households, rural populations, and women. The opportunity to bring these excluded segments into the formal credit fold is immense.
1. MSME Credit Gap: According to a report by the International Finance Corporation (IFC), the total addressable credit gap for MSMEs in India is estimated to be around $380 billion (Source: IFC, 2018). By bridging this gap, the government can unlock significant growth potential for the MSME sector, which accounts for nearly 30% of India's GDP and employs over 110 million people.
2. Agricultural Credit: Agriculture plays a vital role in India's economy, employing over 50% of the workforce. However, many small and marginal farmers still lack access to formal credit. According to the National Sample Survey Office (NSSO), only about 30% of agricultural households in India have access to formal credit sources (Source: NSSO, 2019). Expanding credit access to this segment can boost agricultural productivity and improve the livelihoods of millions of farmers.
3. Women Entrepreneurs: Women-owned businesses in India face a significant credit gap, estimated to be around $158 billion (Source: IFC, 2019). By providing targeted credit interventions for women entrepreneurs, the government can promote gender equality and harness the untapped potential of women-led businesses.
4. Pradhan Mantri Mudra Yojana (PMMY): Launched in 2015, the PMMY scheme aims to provide affordable credit to micro and small enterprises. As of March 2021, the scheme has disbursed over Rs. 15 trillion in loans to more than 28.8 million borrowers (Source: PMMY website). This demonstrates the vast potential for expanding credit access to underserved segments.
The government and regulators have introduced several initiatives and policy measures to tap into this opportunity. These include:
1. Establishment of the Public Credit Registry (PCR): The PCR aims to create a comprehensive database of credit information, enabling lenders to assess the creditworthiness of borrowers more effectively and efficiently.
2. Promotion of digital lending: The Reserve Bank of India (RBI) has issued guidelines to promote digital lending, leveraging technology to expand credit access and reduce costs.
3. Priority Sector Lending (PSL) norms: The RBI mandates banks to allocate a certain percentage of their lending to priority sectors, including agriculture, MSMEs, and affordable housing.
4. Schemes like the Emergency Credit Line Guarantee Scheme (ECLGS): Introduced in the wake of the COVID-19 pandemic, the ECLGS provides collateral-free loans to MSMEs, helping them cope with the economic disruptions caused by the crisis.
Meanwhile, fintechs in India have been heralding a change in the personal loan market in India that has experienced remarkable growth, mirroring the overall PL sector. Since April 2018, fintechs have sanctioned over 180 million personal loans, exceeding ₹2 lakh crore in value. This surge initially stemmed from a low base and post-pandemic recovery, but has now settled into a more normalized growth rate. Notably, fintech loans have significantly expanded their reach, extending credit to borrowers in tier III cities and beyond. These loans are now available in 721 districts, with the share of the top ten states slightly decreasing from 80% to 77%. Remarkably, 40% of loans issued in the first half of FY 23-24 went to borrowers in tier III cities and beyond, marking a three-fold increase in sanction value share since FY 18-19.
Rural areas are seeing an increasing number of fintech borrowers, although many of these borrowers are new urban migrants using their permanent rural addresses. States like Bihar, Himachal Pradesh, and Uttar Pradesh show a higher percentage of rural borrowers, likely due to this migration trend. However, the rural-urban classification based on the 2011 census does not accurately reflect the current urbanization landscape.
Despite overall growth, female participation in fintech loans remains low, declining during the pandemic to account for just 14% of loans in H1 FY 23-24. This participation is meager in rural and semi-urban areas, though it is relatively higher in northeastern states and Kerala, exceeding 20%. Young borrowers under 35 years old makeup two-thirds of the loan sanction value, indicating fintechs' strong appeal to this demographic. This trend underscores the potential for fintechs to grow responsibly and sustainably by catering to the evolving needs of a younger market segment.
Over time, fintech lending has seen an increase in mature borrowers with longer credit histories. In H1 FY 23-24, more than two-thirds of the sanction value came from borrowers with a credit bureau vintage of over three years, and half had a vintage of more than five years. This shift shows that fintech loans are moving up the risk chain. The proportion of mid-low-risk borrowers has risen from 36% in FY 18-19 to 59% in H1 FY 23-24. Additionally, while the average loan size gradually decreases due to a higher volume of small-value loans, there is considerable variation across different demographics and regions. The average ticket size tends to be higher for female, urban, and metro borrowers and increases linearly with age, credit history, and credit score.
Conclusion
The importance of India's credit story lies in its potential to drive broader economic development. As more people gain access to credit, consumer spending increases, which in turn fuels business growth and job creation. This ripple effect can significantly contribute to the country's GDP. Moreover, by providing tailored financial products, fintechs are helping to cultivate a culture of responsible borrowing and financial literacy, laying the foundation for a more resilient economy.
Additionally, the focus on underrepresented groups, such as women and young borrowers, is vital for social equity. As these demographics gain financial independence, the socioeconomic benefits extend far beyond individual households, fostering more balanced and sustainable development.
In essence, the transformation of India’s credit landscape through fintech innovation is not merely a financial phenomenon but a pivotal force for economic and social change. It promises to create a more inclusive and dynamic economy, positioning India as a global leader in financial technology and development. As fintechs continue to innovate and expand their reach, the future of credit in India looks incredibly promising, heralding an era of unprecedented growth and opportunity.
