What’s next for small ticket loans? Key trends shaping financial inclusion
By Artem Andreev, Country Head, RupeeRedee
Securing a loan through traditional financial institutions is challenging, especially for low-income individuals, such as blue-collar workers, marginalised groups, and micro-entrepreneurs.
They face hurdles like lacking collateral or having a poor or non-existent credit history—key factors that banks use to assess loan eligibility. Moreover, a medical emergency can place immense financial strain, making it even more difficult for these individuals to navigate their financial needs.
This is where small-ticket loans come in. These loans, often amounting to less than Rs 1 lakh, provide a vital lifeline, enabling individuals to cover unexpected medical expenses such as hospitalisation, surgery, or essential medications.
Beyond medical emergencies, these loans can also be used for other pressing needs, such as funding a child’s education, making necessary home repairs, or managing unforeseen life events like job loss or natural disasters.
For micro-entrepreneurs, such loans can be instrumental in sustaining their businesses during tough times, whether it is for purchasing inventory, upgrading equipment, or covering operational costs during a slow period.
Alternative banking systems: The backbone of small-ticket loans
Traditional banks and financial institutions often overlook or avoid providing smaller loans due to the perceived risks and lower profitability associated with them. As a result, there is a growing reliance on alternative banking methods and financial innovations designed to promote financial inclusion.
These alternatives include microfinance institutions, digital lending platforms, and peer-to-peer lending networks, which cater specifically to the needs of low-income individuals and small businesses. By offering more accessible and flexible financial products, these institutions help bridge the gap left by banks, empowering marginalised communities to participate more fully in the economy and improve their financial stability.
This new financial revolution is being led by FinTech companies, which are changing the way credit is distributed and accessed. As of September 2023, they hold 77% of the market share in small-ticket loans. By using inventive methodologies and technologically assisted resolutions, they are dismantling customary obstacles and enabling widespread financial empowerment.
Key Trends Shaping the Future of small-ticket Loans
A number of significant developments that will influence the direction of financial inclusion are emerging as FinTechs continue to rule the small-ticket lending sector. Some of them are:
- AI-Powered Underwriting and Customised Loans: Artificial Intelligence (AI) is a significant factor in improving credit risk assessment accuracy. AI can spot trends and forecast credit behaviour by examining massive databases, which enables lenders to create more specialised lending options. Customers’ financing experiences are enhanced, and FinTechs can better control risk as a result.
- Embedded Finance and Seamless Lending Experiences: Another trend that is gaining traction is embedded finance, which is the integration of financial services into non-financial platforms. FinTechs may provide customers with frictionless borrowing experiences by directly integrating loan services into social media, eCommerce platforms, and other digital ecosystems. This trend facilitates credit accessibility and streamlines the borrowing procedure, which is especially advantageous for small-ticket loans.
- Blockchain and Decentralised Finance (DeFi): Blockchain technology on decentralised finance (DeFi) platforms makes peer-to-peer lending possible without middlemen. DeFi, which is still in its infancy, has the potential to further democratise credit availability by offering quicker, less expensive, and more transparent financing options.
- Increase in Volume of Digital Banking and Mobile Payments: Access to financial services has been dramatically improved by the widespread use of digital wallets, especially in rural areas where traditional banks might not be present, and this trend will continue to reap rewards for the FinTech sector. More financial inclusion is likely to be facilitated by improved digital financing solutions made available via mobile phones, which enables consumers to access credit, manage their accounts, and make payments from the comfort of their homes.
- Cybersecurity and Fraud Prevention: Digital lending platforms are growing exponentially and expanding their services rapidly, and with this come the concerns of fraud and cybercrime. FinTechs must make significant investments in security measures to preserve confidence and safeguard sensitive client data. This entails implementing multi-factor authentication, real-time fraud detection systems, and encryption technology.
- Partnerships and Collaborations: To increase the accessibility of small-ticket loans, cooperation between FinTechs, established financial institutions and governmental organisations will be essential. These kinds of collaborations can aid in resolving infrastructure-related issues, generating customised financial products, and maximising government efforts to establish a digital economy.
The path forward for greater financial inclusion
The need for small-ticket loans is anticipated to rise as the Indian economy expands and becomes increasingly prosperous. FinTechs are in a good position to meet this demand because of their sophisticated analytics and digital skills. However, their lending policies must support financial inclusion. This entails providing borrowers with loans that are not only easily available but also reasonably priced and long-term.
FinTechs can prevent over-indebtedness and improve their customers’ long-term financial health by encouraging ethical lending practices, constantly innovating, and adjusting to their clients’ changing needs while keeping an eye on sustainability.
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September 12, 2024