The retail revolution: what are the key trends in credit-linked purchases?

By Puja Sharma

The pioneering digital book-keeping app OkCredit released its annual study titled ‘Decoding Informal BNPL’ a detailed report that delves deep into the system of credit-linked purchases in unorganised retail.

Informal BNPL gets back its groove with higher credit, shorter repayment periods and digital payments standing out as key trends. Quite similar to the exponential growth witnessed in modern BNPL, the informal BNPL too is seeing robust growth along with strong metrics, according to the report. This informal BNPL plays a major role in running India’s retail engine, 85% of which is unorganised.

The data report is based on the insights generated from 1 billion transactions on the company’s platform that were recorded last year. They witnessed a 25% growth in the volume of transactions, compared to the year before. In value terms, $50b worth of credit was added to the digital bookkeeping app, capturing 1.6% of the national GDP.

For example, a good indicator of a healthy BNPL is repayments. The repayment tenure, also known as credit cycle has come down for all categories, pointing to faster repayments in informal BNPL. Apparel and medical stores which saw their credit cycle jump up to more than 60 and 40 days respectively during the peak of the pandemic in 2020,  have seen a steep decline.

The report gives a clear picture of credit behaviour in unorganised retail by dividing small businesses into medium, small, and micro. While micro businesses contribute to the volume, medium and small businesses make up for the value. It further digs into several layers- category, geography, tier, B2B/B2C to come up with insights that are unique and a first in the sector.

Take NPAs (Non-performing assets) for instance. While NPAs for the organised sector are known and easy to measure, there is hardly any data on NPAs in informal BNPL. The report brings out an estimate of NPAs in informal BNPL, pegging them at 4% for medium businesses, 5% for small businesses, and 8.2 % for micro-businesses. Higher NPAs in micro-businesses are due to the small size of credit transactions. Shop owners, many times have a laid-back attitude when it comes to the collection of small credit, which later leads to NPAs.

Microbusinesses in Bihar, Rajasthan, and Madhya Pradesh have the highest NPAs. Geographically, Jammu and Kashmir have been the best performer when it comes to credit recovery for small businesses. It has seen NPAs decline from 7.8% to 3.4%.

The report also dwells intensely on peak credit size- the maximum amount of credit a shop owner records for an account. Peak credit size is a barometer for the credit capacity of small, medium, and micro-merchants. Peak credit size for both small and medium businesses has expanded indicating growth in their business. Since micro businesses were worst affected in the pandemic, a lot of them have reduced selling on credit and are optimizing for positive cashflows. It’s reflected in the data, as credit size for micro-businesses has only marginally increased and even declined in most cases.

“Digital payments have been a catalyst for growth in every sector. But so far, there has only been anecdotal data to understand its adoption in unorganised retail. With this report, we have outlined pockets of growth in digital payments. The rapid growth of payments on our platform is an indicator of the eagerness of SMBs to latch on to online payments for growth,” said Gaurav Kunwar, Chief Product Officer and Co-founder of OkCredit.

The most important aspect of a credit business is credit recovery. OkCredit’s data shows that while cash payments are the primary mode of payment, digital payments are on the rise and growing steadily. Nearly 90% of the users of the online payment on the platform use UPI.  Within that, 60% of the payments for purchases under Rs 200 are being made through UPI. GPay leads in UPI payments, followed by PhonePe, Paytm, and Bhim. Paytm is a leader in small-ticket transactions- under Rs 200 payments and dominates at local shops.

The report further states that the next wave of growth among retail SMBs will be driven by the availability of easier credit. There’s a vast scope of formalising this BNPL for retailers, offering them the same ease and convenience that millions of consumers in India are getting.

“Over the years of facilitating informal BNPL, it has brought about a huge transformation. This positive change is also reflected in our data, wherein we have seen the credit cycle going down and credit sizes going up. Thanks to digitised credit records, merchants have better visibility of their customers, can remind them, and get back payments faster eventually leading to improved cash flows. This is just the first step. Digitisation is set to unlock many more growth opportunities for retail SMBs,” added Harsh Pokharna, CEO and Co-founder of OkCredit.

Key overview

• Medium and small businesses have seen the highest growth in credit lines at 13% and 11%.
• People in cities are better repayers of credit than in tier-2 and tier-3 towns, as reflected in shorter credit cycles in cities.
• Southern states in India have a higher concentration of small and medium businesses than other parts of the country.
• Maharashtra has witnessed a humongous drop in repayment tenure. People are paying back in 7 days as compared to 28 days in 2020.
• Lifestyle categories such as apparel and jewellery show high NPAs, owing to their stagnant demand during Covid and higher ticket sizes.