Small-Ticket Personal Loans: Why Banks and Non-Banks Are Cautious?

Indian banks and non-banks are exercising caution on small-ticket personal loans, which are loans less than ₹50,000. This is a significant shift, as banks have traditionally been more aggressive in disbursing these loans. There are a few reasons for this caution. First, small-ticket personal loans are more likely to default than larger loans. This is because borrowers with smaller loans may have less credit history and may be more vulnerable to financial shocks.

Second, small-ticket personal loans can be expensive to process for banks. This is because they require the same amount of paperwork and processing as larger loans. Finally, banks are concerned about the impact of small-ticket personal loans on consumption. If people are borrowing money to finance consumption, it could lead to a rise in debt levels and a decline in savings.

Why Banks Are Cautious

ICICI Bank, one of India's largest banks, has said that it has a very minimal presence in the smaller ticket size segment. The bank is not reliant on personal loans for growth, and is instead focusing on other areas such as credit cards.

Analysts say that large banks are not necessarily chasing small-ticket personal loans because such borrowers may not necessarily conform to their underwriting standards. However, they say that banks are continuing to pursue aggressive growth within the unsecured retail space.

The Impact on Consumption

Some experts believe that the caution exercised by banks on small-ticket personal loans could hit consumption to an extent. This is because people may not be able to get these loans to finance their consumption needs.

However, other experts say that people will simply look for other avenues to borrow money, such as from friends, family, or moneylenders. They also say that the demand for personal loans has increased in recent years, and that this is not just due to the supply of personal loans going up.

Bajaj Finance, one of India's largest consumption financiers, has also decided to be careful of those with multiple small loans in both urban and rural areas. The company has seen a strong growth in the number of personal loans disbursed in recent years, with steeper growth seen in the two categories of less than ₹50,000 and ₹8 lakh-plus.

What Does the Future Hold?

It is difficult to say what the future holds for small-ticket personal loans. On the one hand, banks and non-banks are exercising caution on these loans. On the other hand, the demand for these loans is still strong.

It is possible that banks and non-banks will develop new products and services to meet the needs of borrowers with smaller loans. They may also focus on using technology to reduce the cost of processing these loans.

Overall, the caution exercised by banks and non-banks on small-ticket personal loans is a sign that the lending landscape is changing in India. It is important for borrowers to be aware of this change and to make sure that they understand the terms and conditions of any loan they apply for.