Advances in loan market

Dreaming of having a lavish wedding or going in for that hair implant? Or buying all that gleaming gold and silver jewellery? The good news is that you don’t have to wait to save — not when loans of every hue and tenure are on offer.

Loans may seem a traditional, time-tested product in the financial world, but lately there has been a lot of innovation in this space. Now, with low interest rates and slow growth in large corporate lending, there is increased interest from lenders to step up on retail lending products. Also, thanks to data and technology, offering new products and services and reaching out to new customers has been easier. As a result, borrowers are, in a way, spoilt for choice — there are many interesting loan products in the market that cater to specific needs, are easy to apply for and offer flexible terms. Also, rather than take weeks and months, loans are now processed in a breeze, thanks to online processes and credit scores.

But borrowers must do a thorough due diligence on the lender before taking a loan. For instance, peer-to-peer lending is not currently regulated. Many of the platforms only have a moneylender’s licence and hence cannot lend across State boundaries. Also, many mobile credit verification services may gather sensitive information from your messages.

Given the high cost of typical Indian weddings, borrowing to celebrate a wedding is not uncommon. Banks such as Central Bank, Axis Bank and State Bank of India, as well as NBFCs such as Bajaj Finserv and Tata Capital, offer wedding loans.

The loan amount can range from ₹10 lakh to ₹40 lakh or more, with a repayment period of up to seven years. Bajaj Finserv, for instance, gives loans of up to ₹25 lakh for two to five-year tenure.

Eligibility may include minimum net monthly income (₹15,000 to ₹30,000 based on the location and age), employment status (earning for over two years) and credit rating (CIBIL score of 700 or higher).Interest rates vary from 11.5 to 15 per cent based on the borrower’s credit profile.

When buying appliances, consumers had access to consumer durable loans from banks and Non-Banking Financial Institutions. The interest rates ranged between 12 and 22 per cent depending on the income and credit profile of the customer. NBFCs such as Tata Capital, Capital First and Bajaj Finserv have been offering zero interest rate loans on select brands, thanks to the interest subvention by select manufacturers.

Similar deals are also on offer for new-age online buyers. Flipkart, for instance, has partnered with Bajaj Finserv and a few key brands to offer zero interest loans. Unlike the offline offerings, there are no processing fees or other charges. The loan tenure ranges from three to twelve months. If you are an SBI customer, you may be able to qualify for an instant loan when shopping at Flipkart. The interest rate is 14 per cent and the minimum ticket size is ₹5,000.

Take the case of paying for emergency or planned medical expenses. You now have many options beyond generic personal loans or high interest rate credit cards. Arogya Finance, for instance, offers a cashless card option with a pre-approved limit of ₹2 lakh. The rate of interest on these cards is 12-15 per cent and up to 75 per cent of the medical bill can be covered.

You can also get loans for medical emergencies, even if you don’t have a credit history. Arogya offers loans ranging from six months to 36 months with the limitation that the monthly EMI should not exceed one-fourth of the borrower’s monthly income. The loan is disbursed directly to the hospital.

There are also options from different players in case of pre-planned medical treatments for non-life threatening illnesses. For instance, bariatric surgery, infertility treatment, ENT, ophthalmology and cosmetic procedures such as hair implant are among those covered by lenders such as Tata Capital. You can get loans of ₹1-3 lakh for a period of three to four years, at 13-17 per cent interest rate. Arogya offers loans for medical implants such as pace-makers, in partnership with manufacturers such as J&J, Medtronic and Dr Reddy’s.

Device makers also have their own scheme. Medtronic has partnered with hospitals to offer loans ranging from six to 36 months to patients with monthly income as low as ₹8,000-10,000. You need to pay 15 per cent of the device cost (that ranges from ₹20, 000 to ₹8.5 lakh). The loan is capped so that the EMI payments are limited to 20 per cent of the family income. The loan does not have any prepayment charges.

The advantage of medical loans in some cases is that, similar to consumer durable loans, the partners (the medical device manufacturer or healthcare facilities) may chip in with the interest payment. Hence, borrowers pay lower interest rate, defer payments or get longer loan tenure. For instance, Medtronic offers interest-free repayment if the loan duration is only six months.

Paying security deposit (which can be 6-12 months of rent) when renting a home is another specific need with a new solution. Loantap, an NBFC, enters into an agreement with the owner and loan taker. Every month, the borrower pays rental dues to the owner and loan interest to the lender. The principal amount is repaid to the lender when the lease is terminated.

Education loan, especially to study abroad, is another category with products from banks and NBFCs. Loan tenures (which include the course period) vary from 10 to 15 years based on the amount — Baroda Scholar Program has 15-year tenure for loans of over ₹7.5 lakh and 10-year tenure for lower amounts. Others such as Paras Education Foundation offer loans for tuition, living and other expenses for study abroad. The loans are in foreign currency and the interest rate is 3-6 per cent per year on a reducing balance.

A very short-term loan, popular in developed countries, is payday loans. LoanTap allows salaried employees to borrow up to half of their salary for 10-20 days, until they receive their salary. The loan is made available within 24 hours; but the convenience comes at a cost — the interest rate is 24 per cent due to the short tenure.

Many banks offer schemes for women to buy gold and silver. Karur Vysya Bank’s Mahila Swarna Loan, for instance, is offered to women employees of the Central or State Government. Bank of India’s Mahila Gold Loan Scheme is offered to all women. Taking a loan for travel is another category of personal loan where there is action.

Besides the retail segment, businesses also have new loan choices. Unlike in the past, when borrowings were solely based on the strength of the promoter’s credit history, even new companies that do not have enough history have more credit options.

For example, early-stage companies working on emerging technologies can tap into SIDBI’s (Small Industries Development Bank of India) loans of up to ₹1 crore under its Srijan Scheme.

There are also lenders that focus on collateral-free short-term (up to 12 months) working capital loans (under ₹10 lakh). Lendingkart, for instance, offers loans of up to ₹50 lakh, without collateral and delays in physical verification.

Online merchants can also tap into working capital loans from ₹1 lakh to ₹1 crore for 90-180 days from NBFCs such as Capital Float. The seller has to meet certain requirements on operational history (one year) and quarterly sales (₹25,000).

Another option for SMEs to consider is loan against outstanding invoices. Here, typically, the requirements are more stringent.

For example, Capital Float requires a business to have been operational for over two years, with a turnover of over ₹1 crore. The loan tenure is 30-180 days and the loan amount is up to 80 per cent of the invoice value.

Besides banks and NBFCs, peer to peer (PTP) lending platforms, where lenders and borrowers can connect online, are another avenue for borrowers. PTP portals such as Lendbox, LenDenClub, CashKumar, i2iFunding, RangDe, Milaap, Kiva and Faircent help borrowers get loans faster. According to the recent RBI consultation paper, there are 30 such platforms operational in India.

Lenders and borrowers first fulfil Know Your Customer (KYC) norms. Preliminary due diligence — which includes background verification, financial assessment and repayment ability — is done on borrowers. A brief profile of the individual, detailing the family background, business, purpose for which the loan is sought, the amount, tenure, interest rate and the loan amount mobilised till date are made available on the portal.

The loans can be secured or unsecured. A borrower can share the loan proposal, including preferred interest rates, tenure and repayment terms with lenders. The rates vary with the credit profile of the borrower. For instance, at LenDen, the interest rate ranges between 12 and 30 per cent. It may be accepted, rejected or terms can be renegotiated. If the terms are agreeable, the lender and the borrower sign a formal agreement and the lender transfers the amount to the borrower.

The platforms also facilitate collection and recovery. In case the borrower fails to pay the EMI on the stipulated date, a penal interest is charged by these platforms and paid to the lender.

Even if you are not the traditional borrower, you may be able to get a loan as lenders are reaching out to newer target segments such as first-time borrowers and the self-employed segment for low-ticket unsecured loans.

Take the case of home loans — a very traditional collateral-backed product. Generally, women in the low-income segment — house-maids, vegetable vendors and those in the garment or papad making industries — have had to rely on chit-funds or private sources to buy or build a home.

MALA is a home loan scheme from Aspire Housing Finance that addresses this. It is open to women who are primary borrowers for a home, typically in rural or semi-urban locations. Loan amounts are in the range of ₹2-10 lakh.

The loan-to-value of the homes can be up to 80 per cent and the interest rate is 10-12.5 per cent. The income range of the borrower is about ₹10,000 per month.

As a borrower, you do not have to contend with rigid repayment terms, either. Many lenders let you pre-pay your loan and also offer a lot of flexibility in EMI payment. Tata Capital, for instance, lets borrowers opt for a step-up or a step-down EMI. Say, your current cash flow situation only lets you manage a smaller monthly payment, but you expect better pay raise in the future. You can go for a step-up EMI where the payments start low but increase in later years. If you are close to retirement and would like to pay the bulk of the loan now, step-down may be a choice to consider.

There are also loans where you only pay interest regularly. The principal can be re-paid whenever you have some surplus. The loan balance reduces on repayment of the principal and new monthly interest dues are calculated. This product from LoanTap can help you manage cash outflow.

There are also choices on how often you make the EMI payment. LendingKart, for instance, offers bi-weekly and monthly repayment options, besides customised repayment options. For loan against invoices, Capital Float lets business owners do a bullet repayment.

Lenders also let you receive the loan in a distributed way. LoanTap offers an overdraft facility. You receive approval for a larger amount but can choose to take only a smaller loan; the unused amount can be tapped at any time you need, reducing your interest expense.

Loan tenures are also set flexibly based on the borrower’s business. For example, Indifi Technologies, an intermediary, offers 30 to 60-day demand loan for travel agents and longer tenures to other business owners, based on their cash cycle.

Thanks to lenders using technology, loan turn-around time has been cut drastically. Lenders are using alternate data sources to underwrite loans faster, reduce documentation, do away with Contact Point Verification and use surrogates for income and address.

You can fill an application online, complete E-KYC process, scan and submit your documents. If you have an existing account in the bank, the process is even faster; many banks can approve certain loans and up to certain limits, in under an hour. Business loans, too, are given out faster — LendingKart uses a 100 per cent online loan application process and disbursal happens within 72 hours.

Lending platforms that let you compare different loan choices also help borrowers. For one, search time is reduced and you can evaluate multiple options at one go. Also, platforms such as Rubique do a profile match between the borrower and the lender’s criteria. This helps lower the rejection rates.

There are also efforts to better understand the needs of the borrower and offer loans based on their life-cycle needs. For example, a rural borrower may be given a loan to buy cattle. This may be followed by a two-wheeler loan to take the milk to the local chilling unit. The next steps may be to offer loans to set up a chiller unit and then a commercial vehicle to transport from there to a regional centre.

While more loan choices, faster processing and flexible terms seem good, borrowers have to do their homework.

One, you must check on loan terms such as prepayment penalty. You must also calculate the total loan cost, including processing fees, when weighing options. Two, make payments on time and maintain a high credit score to avail the best terms. Three, knowing the documents needed for different types of loan can help. For instance, a doctor’s certificate giving details of the procedure needed and indicative cost may be required for a medical loan. Four, ensure you will have enough cash to pay your monthly dues. A simple rule of thumb used by lenders is that if the total EMI payments are over 40 per cent of your monthly net income, your loan may be rejected.

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