Changing Trend of Personal Loans in India

The stellar growth of the Indian economy in last three decades has manifested itself in evolution and development of its various segments – including the business and personal finance sector. One such impact has been the way in which individuals’ financial borrowing patterns have transformed over the ten years. A financially conservative mindset was the hall mark of the Indian customers even till a few decades back. Post liberalization in early 1990’s, with growth in jobs and opportunities in various sectors as well as in cities and smaller towns, customers started exploring debt based financial products on offer from banks and financial institutions.

One such financial product, the Personal Loan, which is typically unsecured loans to individuals, has seen significant growth in the last ten years. Earlier, Personal loans were generally viewed to be loans taken mostly for emergency purposes, be it for marriages, medical or some pending home improvement expenses. Moreover, around 2007-08, news reports suggest that personal loans were few and far between, with instances of defaults being recorded during that time.

However, post that phase, Personal Loans slowly started regaining popularity on back of rationalization of interest rates, multiplicity of products from banks and financial institutions, online credit scoring as well as emergence of intermediaries and third party financial product distributors such as MyMoneyMantra who reached out the customers from all walks of life.

In specific over the last five years, Personal Loans have become quite common place and are being increasingly sought for fulfilling customer aspirations of dream vacations, leisure and entertainment as well as for acquiring latest gadgets. mymoneymantra estimates that the average personal ticket loan sizes is likely to have almost doubled from around 2.5 Lakhs per loan in 2011-12 to around 5 Lakhs per loan presently.

Also, over the last five years, an interesting trend noticed has been that there has been a growth of working single women availing personal loans. However, the proportion of such customers is still limited and could be as low as a tenth of all personal loans applications. According to market analysts, the surge in personal loans over the last five years in specific has been enabled by a combination of following factors.

Firstly, the growth of the economy and jobs has allowed individuals greater leverage in terms of availing debt based on their incomes. Secondly, the opening up of a stupendous range of products and services for customers has only been matched by the soaring aspirations and needs of customers. Finally, the progressive rationalization of interest rates over the last five years has allowed individuals to afford higher personal loan amounts.

For sake of comparison, on an indicative basis, interest rates for personal loan in 2011-12 were around 13.5% – 14.5%, as compared to personal loan interest rates of 11.29% – 12.5% presently.

Looking at the strong enabling factors and growing market size, it is likely that the need for personal loans would continue to grow in coming years. Moreover, it is projected that Personal loans could be one of the financial debt products which may be able to immediately cater to the growing needs and aspirations of customers, especially as technical and process convergence between financial institutions, banks and intermediaries underway, may enable instant approval of personal loans for customers. Hence, the future of this loan product looks dynamic and exciting.