An Uber for Asset-Backed Lending – Is the Future of Secured Lending Branchless?
In today’s technologically advanced world, lending has reduced the complexities of a time-consuming process from days to minutes. While financial institutions were early adopters of digital technologies when the industry was in its infancy, credit must also be given to new-era fintech companies that are transforming borrowers’ lending experience.
We live in an age where the degree of convenience is much higher than that of our previous generations. Deliveries of services that were once considered normal would now induce a customer to build loyalty with a competing brand, as it is considered a hygienic factor at present. Whether it’s food delivery apps, taxi aggregators or OTT, the public today expects the highest quality services from the comfort and convenience of their homes. This has led to a paradigm shift in collective consumer expectations for all products and services, including financial services. That said, due to its complex nature, financial services require considerable modification and rapid technological change to adapt to the mold of new era consumer expectations.
With infrastructure between banks and FinTechs increasingly driven by APIs, microservices and configurable SaaS products, multiple banking products and services ranging from opening new accounts and fixed deposits to obtaining loans personal and obtaining sanctioned credit cards, can be created 100% online. Along the same lines, secured lending products where a physical asset like gold is implied as collateral can also be accessed through an app. From a bank’s perspective, of all the retail credit offerings that exist, unsecured lending products such as personal loans and education loans, while rapidly growing and easily digitized, represent 12.8% of the overall retail loan portfolio in India. based on CRIF report “How India Prepares 2021”.
Meanwhile, asset-backed lending products such as gold loans, home loans and auto loans, which make up the majority of the retail loan portfolio, still depend on physical interactions within the branch. . Because of this, lenders are forced to maintain expensive branch operations. This not only leads to an increase in their Opex/AUM ratio (a basic operational indicator for bankers), but also considerably limits their ability to extend these offers to new geographies due to the establishment of new physical branches, unlike other home products or services. such as e-commerce brands. The Opex to AUM ratio of two of the largest NBFC gold lending players in India is between 3.6% and 6% in Q3 FY2022. So on the one hand we have consumers who want home-based services and on the other, lenders who want to offer nearly risk-free secured loan products like gold loans but struggle to find the optimal balance between managing retail operations and branches.
There is a very clear gap between supply and demand in the market, which, by the way, not taking into account the expansion of TAM and considering only the organized sector, is estimated at around 50 billion dollars in India (gold lending market) and unorganized gold backed lending market is estimated at 3 times the same. This is where FinTech’s comprehensive gold loan products and services come in. Their fluke is the use of technology to manage or automate the operational trinity of loans: front offices (loan managers visit customers instead of customers visiting branches), middle offices (automotive services/sales/support centers based on applications) and back offices (banking, payments, underwriting, etc.) using technology.
For consumers, this means safer, faster and more convenient service. A professional loan manager comes to the client’s home, analyzes the gold, registers the loan and within 30-40 minutes the amount is paid into the client’s bank account. Thereafter, the customer can manage the loan entirely through apps. Through it all, banks only have to lend money – everything else is handled by Fintech platforms. As a result, Indian consumers increasingly prefer to have their gold pledged in the privacy of their homes rather than risk physically transporting the asset to be deposited as collateral in bank branches.
There is a common misnomer that borrowers with low credit ratings usually opt for gold loans, which is quite the opposite in real life. For a business owner who has gold as a dead asset in the almirah, a gold loan is more prudent than a business loan for two reasons. First, interest rates on gold loans are much lower. Second, in gold loans, one only has to pay the interest component monthly and one can repay the principal at the very end. This means that for a trader or manufacturer, the working capital acquired through the loan can be fully utilized for investments and once returns are made, the principal can be repaid at the end of the loan term.
It is imperative to remember that gold is an asset held by more than 80% of Indian households, regardless of the quantity. So for any actor trying to monetize this dead asset, one of which happens to be the Indian government, the goal is not a Pareto optimal function! Futuristically speaking, 10 years from now it might be considered as strange to go to a branch to get a gold loan as it is today to go to a restaurant to pick up food.
The opinions expressed above are those of the author.
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