The festive season is long over but the spending spree hasn’t! Easy access to small loans has fuelled a surge in consumer spending, creating to a ripple effect in the Indian lending landscape. This calls for a strategic move to re-evaluate your Collection Partners this Q4. Before diving in, let’s understand the significant events that unfolded in the past year.

Understanding the Landscape

Consumer Spending is at an all time high!

With a 4 fold increase in unsecured personal loans disbursals in the last 6 years, last year was the biggest year of them all. We saw the biggest ever consumer spend during festivals like Diwali and an overall 32% spike in unsecured personal loans disbursed, amounting to 64,000 crores last year and has also shown the highest ever default till date.

I work hard to live a better life, I deserve to spend on things that make me happy.

Said Sanjay Raju, a 26-year-old driver earning around 25,000 rupees a month, who has taken loans from finance companies to fulfil his lifestyle wishes. In the September-December 2023 period, he used loans from finance companies to purchase an iPhone (39,000 rupees), a used bike (80,000 rupees), branded clothes (11,500 rupees), and a night out with friends (5,000 rupees).

With more low-income individuals gaining access to unsecured loans, defaults have risen, particularly for loans below 10,000 rupees and 50,000 rupees. CRIF India reports that 38% of loans below 10,000 rupees issued in the past 12 months originated outside the country’s top 100 cities. As a result, the Reserve Bank of India (RBI) has been closely monitoring the situation.

RBI increases risk weights

The Reserve Bank of India (RBI) has increased risk weights for consumer credit exposure (i.e., unsecured personal loans) for commercial banks and NBFCs by 25 percentage points. This action comes after repeated warnings to lenders, as the central bank believes they haven’t yet implemented sufficient improvements.

As a result of this change, Banks and NBFCs will need to set aside more capital against their unsecured personal loan and credit card portfolios. This will lead to an increase in the cost of capital for lenders and could potentially result in higher interest rates for some borrowers.

Borrower Protection Gains Paramount Importance

The Reserve Bank of India (RBI) and the Government of India have increasingly implemented measures to empower citizens and strengthen the services provided to them. Two recent examples include:

1. Guidelines for Banks, NBFCs, ARCs, and Bureaus to Strengthen Customer Service: This initiative aims to ensure better data privacy, grievance redressal mechanisms, access to free credit reports, and other improvements.
2. Digital Personal Data Protection (DPDP) Act, 2023: This act requires companies to obtain consumer consent and be transparent about how personal information is used. Failure to comply can result in fines of up to ₹250 crore. The act is expected to have a deadline of July 2025.

Now, how does Q4 become crucial to your Collections strategy?

Choosing the right agency or partner involves evaluating these players on a variety of factors to be well-prepared for the challenges of new fiscal year. Let’s explore.

Understands the borrower and the market

1. Understanding borrowers in new markets – With more than 1000s of new cities and towns getting access to loans digitally, it becomes ever more challenging to understand borrowers from different cultures, religions and ethnicities in a country where more than 700 languages are spoken. Finding partners who can understand local customs while ensuring ethical collection practices, will help you maintain high efficiencies in new markets.
2. Leverages borrower insights – Handling post-festival spenders, Tax Season, lifestyle spenders, restructuring loans for the people who need it and how they can come up with creative strategies during such events and seasonalities. A smart partner can help you leverage such windows of opportunities.
3. Expertise in unsecured personal loans, especially small ticket (STPL) is crucial – As these loans are the biggest growth driver for lenders across the country, look for a proven track record or evidence in recovering such loans effectively. Knowledge of digital collections and optimised operational processes, makes it financially viable for your partners to reduce STPL defaults.

The Right Partner Understands You, Technology, and Compliance

1. Brand image – Prioritises building a positive brand image through superior customer experience.
2. Scalability – Consider their ability to cater to your growth in new territories.
3. Optimise efficiency and costs: Evaluate their processes, tools, and pricing to maximise your team’s performance and minimise collection expenses.
4. Technology adoption: Evaluate their collection analytics, data protection, borrower data privacy, and how they use software to gain a competitive advantage.
5. Data Privacy – Evaluate how they protect you from data leakage at a business and operational level. With the DPDP Act coming into effect, this becomes the question of the year.
6. Regulatory compliance: Ensure they proactively stay updated and compliant with evolving regulations. Find out what regulatory certifications and processes they have in place to ensure and maintain compliance.

Choosing the right collection partner in Q4 isn’t just about short-term gains; it’s a strategic investment in the long-term health of your Loan Product’s portfolio. Find a partner who aligns with your goals, protects your borrowers, and ensures a smooth, compliant, and cost-effective collection process.