Loan disbursals jump, but are they leading you to a debt trap?

A recent report by the Fintech Association for Consumer Empowerment (FACE) noted the constantly increasing volumes of digital lending in India. For FY 2022-23, disbursement volumes jumped 131%, while its value soared 129% on a YoY basis, standing at Rs 92,848 crores. During this period, 7.26 crore loans were given out. .In FY 2021-22, this was Rs 35,940 crores, with 3.10 crore loans disbursed.

However, the average ticket size ranges between Rs 10,000-12,000, indicating that the loan amount remains strongly footed in the small-ticket segment i.e. less than Rs 25,000.

Mixed Bag for Indian lending space
Retail inflation has eased to a 2-year low of 4.25% in May, 2023 and RBI has hit a pause on hiking interest rates, leaving it at 6.5% for the time being. As a consequence, the cost of borrowing for the regular person becomes less expensive and hence, more lucrative. As the FACE report mentions, India’s digital lending space remains in an accelerated mode of growth.

Even the attraction of other unsecured loans like credit card usage has massively risen in the last year. While merchant outlets saw 22 crore debit card swaps last year for payment purposes, falling 31% in the last year, credit cards surpassed this number at 25 crores swipes, rising 20%.

In fact, credit cards are taking over their debit counterparts in every possible aspect. Combining both physical and online transactions, payments worth Rs 1.3 lakh crore were made via credit cards last year. For debit cards, this figure was a paltry Rs 53,000 crore.

Gaurav Jalan, CEO & Founder, mPokket, highlights the need to be extra-cautious while taking a loan, lest you fall prey to frauds and cybercrime. “It is essential to choose reliable lending platforms that are focused on data protection and have a proven track record. Moreover, it is critical to refrain from disclosing sensitive financial information over the phone and to report any suspicious calls right away to the appropriate bank or credit card issuer. Users can keep their credit score high by streamlining spending habits, taking into account their ability to repay and avoiding unnecessary debt. Verifying and updating KYC documents in advance prevents the rejection of loan applications. Finally, to safeguard one’s funds, always be alert to the possibility of any fraud, ensure due diligence and verify the identity of the caller or recipient before disclosing personal or financial information online”.

Easy loans, weak financial health?

Getting loans quickly, frequently and in a friction-less manner online can thrust a regular lendee into a debt trap, which might be hard to escape. This is also why RBI is planning to crack down on this burgeoning segment. This is because if an unsecured digital loan or credit card goes bust, the loss to banks stands at 100%.

However, this category has been showing steep growth, growing at 24% as of April, 2023. This figure was at 18.2%, a year before, notes RBI data. A default in this category by consumers adversely impacts their financial health too, and the road to recovery from a debt trap is a long, tedious one.

Shifali Satsangee, an Agra-based personal finance advisor, highlights a few tell-tale signs that can indicate that you’re certainly caught in a debt spiral :

• You cut down extensively on savings to tide over contingencies
• A large chunk of your income goes towards servicing your debt.
• Your credit cards are often declined, because you constantly exceed your outstanding limit.
• You receive frequent messages and calls from loan companies and collection agents, reminding you to pay back.

If you find such weaknesses in your financial health as well, it is time to rejig and revisit your loans and expenses. The best way to start off is by consulting a financial planner, who can help you consolidate and review all your payables, expenditures and suggest a favorable plan.