When you do not have access to the banking system and conventional forms of credit then you have no other choice but to turn to the likes of payday loans, check cashing services and others. As consumers utilize payday loans, prepaid cards and other similar items, they’ll notice they cost a lot.
For a country that has millions of impoverished citizens, every dollar, or rupee, counts.
Despite being one of the biggest developing markets in the world today, many consumers in India lack bank accounts, credit cards and other products provided by traditional financial institutions. Due to this trend, a large number of unbanked Indian consumers turn to local startups to borrow funds.
For the past few years, a growing number of young professionals, who also happen to be employed, are using the likes of SlicePay and Cashe, to access credit. Since they do not own a credit card and have yet to build up a credit history, they use alternatives, like payday loan stores.
At the same time, however, it is being reported that there is an increase in bad loans. This has prompted traditional banks to be even more cautious than ever, which also means the demand for alternative financing from small businesses and peer-to-peer (P2P) services continue to go up.
Payday loans and alternative financial services were popular, and now even more so.
The research has found that 64 unconventional lending firms were started in India last year. So far in 2016, there have been 34 more new startups. India is now No. 3 in personal loan startups.
That’s right. India only ranks behind the United States and China for personal loan startups.
Moving forward, Indian startups are collaborating with non-banking financial corporations (NBFCs) or even applying for their very own NBFC license. This allows the partnerships to utilize a loophole in current regulations created by various jurisdictions across the South Asian country. However, as part of the regulations, NBFCs are permitted to lend out money, but are prohibited to receive deposits.
In other words, the lending startup industry is booming. The main problem is that they cannot source funds. Therefore, they turn to the banks that offer low interest rates with good credit scores.
What makes the trend in India fascinating to financial experts and business professionals is that these startups are experimenting in various segments of the marketplace. Some are providing personal loans, while others are offering customers with payday loans. The market is filled with choices.
The interest rates are not too bad. Some even offer cheap payday loans that can be taken out for up to 30 days and has an interest rate between 24 and 30 percent. This may seem high to some, but the lenders are taking all of the risks.
As Indian entrepreneurs look to tap into a potentially lucrative market, other North American and European jurisdictions are looking to rein in this industry. Canadians, Americans and Britons are all working hard to either restrict or prohibit the short-term, high-interest loan model. Many of these places are succeeding, but it seems the developing markets are ignoring the warnings and moving ahead.