Lately, there has been a shift in the thought process of Indian consumers and businesses when it comes to taking a loan. Gone are the days when a loan would be the last resort, that too, mostly for the purchase of an asset like a home or a car.
Today, consumers are taking micro loans for a number of purposes ranging from starting a business to fulfilling tuition fees. And the biggest enablers have been lending businesses that are making the entire process hassle-free.
To understand the market of loan disbursals in India, let’s have a look at some of the recent data points, as shared by MoneyTap:
- The year 2019 showed growth in unsecured lending, which includes durable consumer loans and personal loans. This segment grew by over 100% in 2019 over 2018, with fintech lenders offering loans through partnerships with existing NBFCs or banks or acquiring an NBFC license
- According to the report published by an Indian digital company, in the year 2019-20, 37% of millennial customers resorted to borrowing for emergencies like medical emergencies – a sharp increase from 31% last year
- Personal loans grew at 28% compared with 33.5% in the same period last year. The volume of origination in the personal loan category soared 134% YoY
- RBI mentioned that credit worth Rs 2.31 lakh crore was disbursed when the fortnight ended in the month of March. This is estimated to be a combination of both term and working capital loans
Several businesses were seen taking loans to keep the operations up amidst the COVID-19 lockdown and the market downfall.
Bankers have been mentioning that the hunger for working capital is more acute among the labor-intensive industries. Click To Tweet
Leave alone the entire pandemic situation, the lending business is one that has been the backbone for everyone, come what may. But the fact is that there are a lot of challenges that even lending businesses go through. One of these is receiving timely repayments.
Before we talk about how Razorpay can help accept payments via its lending business tools, let’s understand the type of loans Indian banks and fintech firms offer.
Types of loans in IndiaA loan is an amount borrowed for a fixed period. The amount borrowed requires it to be repaid along with a predetermined amount of interest calculated on the principal amount. Click To Tweet
In India, there are different types of loans which can be subdivided into secured and unsecured loans. Let’s understand them in brief.
Secured loans are loans that require collateral. To avail these loans, a business or an individual needs to provide an asset to the lender as security for the money they are borrowing.
That way, if the borrower is unable to repay the loan, the lender still has some means to get back their money.
Listed below are the majorly opted types of secured loans:
- Home loan: Home loans are a secured finance mode that offers funds to buy or build the home of your choice. Land purchase loans, home construction loans, top-up loans, etc. are some of the types of home loans available in India.
- Loan against property (LAP): Loan against property is one of the most common forms of a secured loan where anyone can pledge a residential, commercial, or industrial property for availing the funds required. Here, the loan amount disbursed is equivalent to a certain percentage of the property’s value and varies across lenders.
- Loans against insurance policies: This is a reasonably uncommon availed loan type. Individuals can avail loans against their insurance policies. However, not all insurance policies qualify for this. Only policies, such as endowment and money-back policies, which have a maturity value, can be used to avail loans.
- Gold loans: A gold loan requires a business or an individual to pledge gold jewelry or coins as collateral. The loan amount sanctioned is a certain percentage of the gold’s value pledged. These loans are generally used for short-term needs and have a short repayment tenure compared to home loans and loans against property.
Apart from the above mentioned, there are other loans that come under the umbrella of secured loans. They include loans against mutual funds, shares, and fixed deposits.
Just opposite to what the secured loans mean, unsecured loans do not require any collateral. The lender lends money based on past associations and credit score history.
Unsecured loans usually come at a higher rate of interest due to the lack of collateral. Listed below are the majorly opted types of secured loans:
- Personal loan: A personal loan is one of the most popular types of unsecured loans. However, since a personal loan is an unsecured finance mode, the interest rates are higher than secured loans. This type of loan is often used to manage expenses of family chores, pay for a vacation or an international trip, finance the home renovation project, and so on.
- Short-term business loans: A short-term business loan can be used to meet expansion and daily expenses by various entities and organizations. Working capital loans, loans for women entrepreneurs, loans for traders, loans for a manufacturer, loans for service enterprises, etc. come under this category.
- Flexi loans: Flexi loans are a facility whereby you can avail funds from your approved limit and as when required and pay interest only on the amount used. You can withdraw on your loan limit, any number of times and prepay when you have extra cash, at no additional cost.
Other types of loans
Apart from secured and unsecured loans, some loans are classified based on what they are used for. The most commonly used loans in this category are:
- Education loans: An education loan covers the opted course’s necessary fees and allied expenses such as the accommodation, exam fee, tuition fee, etc. An education loan can be taken for a full-time, part-time, or vocational course along with graduation and post-graduation courses in the fields of management, engineering, and medicine, among others.
- Vehicle loans: A vehicle loan is extended in the form of a two or four-wheeler loan, which helps consumers buy their dream vehicle. Vehicle loans are offered either on the purchase of a new vehicle or a used one. Your credit score, the ratio of debt to income, loan tenure, etc., play a crucial role in determining the loan amount that can be availed.
While the lending industry is not new to the Indian market, some of the challenges it has been facing are.
Existing lending business challenges
No doubt, the lending companies have come a long way when it comes to running even the most basic operations with the help of existing lending business tools. Earlier, what used to be a manual heavy process has now started getting digitised. However, there are still a number of loopholes that need to be filled. Some of the present day challenges for lending industry include:
What used to run entirely on a collateral based model, shifted to a money-based model back in the late 90s. While that shift was a big change, it still was heavily reliant on papers and middlemen.
Talking about the current world, while there has been advancement and a lot of processes have gone digital, hundreds of big and small banks and private lending businesses still rely on physical methods for verification, approval and disbursals of loans.
Delay in repayments
Talk to any lending business and they will mention that one of the most tedious jobs is to collect the repayment amount. While a lot of businesses have auto-collect procedures in place, not all lending businesses support it.
Either they have to appoint an agent or keep sending reminders via email and SMS which again, can increase the operational costs of the business.
Sending payment receipts and invoices
As mentioned above, employees in a lending business spend a huge chunk of their time and effort in manual calls, sending reminders or appointing an agent. Add to it the after process.
Once the monthly repayment is done, the business representatives are required to send an invoice, which in some cases is auto generated but in most cases, sent manually. These little things take up a lot of bandwidth while increasing the company’s overall operational expenses.
Slow turnaround time
The traditional process of loan disbursals include manual data entry, laundry list of documentation requirements, KYC by middlemen and so on. A bunch of these activities make the entire process inconsistent and time consuming.
Either a customer is seen waiting to receive a message from the bank or a bank is seen awaiting that one missed document.
Introducing lending business tools by RazorpaySome of the nation's biggest lenders have been using Razorpay's product stack to make the entire disbursals and repayment process more manageable. Click To Tweet
Read further to understand how Razorpay can help you take your next big step.
Secure money movement
One of the essential pillars for any lending business is a safe financial ecosystem. In India, PCI-DSS is the highest level of security compliance for digital payments businesses. Razorpay Payment Gateway and all the other products are 100% PCI-DSS compliant that ensures utmost security.
Our robust APIs and easy integration processes have made payments easier for hundreds of businesses. Lend any amount of money and accept re-payments across the globe with Razorpay.
100% paperless loan process
One of the latest updates from Razorpay’s desk is the launch of e-mandate. This product has a strong use case for businesses dealing with loans of all types and has been a big addition to the stack of existing lending business tools. Replacing the entire offline document-heavy process, e-mandate enables businesses to offer their customers best in class experience.
Your customers can start availing loans within a day with Razorpay e-mandate. With so many existing lending leaders and banks in the market, you must invest in crafting a unique solution, and Razorpay can help you do exactly that!
Automate the repayment process
A lot of business models are shifting to the Subscriptions based model. While it comes with a host of benefits, it also helps your customer manage their finances better.
Add to this the relief that auto-pay brings. Talking in context with the lending business tools, fintech upgrades like UPI Autopay and recurring payments on cards have been a big help.
You can ease your entire business process with Razorpay by making the best of these payment solutions, built with care, for ease.
[Suggested Reading: Retain, Engage, Scale: Three Reasons to Build a Subscriptions Business]
Easy reminders sending capabilities
Ever been at a place where you keep following up with your customer asking for repayments only to end in disappointment? Well, we feel you.
We also realize that over time, consumer’s needs and preferences have changed. Channels like WhatsApp and Telegram are preferred over standard SMS and email. And to cater to the changing conditions, Razorpay Payment Links can be your go-to!
Create unlimited personalized payment links with all the required details and copy-paste on any chatbox.
Not just that, you can also send automated payment reminders and further send them a GST compliant invoice of every payment settled.
NEFT/ IMPS via virtual accounts
While doing our research with some of our partner brands, we realized that lending businesses come across instances wherein the customer shows interest in repaying the entire loan amount in one go.
To simplify such needs and help them get done with ease, another product in our lending business tool-list, Razorpay Smart Collect can be useful. It allows businesses to create unlimited virtual accounts. You can share these details with your customers and accept payments via NEFT or RTGS. All of this can be done within minutes.
Yes, we have made payments simple, even on weekends!
Over to you
In conclusion, we can say that lending businesses have had a significant overhaul in the past ten years. Gone are the days when banks were the sole lenders. With increased competition and enhanced tech services in the market, your business needs to pivot to different routes to invest in customer experience.
And at Razorpay, that is precisely one of our focus areas – helping businesses enhance payment experience.
Start exploring Razorpay’s products for lending if you haven’t already!
If you are a lending business owner, we would like to hear the challenges you face while operating your business. Please write to us in the comment section below and help us understand you better!