Fintechs target small loans secured by stocks, mutual funds and fixed deposits, while unsecured credit faces scrutiny

PhonePe, Mobikwik, Flipkart’s super.money and Paisabazaar are among the fintechs that have partnered with non-bank lenders to offer such secured loans. And they are relying on digital networks to cut costs by eliminating the need for physical checks and branch visits, while targeting customers who otherwise relied on unsecured loans.

“We are uniquely positioned to revolutionize the secured lending landscape by offering fully digital distribution of secured products like loans against mutual funds at scale,” said Hemant Gala, CEO of lending at PhonePe, citing his experience in providing vehicle loans by “minimizing the need for physical touchpoints.”

The focus on secured lending coincides with slower growth in unsecured credit (down from 20% in March to 15% in June) following multiple tweaks by the banking regulator, including raising risk weights, to rein in the exuberance of high-risk consumer lending.

Undoubtedly, approximately 70% of all bank loans, worth ₹169 trillion as of August 23 according to the latest data from the Reserve Bank of India—are backed by collateral, industry experts said, with unsecured loans to consumers and small businesses making up the remainder. Housing, auto and gold loans These are the traditional secured credit segments where non-banking financial companies like Bajaj Finance, Tata Capital, Shriram Finance, Manappuram Finance, Muthoot Finance and IIFL Finance dominate the market.

While small-dollar loans secured by property, gold or securities have been around for a long time, the captive market for these has been small due to limited offerings and lack of easy access.

“Despite advantages such as lower interest rates (between 11-14%) and reduced risk due to collateral, low-value secured credit products remain underdeveloped,” said Prakash Sikaria, founder and CEO of Flipkart-backed super.money, which offers credit via the Unified Payments Interface. “Innovation in this area has been limited, but this is starting to change as more players recognise the opportunities.”

Faster payouts aided by technology have led to a rise in a new sector of consumers who previously did not consider guaranteed products a viable option, he said.

Last month, Super.money partnered with Utkarsh Small Finance Bank to introduce a new co-branded RuPay credit card, superCard, which is issued against a deposit starting from ₹100.

PhonePe, owned by Flipkart parent WalMart Inc, also offers loans secured by mutual funds, gold and property, apart from the traditional categories of auto, two-wheeler, housing and education loans. According to an ICICI Securities report, the firm has partnered with Tata Capital, L&T Finance, Hero FinCorp, Muthoot Fincorp, DMI Housing Finance, Home First Finance, Rupyy, Volt Money and Gradright. PhonePe plans to increase the number of lending partners from 15 to 25 by the quarter ending September, the report said.

Last month, MobiKwik launched its first secure co-branded credit card with SBM Bank India against a minimum fixed deposit of ₹5,000. Like its peers Cred, IND Money, Jupiter and Fi, MobiKwik also plans to leverage its financial planning and wealth management services to offer small, customized loans to customers.

What is helping fintechs is the surge in household investment in capital markets over the past four to five years, which has resulted in a record high. To dematize Mutual fund (MF) accounts and folios for more than 170 million.

“This means that the total addressable market where we can provide loans against securities or mutual funds has also increased,” said Sahil Arora, business director (secured loans) at Paisabazaar. Apart from home mortgages and property loans, Paisabazaar offers small-dollar loans against shares, mutual funds, cars and credit cards secured by a fixed deposit.

According to Sikaria, current offerings only meet the needs of less than 20% of Indians seeking consumer loans, and secured credit will help the next 20-30% of the population access formal credit. Timing, product-market fit and digital access are driving renewed interest in secured credit products, he said.

There is still a long way to go

According to the latest RBI report, “other secured loans”, including loans against gold, shares and fixed deposits, stand at ₹2.6 trillion, 23% more than the previous year, but the share of this category in total loans remains small.

The unsecured loan market is estimated to be around ₹According to industry experts, monthly disbursements amount to Rs 80 billion. In comparison, guaranteed disbursements are around Rs 100 crore. ₹1 trillion. While home-secured loans contribute around ₹Between Rs 25,000 and Rs 30,000 crore, small amount advances against mutual funds or shares account for approximately ₹1,500 crore rupees.

“The process is not that simple right now,” said a senior official at an NBFC, adding that lenders had to rely on third-party repositories like KFinTech and CAMS for mutual fund statements. But with MF Central providing more consolidated investment statements, the addressable market is growing and returns on these products are also good.

The average interest rate for a high-value secured loan is around 9.5% and 10.5-11% for a low-value loan. Unsecured loans, on the other hand, are much more expensive, ranging from 12-14% for prime customers to 20% for subprime customers, given the higher risk involved in the absence of collateral.

The unsecured loan segment is currently growing at a rate of around 15%, with small-dollar personal loans and credit cards registering an annual growth of 25-30%. However, small-dollar secured loans are expected to grow at about twice the rate, owing to the low base and entry of several new players, experts said.

However, the category faces multiple barriers.

“The problem is that India cannot expect much more from secured credit because there are real problems in terms of title to property and ability to create encumbrances on property. These are all real problems,” said Hardik Shah, managing director and partner at BCG. “That’s why secured credit has not taken off as much as unsecured credit. Mortgage penetration remains very low in India compared to other nations.”

Since a large number of small businesses and self-employed borrowers are not yet part of the formal financial ecosystem, lenders and fintechs are offering secured products to such customers who would otherwise not be eligible for unsecured loans.

“If potential borrowers are unable to get unsecured loans due to their credit rating or income, but they own some asset, be it a property, gold or a car, or have investments in mutual funds, securities, insurance or deposits, we can increase our reach in terms of creating a range of products that we can offer to these customers,” said Arora of Paisabazaar.

But he agreed that the category is still in the “evolution stage and therefore does not compete directly with non-guaranteed products because the low-cost guaranteed product market still represents only 5% of the non-guaranteed market.”