BNPL Less Focused On Credit Inclusion, Delinquency Rates Higher: Kotak Report

The brokerage said buy-now-pay-later loans are seeing healthy uptake, though it has a lower share of new-to-credit customers.
<div class="paragraphs"><p>Indian rupee notes and coin.&nbsp;(Photo:    Rupixen/Unsplash)</p></div>
Indian rupee notes and coin. (Photo: Rupixen/Unsplash)

Buy-now-pay-later lenders seem less focused on driving credit inclusion than anticipated and the industry is seeing high delinquency rates, according to Kotak Institutional Equities' early assessment.

Such lending--also called BNPL loans--is seeing a healthy uptake in the Indian market, though it has a lower share of new-to-credit customers, the report said citing data from TransUnion Cibil.

"The proportion of consumers with other live credit accounts stood at around 75% for both BNPL and non-BNPL originations. Similarly, the proportion of consumers who already had at least one live credit card account stood at 35% for BNPL originations and 25% for non-BNPL originations. This data indicates that BNPL lenders seem less focused on driving credit inclusion than anticipated earlier."

The focus is probably on acquiring new customers through a product that allows them to underwrite on a transaction basis, limiting the risk involved, the report said.

The typical BNPL consumer is not very different from a consumer of other unsecured retail loans on parameters like age, risk tier or leverage, it said. "Average credit balance for a BNPL consumer (Rs 1.9 lakh) is also very similar to that of a non-BNPL consumer."

Both types of consumers tend to be comparatively younger and higher in risk tier at origination, the report said.

In spite of the similarities, consumers who hold a BNPL account show higher delinquency on their credit card and personal loan accounts, as compared to consumers who don’t hold a BNPL account, the brokerage said.

"We believe that an income-wise or wealth-wise breakup of customer base would provide a better understanding of customer targeting in BNPL," Kotak said.

Impact On Credit Cards

BNPL consumers are more likely than non-BNPL consumers to open a new credit card account within six months of BNPL loan origination, according to Kotak. And the propensity to avail a personal loan also seems higher for BNPL consumers, it said.

"These data-points indicate that BNPL is indeed serving as a funnel or gateway to credit cards for many consumers, while also giving credit card issuers more comfort on the borrower at the time of underwriting," the report said.

"We do not observe any meaningful impact on credit card balances after consumers have availed a BNPL facility," Kotak said. "Thus, it does not seem that a credit card consumer loses affinity for the card after the use of BNPL."

BNPL, in most forms, can serve as a "wonderful product for consumers to avail short-term credit, establish a credit history, enjoy superior payment experience and also pave the way for them to avail credit cards", the brokerage said.

Kotak Institutional Equities does not expect BNPL to act as a disruptor, though it has potential to develop as a competitor to credit card companies, it said.

"We continue to watch the evolution in the BNPL space as this product continues to gain traction but we are less worried as of now about BNPL disrupting the credit card model. The key risk for card companies is whether BNPL companies start building credit card-related products thereby competing directly with the traditional card players."


Rishabh covers markets and business news for BQ Prime. ...more
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