In the small-ticket lending market, Micro Loan Against Property (Micro LAP) serves as foundational support for lenders and financial institutions. It allows them to cater to the underserved segments with a secure and flexible way to access funds.
By using loan applicants’ residential or commercial property as collateral, Micro LAP provides instant credit access to low-income individuals who often lack credit histories, income documentation, or access to traditional banking services.
According to a TransUnion CIBIL report, personal loans under INR 50,000 account for nearly 25% of total origination volumes.
In addition, ICRA estimates that small-ticket LAP loans by Non-Banking Financial Companies (NBFCs) will grow by an impressive 20-25% over the next five years.
Therefore, it’s clear that Micro LAP is not just a financial product; it plays a significant role in promoting financial inclusion and strengthening economic resilience.
Understanding Micro LAP
Micro LAP loans are essentially small-ticket loans sanctioned against a borrower’s property. The loans, ranging from INR 3 lakh to INR 20 Lakh, can be secured for diverse needs, such as business expansion, medical needs, educational purposes, managing working capital, as well as for personal needs.
Market Dynamics and Growth Potential
Recent industry estimates indicate that Micro LAPs are rapidly growing. Here are some figures that support this claim:
- The market potential of small-ticket Loan Against Property (S-LAP) is INR 22 lakh crore.
- The overall Indian Loan Against Property market is projected to grow at a CAGR of over 14%, estimated to be USD 857.87 billion by FY2026.
- The outstanding portfolio of the microfinance sector is INR 3,77,706 crore as of March 2024. It includes 1,238 lakh active loans and 6.6 crore unique borrowers.
Micro LAP’s Impact on the Lending Ecosystem
Micro LAP offers a strategic approach that combines accessibility, flexibility, and risk mitigation for both lenders and borrowers.
Lenders, including banks, fintech companies, and NBFCs, have started to realise its value as a high-demand product in India’s lending ecosystem:
Secure Lending for MSMEs
The property-backed nature of the Micro LAP enables MSMEs to offer lower interest rates. Loans can be disbursed within three to four working days after a simple document and background check.
In addition, Micro LAPs tend to have longer tenure than personal loans. All these factors ensure lower default rates while offering lenders better delinquency recovery options.
Massive Growth in Fintech Market Share
This new financial revolution is being driven by fintech companies, like Finezza, which are rapidly changing the way how credit is analysed and distributed.
By utilising cloud-based, automated loan origination and management systems, they are dismantling traditional barriers and expanding market reach by streamlining operations.
In fact, the Fintech market share in small personal loans (< INR 1 lakh) reached 51% in FY24, with Andhra Pradesh (49%), Gujarat (59%), and Maharashtra (55%) experiencing significant growth.
6 Key Advantages of Micro LAP for Lenders
Micro LAP offers greater flexibility in lending, offering the following key advantages:
Portfolio Diversification
Lenders can diversify their product offerings by adding secured small-ticket loans to their portfolios, alleviating the risks associated with unsecured loans. This also reduces overall acquisition costs, ensuring a steady ROI.
Promotion of Financial Inclusion
By enabling financial institutions to offer loans to borrowers excluded from the formal banking system, Micro LAP helps them promote economic growth at the grassroots level.
Growth in Market Penetration
Lenders can customise repayment schedules (daily, weekly, or monthly) based on borrowers’ capabilities. This allows them to tap into tier II, III, and IV cities and small business owners with limited financial documentation.
Digital Transformation
AI-enabled loan management systems help lenders create multi-loan categories, automate disbursement tracking, schedule flexible repayment, and predict risks.
Digital tools enable faster loan processing and improve operations, thereby reducing errors and maximising revenue.
Development of MSMEs
Micro, small, and medium enterprises (MSMEs) are a major driver of the Indian economy, contributing nearly 30% to the GDP.
At present, India has over 63 million MSMEs. However, with a credit gap of $ 530 million, Micro LAP offers an ideal solution for their occasional credit issues.
Competitive Edge
Affordable interest rates, faster processing through digitisation, higher loan amounts (up to 70% of the collateral’s current market value) with lower interest rates (10% – 12%), and lower pre-payment charges enable lenders to gain a competitive edge in the market.
Challenges in Micro LAP That Can Be Sorted Through Digital Transformation
While Micro LAP is brimming with opportunities for lenders, it is not devoid of challenges:
- Assessing Borrower’s Creditworthiness: Borrowers in this sector often lack proper income proof. Therefore, lenders must apply alternative loan eligibility methods to assess creditworthiness, such as digital transactions, GST history, and cash flow.
- Rising Rate of Retail Defaults: Recent trends indicate a significant rise in loan defaults among over-leveraged retail borrowers, emphasising the need for loan delinquency management systems that address the issue in real time.
- Regulatory Compliance: The Reserve Bank of India (RBI) has strengthened its lending regulations to promote fair practices. Lenders need to adapt to these changes proactively to remain compliant.
How Finezza’s Cloud-based Lending Solution Tool Facilitates Micro LAP
Finezza’s advanced loan origination and loan management software helps lenders improve their loan sanctioning and tracing process and maximise profitably.
Here’s how Finezza’s end-to-end lending solutions assist lenders:
- Analyses bank statements in real-time, providing a quick picture of cash inflow and outflow, average monthly balance, and digital transactions.
- Performs credit assessment based on bank statement analysis, financial statement analysis, and a distinct scoring model to predict repayment success rate.
- Automatically tracks, detects, and flags different transactions with its built-in fraud detection algorithm.
- Accommodates various loan types, Micro LAP, equipment loans, and overdraft loans.
- Creates diverse repayment options such as daily, weekly, fortnightly, and monthly payments and moratoriums on principal and interest.
- Facilitates various payment methods, including cheques, online payments, and UPI transactions.
- Customisable templates and automated compliance checks ensure adherence to RBI norms.
Moreover, Finezza’s collection delinquency management system’s rule-based assignment automates case allocation to field staff. In addition, the 24/7 metrics tracking provides continuous monitoring of collection performance.
Key Takeaway
Micro LAP is poised to become the future of small-ticket lending as it offers great opportunities for lenders to expand their reach and drive financial inclusion.
However, by adapting state-of-the-art, cloud-based solutions like Finezza, lenders can overcome the challenges of this segment, streamline loan processing, reduce default rates and delinquencies, and eliminate manual errors.
To learn more about its benefits in Micro LAP processing, book a free demo today!
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