Small loans, big impact: Digital nano-loans as enablers of financial empowerment

Chik Shampoo’s case study on sachets in the 70s often serves as a playbook to tap into India’s billion
people-strong potential. What started as a revolution in FMCG has now transcended industries, even
reaching financial services. And one such space in the BFSI subset has managed to gain significant
momentum: lending. Sachetised loans, also called nano-loans, are on the rise. And they’re playing a
crucial role in financial empowerment across the board.

CRIF’s CreditScape report of September 2022 stated that there were 4.77 crore small ticket personal loans
(STPL), worth INR 30,228 crore. The ticket size mix in the same report indicated over 75% of STPLs
comprised loan sizes less than INR 10,000—and most of these loans had a tenure of less than 3 months.
These STPLs have another interesting feature: the majority of them originate from NBFC fintechs. Could
it be, then, that the adoption of technology by lending institutions has contributed significantly to the rise
in nano loans? I’m convinced that this is the case. Here’s why:

• Digital inclusion: 99.9% of India’s adult population has Aadhar cards, making documentation—which was otherwise an obstacle to financial inclusion—possible. Add to this a smartphone penetration of 71%, and a vast majority of Indians now have access to tech-enabled services like e-commerce and digital payments.
• The rise of embedded finance: Awareness of products is often a barrier to business, and credit products are no different. However, thanks to embedded finance, banks and NBFCs can now simply go where their customers are. This gives borrowers access to financial products they otherwise wouldn’t consider availing.
• Low-documentation onboarding: Traditional loans are infamous for their cumbersome application processes. But digital credit products have solved this issue. With digital frameworks like account aggregator, DigiLocker, and Aadhar in place, digital loans are now entirely paperless.
• Robust digital underwriting: Loans that can be availed from digital devices now use alternate data to underwrite borrowers. This eliminates the need for credit scores in new-to-credit and thin-file borrowers. And the holistic nature of assessment has made lenders less hesitant to lend to those with no former credit history. 
• Viability of small-ticket digital loans: Traditionally, lenders considered financial inclusion a high-effort, low-impact pursuit. But factors like easy data access, digital documentation, and alternative data underwriting have changed that. The cost of acquiring financially excluded borrowers has now significantly reduced, bringing on a bigger appetite for risk in lenders.

How will digital nano loans contribute to financial empowerment?
While sachetised loans help acquire bottom-of-the-pyramid customers, they can also be instrumental in
democratization of credit. Here’s now these small ticket-size credit products empower the financially
underserved:

• Bringing the financially excluded into the formal-credit fold: As of this year, one-third of rural households depend on non-institutional sources of credit. And it’s no secret that these informal sources of loans are subject to high interest rates and unfair business practices. Digital nano loans can change that. Their easy-to-avail nature can bring more customers to the formal credit system.
• Building credit documentation: The lack of credit history has often led to institutions turning away the financially excluded from availing loans. Nano loans can help NTC customers build their credit history, thereby strengthening their relationship with formal lending institutions.
• Paving way to more credit access: Trust plays an intangible-yet-crucial role in the lending business. With nano loans helping borrowers build credit history, institutions feel confident in extending more credit to their applicants. Borrowers, in turn, feel more confident in availing loans of bigger ticket sizes, improving their lifetime value with formal lending institutions.
• Extending trust to other non-lending formal institutions: Distrust in formal institutions, especially through digital channels, has been a deterrent in India’s financial inclusion story. Digital nano loans, however, may serve as a trust-worthy entry-point to build trust in digital financial instruments. If the sachet loan experience is smooth and hassle free, borrowers could be more likely to explore other digital financial products like insurance.

They say that big things come in small packages. And that definitely seems to be the case with nano loans.
These small-ticket credit products seem to be doing their role in helping India inch towards financial
inclusivity.