Delay in loan repayments and defaults are rising in the fintech-led consumer credit space, according to data in the Reserve Bank of India's (RBI) annual Financial Stability Report.
Delinquency levels were at 1.82 percent of loans sanctioned by fintechs in September 2020 and that number increased to 4.56 percent in September this year, according to data by credit information company TransUnion CIBIL.
The data is based on repayments due past 90 days, which in banking are categorised as Non-Performing Assets (NPAs). At 4.56 percent, fintech loan delinquencies are much higher than that of private sector banks and non-banking financial companies (NBFCs) or housing finance companies (HFCs).
Delinquencies of private banks were at 2.23 percent and that of NBFCs and HFCs at 3.77 percent as of September 2021.
Public sector bank delinquencies stood at 5.03 percent, however, the levels have in fact dropped from 5.48 percent in September last year. This shows that fintech and digital lending is the only category that has seen the most increase in late repayments or defaults, up by almost 2.5 times in a year.
The data also shows that fintech loan delinquencies peaked in January 2021 at 6.60 percent, the highest across all products categories.
The report refers to data derived from TransUnion CIBIL’s fintech category which comprises of NBFCs registered with RBI and active in the digital lending category, as well as peer-to-peer lending platforms.
This report comes at a time when digital lending is picking pace in India, a country with abysmal credit card penetration of only three percent. Since the beginning of the pandemic, Indians have moved to seek small-ticket credit through digital modes for personal loans and also opting for Buy Now Pay Later (BNPL) models of credit for purchases.
The space is growing at speed with players like Simpl, ZestMoney, PayU's LazyPay, Paytm, BharatPe, Mobikwik, Uni, Slice and even e-commerce giants Amazon and Flipkart offering credit products.
Pure-play fintech pay-later is expected to grow to a $26 billion market by 2025, according to data by Bernstein. The market has also faced setbacks after scams by Chinese digital lending apps surfaced over the past year. Unregulated lending by these apps coupled with high-handed recovery methods, drove many customers to suicide in 2020.
To avoid customers from falling into the trap of fake apps and debt traps, the RBI constituted a working group that has shared recommendations for the regulation and licensing of digital lending platforms.
Addressing the risk potential in digital financial services, the RBI report read, "Digitalisation of financial services can also bring in its wake various risks such as greater reliance on third-party service providers, misselling of financial products, breach of data privacy, unethical business conduct and illegitimate operations. The regulatory landscape for fintech is evolving to address such risks."
The report also said that the RBI is currently in the process of consolidating all fintech-related work under one umbrella to manage risks and ensure effective regulation and supervision of fintech entities, products and services.
"The new setup will be tasked with managing the entire gamut of fintech-related activity in coordination with its regulatory and supervisory departments," the report said.
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