Digital lenders are witnessing a sharp rise in the stress levels as collections have dropped due to state lockdowns.
This has forced many firms to set aside substantial amounts of money as provisions to cover the likely losses. Such provisions, in turn, impact their profitability.
Typically, digital lenders are fintech companies which operate on internet-based platforms to give unsecured loans to tech-savvy borrowers.
Lenders as NBFCs
While some digital lenders function as full-fledged non-banking financial companies (NBFCs), raising capital and lending from their own books, others work as sourcing partners for banks and NBFCs.
In recent years, digital lenders have thrived, benefiting from a rising number of tech-savvy borrowers; in the process, they have also attracted regulatory attention.
The Reserve Bank of India (RBI), in January 2021, set up a working group to frame rules for digital lenders. The regulator also asked these firms to disclose names of the originating lenders on their websites for transparency.
The pandemic has exposed the weakness in their business model, particularly on the collection front.
The financial sector is reeling under the pain of COVID-19 second wave, and fintech-based lenders, who distinctively offer unsecured loans to the so-called ‘thin-file’ borrowers, those with weak know your customer (KYC) documents, are the most affected.
Their clientele includes self-employed professionals, freelancers or small business owners, whose credit worthiness is assessed based on alternative sources of data, such as their bill payment history or social media usage.
High-risk segment for banks
Early estimates suggest that collections between March and May 2021 could have slid by up to 15 per cent for fintech-based lenders, according to Jindal Haria, director, India Ratings and Research.
“There is great uncertainty about what will happen next,” he says.
Haria of India Ratings says a slowing economy, higher financial stress due to jump in medical expenses and inability to carry out physical collections have impacted fintech lenders. They are now relying on tele-calling for collections, he points out, adding, “Also, there is fear and the need to preserve liquidity because this wave is far more dangerous than the last one.”
The failure rate of auto-debit transactions in April is another indicator.
According to data released by the National Payments Corporation of India for auto-debit requests made over the National Automated Clearing House, 34.1 percent of such requests were declined in April, up from 32.76 percent in March.
Many of these requests are for EMI (Equated Monthly Instalment) payments to fintech lenders.
Collection efficiency falls
Collection efficiency has fallen below the year-ago period, says Anuj Kacker, co-founder, MoneyTap, speaking to Moneycontrol on behalf of the Digital Lenders’ Association of India.
“A lot of the collection also takes place through tele-calling. Since this wave has infected a large number of white-collar workers, many of these agencies have seen their staff getting affected. There are tele-calling companies which are completely non-operational,” he explains.
According to Kacker, “These are down to 25 per cent of staff strength because either the employees themselves or someone in their family or extended family is down (with COVID). In other words, even the productivity of digital collection has been reduced.”
In his estimation, another problem is the rising incidences of fraud and misinformation, which hurt the credit culture.
Borrowers hold back
Some borrowers may be holding back on repayments, Kacker says in expectation of fresh relief from the government or the RBI.
Shockingly enough, he points out: “We are seeing instances where genuine customers who have great track records have stopped repayments expecting a moratorium from the RBI.”
According to India Ratings’s Haria, restructured accounts exhibit higher stress, constituting about 5-20 per cent of the loan portfolio.
``More than half of the collection lag is coming from that segment. This is the sense we are getting, at least for now,” he says.
Last year, to help COVID-hit borrowers, the RBI offered a one-time loan recast facility following the recommendation of an expert panel headed by veteran banker K V Kamath.
What lies ahead?
If lockdowns prolong, Fintech lenders may face a crisis, believe the experts. Many doubtful cases may turn to NPAs (non-performing assets). A loan becomes an NPA if there is no repayment of interest or principal for 90-days.
Abhishek Agarwal, Co-founder and CEO, CreditVidya, said bounces have gone up by 20 per cent - 30 per cent between March and May due to lockdowns.
“That does not mean the portfolio quality is bad. If the lockdowns are of limited duration, we will be able to recoup the money. But if they continue for two more months, the stress will be far worse than last year,” he predicts, gravely.
Not impacted equally
However, not all players are impacted equally. Companies that lend predominantly to salaried employees state that pay cuts and job losses have not been as much of a problem this year as last year.
Says Akshay Mehrotra, co-founder and CEO, EarlySalary: "In the second wave, the salaried segment, where we operate, has been less affected. We have had no change in bounce rates in April or May.”
If anything, in the 0-30 days bucket, there has been a marginal improvement in the higher ticket-size collections capability between March and May, he adds.
Gaurav Hinduja, co-founder and managing director, Capital Float, states that in April and May, the company’s collection efficiency has been above 90 per cent across all its products.
“Especially on buy now pay later, we are not seeing any drop in collection efficiency during the second wave. We will end May at 94 percent - 95 percent, which is on par with March,” he points out.
However, the rising stress level is not unique to digital lenders, said Srinath Sridharan, governance council member, Fintech Association for Consumer Empowerment (FACE).
The problem is severe in states where the lockdowns have been implemented strictly. Even then, not all missed repayments may not necessarily translate into bad loans, he says.
“So far the delinquency buckets have not been hit, the lenders are in touch with their customers and so it’s a matter of time before the collection happens,” Sridharan says, adding, “We are also not noticing any drop in CIBIL scores, which is an important factor.”
To guard against the potential bad loan crisis, digital lenders are making higher provisions, in some cases, by up to 10 per cent in accounts where repayments have fallen.
This is particularly true for lenders who lend off their own balance sheets. For instance, a company which earlier would have provided two per cent against a loan is now increasing the cover to 2.2 per cent.
Accounts which slip into the bad loan bucket or get written off may eventually need further provisioning.
Digital lenders have started to focus on quality of loans instead of building up volume to cut risks, shrinking loan books to pre-COVID levels.
“If we compare pre-COVID levels and the current period, through-the-door customer approvals have fallen by 25 per cent and collection efficiency has improved by 30 per cent,” points out Mehrotra of EarlySalary.
Looks like there is a silver lining as well to digital lending stress.