COVID-19 and the ensuing lockdown has thrown the entire lending sector into a tizzy.
From tracking down borrowers who have migrated to their hometowns to getting businesses to start paying back term loans to even collecting consumer durable loans and personal loans, the non-banking finance sector (NBFC) is staring at stressful times.
Digital lenders which are remotely connected with borrowers have more challenges in hand. Industry experts pointed out that phone calls, SMS or WhatsApp reminders are showing only limited effect on borrowers who have not repaid a single instalment since the moratorium was offered during the beginning of the pandemic. Multiple players are thought to be scaling up their collection engines.
While salaried segments are still servicing their debts, the self-employed and blue-collar segments are showing some early signs of stress, they said.
Reports from the ground
“Larger NBFCs with high credit-worthiness and strong parentage or investor backing are in a better position to deal with the current crisis. The smaller ones are barely able to sustain their business, surrounded by lack of growth, deteriorating asset quality and limited availability of fresh funds,” said an Alvarez and Marsal report prepared in August.
Moneycontrol has exclusively seen the report named ‘NBFC Sector in India: A Brief Update Post Covid.’
The report has highlighted that lenders have been revisiting their collection strategies as even sales and credit teams are assisting in collecting payments from borrowers. Lenders are also looking for ways to reach out to customers and are encouraging borrowers to opt for digital modes for repayments.
As per data in the report, collection efficiency for personal loans was at 65 percent, while for SME lenders, it was 70-75 percent, as of August 2020. Even among the MSME sector, unsecured loans have seen collections around 65 percent, the report stated.
While collections for self-employed languished around 55 percent, for the salaried segment, it was hovering around 75 percent.
Stress in business loans
“Those businesses and bottom of pyramid borrowers who took income- generation loans for priority sector activities have not been able to invest in their business during the 90-day lockdown. How do they restart operations while also maintaining credit discipline,” asked Santanu Agarwal, deputy chief executive officer at Paisalo, a listed non-banking lender, specialising in this space.
Agarwal feels there is a need to relax NPA and SMA recognition for all borrowers, since most businesses were not functional for 90 days of lockdown. SMA stands for special mention accounts, which have not gone NPA but are showing signs of default.
“There are some customers who have had to go through genuine problems with respect to cash flows and restructuring option based on the latest RBI guidelines. It will be useful for them,” said Rajan Bajaj, founder, Slice, a Bengaluru-based credit startup.
Among the small businesses, those who have transformed themselves during the lockdown to cater to the customer demand during the pandemic have managed to repay their instalments. The next set is the ones who needed additional funding to jumpstart their business after the lockdown months, even these entities have started repaying.
The final set comprises business hard hit by the pandemic, which will need restructuring.
Consolidation and acquisitions
The overall sector could also see consolidation and acquisitions going forward, said industry experts. Many fintechs with exposure to segments where recovery chances are slow, could ideally look to get acquired by larger peers, or sell the technology platform to lenders looking to ramp up their tech solutions.
Cofounder of Pune-based lending startup, EarlySalary, Akshay Mehrotra, said early-stage lenders could face problems scaling up in the post-COVID scenario. However, he added that such acquisition deals have not started taking shape in the industry yet.
“I think we could see some prominent venture capitalists in this space taking the lead here, and broker a few deals. In fact, 2021 could see more such cases,” he said.
Even Alvarez and Marsal, in its report, said that NBFCs with higher risk appetite and strong asset quality will look to consolidate leadership position in the coming months. On the contrary, stressed lenders should look to focus on collections.
Legal issues complicating matters
Further, with the case on additional moratorium lying with the Supreme Court, it has created further confusion in the market.
A fintech lender, who spoke on condition of anonymity, pointed out that there was a lot of confusion among consumers, borrowers as well as lenders because of the Supreme Court case. The case has been adjourned till November 2.
One major problem that lenders is facing is around their credit models. In a post-COVID scenario, models which were designed to assess the cash flow and business metrics even for the last year have gone for a toss this year.
Most lenders used to assess cash flow by using income statements, average monthly balance, and cash flow into current accounts, among other metrics.
Given the prolonged weeks of lockdown. the fintech model has been somewhat disrupted, said Bhavik Hathi, Managing Director at Alvarez and Marsal.
“The data from the last six months is either not adequate or not reliable in terms of making predictions for the next six months,” he added.