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Why the fintech lending industry will have a tough time in the months to come

Industry insiders say repayments by low-income group borrowers will see massive defaults in the wake of the COVID-19 induced economic contraction. The good news is that the salaried, white-collar segment is holding on, while some businesses are showing signs of life.

September 14, 2020 / 10:56 AM IST

With the loan moratorium ending in August and the first 10 days of September done, early repayment trends for certain unsecured loans are looking bleak, say fintech lenders.

While the high-income salaried segment still seems to be better off, loans to blue-collar workers, weekly wage earners and freelancers could see large-scale defaults, they added.

Data shared by Mumbai-based CreditVidya show that within the unsecured portfolio, there could be defaults of 35-50 percent in the mass market segment (borrowers earning between Rs 10,000 and Rs 20,000 per month) and 20-25 percent in the mid-market segment (salaries up to Rs 60,000). The affluent segment, with incomes above Rs 60,000, could see defaults of 10-15 percent.

“Consumer confidence in the country continues to be low, and there is no doubt that fintech lending firms are going to be disproportionately impacted by this. The retail credit space does not look good,” said Abhishek Agarwal, Chief Executive Officer, CreditVidya. He expected lenders to tighten their credit lines and focus more on collecting dues.

CreditVidya evaluates loan applications to help lenders underwrite first-time borrowers.

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Moneycontrol spoke with a clutch of founders of fintech lending startups and the consensus was that 30-35 percent of the overall loan book had gone into moratorium because of the pandemic.

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The RBI had announced a loan moratorium till the end of August to help borrowers tide through the COVID-19-induced stress on their earnings. During the moratorium, borrowers incurred interest on the loans, but missed payments were not reported to credit bureaus.

“Some repayments have already started to kick in — these are still early days and reconciliation will take time, but a quick pulse looks positive in the salaried segment,” said the founder of a Bengaluru-based fintech lending platform.

Lending to risky segments

Many of the fintech lending startups were extending loans to consumers in low-income groups, first-time borrowers with no repayment history, and freelancers or self-employed people. These risky segments, which are not catered to by traditional lenders, were evaluated through alternative data points by these tech-enabled lenders.

With COVID-19 and the lockdowns, a large section of these borrowers faced financial difficulties, making it tough for the fintech lenders to recover their money.

A fintech entrepreneur pointed out that through the moratorium months many borrowers had migrated from places where loans were disbursed to their villages and home towns, typically areas not serviced by the lenders. This made it difficult for them to track down the borrowers.

“The loans were given to their city addresses. They are not coming to office, and many have even vacated their rented premises. How do we collect from these borrowers who might now be spread across the country,” said the founder mentioned above.

Further, the prolonged shift to working from home in the Information Technology sector and other related sectors has made the problem acute.

The National Statistics Office recently said that India’s GDP had contracted by almost 24 percent in the first quarter of the current financial year. Ratings agency Fitch has predicted that the Indian economy will contract by 10.5 percent in the current fiscal year. These macro numbers have raised doubts on the repayment abilities of many borrowers.

Businesses also struggling to repay

Besides retail loans, business loans, too, are seeing major stress. Many small industrial clusters are functioning with skeletal staff and minimal business. Term loans, thereby, are showing a high probability of default. Further, supply-chain finance has been affected, as many large corporates have delayed vendor payments, said another lending entrepreneur.

“Many large corporates in stressed sectors have become cautious about their expenditure — even small-value payments are getting sanctioned only by CXO-level officials. This has caused delays in vendor payments, which, in turn, is affecting supply-chain finance lending,” the entrepreneur said.

Silver lining

There has been some resumption in business activity since August and that is one green shoot that has emerged in the economy. Pent-up demand throughout the summer has caused some businesses to bounce back to pre-Covid levels to a certain extent. Industry insiders are also hoping to see some rise in consumption from festive season purchases.

For instance, Sequoia Capital-backed ProgCap, which facilitates loans to retailers selling smartphones, consumer durables and two-wheelers, said it was seeing many borrowers getting back to business, and repayments coming in.

“During April and May, collections had dropped to sub-5 percent, but from June there has been some bounce-back and brands came back to almost 80 percent of their business,” said Pallavi Shrivastava, co-founder, ProgCap. She was the regional lead for inclusive business at the International Finance Corporation before starting ProgCap in 2017.

The digital lending industry is grappling with multiple questions, from how much of the outstanding it can recover to how quickly to resume lending aggressively. But, going by the early trends, normal business seems to a few quarters away.
Pratik Bhakta
first published: Sep 10, 2020 07:38 am

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