In January 2020, credit bureau TransUnion Cibil noted that delinquency rates in housing loans and credit cards had gone up by 13 basis points (bps) and 10 bps, respectively. This finding for JAS 2019 was on a Y-o-Y basis. One reason for consumer credit quality worsening was due to easier lending standards as many new-agelenders rushed to provide loans to customers excluded by traditional financial institutions.
This delinquency is unlikely to change.
According to Abhay Kelkar, VP, Research and Consulting, TransUnion Cibil, flattening demand for large-ticket asset purchases was causing slower asset finance loan originations while consumers were increasingly turning to consumption credit products to help finance day-to-day expenses.
The ongoing Covid-19 pandemic could exacerbate this situation as business activities pan-India have come to a standstill. With job security on the line and weakening economic sentiment, debt delinquency around auto, property and personal loans as well as credit card payments could rise. This is despite the three-month moratorium extended by banks.
Easy access to loans now a trojan horse?
Over the past couple of years, several fintech companies tried to bridge the lending gap for people unable to get loans from traditional financial institutions by relaxing their criteria for loan disbursement. According to Akash Gehani, Co-founder of Instamojo, this leads to extending loans with higher risk. “To add to that, a lot of these companies focused more on growing their loan books and didn’t invest enough in collections processes, which leads to heightened credit delinquency,” he noted.
Considering the uptake for digital finance and online financial services, credit delinquency could impact the sustainability of fintech companies. Gehani observed that it usually takes a couple of cycles to assess the health of a credit business. “There was a lot of growth in the early days due to more loans being given out. But now that it has led to higher delinquencies, we will see many fintechs being unable to sustain their business operations,” he added.
Technologies like AI and ML can go a long way in analysing a customer’s credit worthiness and determining their repayment intent and future behaviour. However, this is possible only where there is significant amount of data about those customers. In the absence of such data, companies have to rely on others entities who have the data, or traditional sources like credit bureaus.
What the pandemic has taught industry stakeholders is doing due diligence before extending credit to ensure their business sustainability. Like Kelkar pointed out, “The shift in consumer credit demand warrants ongoing monitoring to understand the impact on lender portfolios.”