Before the lockdown, my grandmother was extremely resistant to technology. She had no patience for anything beyond WhatsApp, and would often become fed up with that too. Over the past few weeks, however, she is finally embracing other uses of her phone. Her TV serials got cancelled, so now she is discovering original content on OTT platforms. Her daily evening walks with friends got cancelled, so now she plays housie over video call.
From the sounds of it, this story isn’t unique. According to certain lenders to the bottom of the pyramid, some of their customers have also begun to acquaint themselves with the features of smartphones. While some of the increased activity may be attributed to boredom, one investor relations manager suggested that some customers were motivated to experiment with online payments for the first time to avoid additional interest accruals during the moratorium.
Even after the moratorium period ends on May 31, restrictions on movement in some parts of the country may make it difficult for lenders to go about their collection activities as before. While there is a standstill on asset classification for standard accounts during the moratorium, this will no longer be permitted once the moratorium period is over. Many lenders have thus far been claiming that their micro borrowers are resilient and that a majority of such borrowers’ repayment capacity has not been impaired by this crisis, but once the moratorium ends, they will need to back up these claims.
The use of digital payments
The pressure on lenders to demonstrate strong asset quality will resume in a few weeks. If it remains difficult for them to resume collection activities, they will need to adopt alternative approaches. Perhaps the most efficient approach might be to harness the capabilities of UPI and/or similar Aadhar-enabled payment services. A few lenders have already begun to work with such services and enter into tie-ups with various fintech companies.
MFIN Chief Executive Officer Harsh Shrivastava is optimistic about the opportunity to increase the use of digital payments. He says, “Previously, many of the borrowers themselves were earning in cash and therefore found it easier to repay their loans in cash too. However, the spread of coronavirus has made people wary of exchanging currency notes and therefore even small essential goods providers such as milk vendors have begun accepting digital payments.” This will likely result in more borrowers being willing to make their loan repayments through digital avenues as well.
To stay afloat, lenders will also need to continue disbursing new loans. Since many such loans are extended for livelihood purposes rather than discretionary consumption, it is likely that the demand for these loans is relatively inelastic. However, if lenders are unable to supply these loans on account of restrictions on movement, their business continuity is likely to be hampered. Shrivastava notes that while many lenders already disburse loans digitally into customers’ savings accounts and rely on online credit history checks as part of their underwriting processes, these processes have scope to be further digitised.
Regulatory facilitation for digitisation
As part of the ‘Atmanirbhar Bharat’ government response to the pandemic, Prime Minister Narendra Modi has urged the country to build technology-driven systems and processes. Finance Minister Nirmala Sitharaman announced that fintech would be used to enhance transaction-based lending using data generated by e-marketplace being instituted in place of trade fairs as part of the broader relief package. She also announced, in the context of relief for street vendors, that digital payments would be incentivised through monetary rewards. Indeed, regulatory facilitation for the digitisation of financial inclusion began even before the pandemic hit India – in January, the RBI amended the Prevention of Money Laundering Act to allow video KYC processes, which has made it possible for lenders to introduce digital onboarding processes for new customers.
The benefits of digitising financial inclusion have been known for some time now. Lenders would benefit from increased scale, reach, and efficiency. Borrowers would also benefit from increased efficiency and access to more financial services. Financial inclusion could be an incentive for people to engage in the digital economy, and more engagement in the digital economy could accelerate the impact of financial inclusion. A virtuous circle indeed; a win-win for all.
There are many studies and detailed analyses on the opportunity for growing digital payments in India in particular. In recent years, consultancy firms and the Indian government alike have conducted deep-dive research into this space to conclude that digital finance is a huge opportunity. The penetration of smartphones and the internet has increased greatly in the past few years, owing largely to the fall in their cost. This has propelled digital India forward, and made it possible for various businesses to scale up – e-commerce is perhaps the best example. The demonetisation crisis of 2016 also compelled people to embrace technology: digital payments and fintech companies grew, and the launch of PMJDY added to the digital infrastructure for financial inclusion.
A 2018 BCG-Google report concludes that digital lending in India would be a trillion-dollar opportunity by 2023. The same report also surveyed the internet using buyers to reveal that the key obstacle for digitising financial inclusion was the discomfort customers experienced in putting financial information online. Lenders interacting with the ‘real’ India (outside mega-urban regions) have corroborated this in pre-COVID times: whether on analyst calls or at conferences, they have consistently maintained one thing – they are ready to digitise but their customers are not.
The tides are turning
If that is the case, it seems that the tides are turning. In the midst of this crisis, there is an opportunity. Millions of people and institutions around the world are being forced to adapt, and as we all know, digitisation is perhaps the biggest aspect of adapting to this crisis. Even courts have been forced to allow digital hearings, which would have seemed completely outrageous to even think about pre-pandemic.
The rise of online payment systems is extremely encouraging, and the regulatory landscape is likely to be unconditionally supportive in an endeavour to use them to further the provision of financial services. With the appetite for technology now growing even in poorer sections of society, whether out of boredom or necessity, everything is in place for lenders to seize this opportunity. NBFC-MFIs, in particular, may be hard-pressed for cash right now and hesitant to invest, but it really seems like those who work to build on the existing infrastructure will stand to emerge better positioned for an uncertain future, as much will depend on digital and analytics capabilities.Stuti Johri is an investment analyst at Trivantage Capital Management India Private Limited. The views are personal.