Fintechs lending to high-risk segments even as banks, lenders clamp down on unsecured loans

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December 11, 2020 8:00 AM

A study by Equifax and Small Industries Development Bank of India (Sidbi) put the ratio of bad loans in the personal segment at 6.15% for fintechs, in December 2019, way above the 0.71% for the industry.

The fintech industry in general, and the lending sector in particular, is looking to build new products on a scalable architecture that is being created with initiatives such as account aggregation.

Armed with capital a clutch of fintechs is moving in to finance the self-employed and freelancers at a time when banks and other lenders are clamping down on unsecured loans. The risks are high given how even before the pandemic the share of loans in the 90 days-past-due (dpd) category was elevated.

A study by Equifax and Small Industries Development Bank of India (Sidbi) put the ratio of bad loans in the personal segment at 6.15% for fintechs, in December 2019, way above the 0.71% for the industry.

However, lenders like Abhishek Agarwal, co-founder and CEO, CreditVidya, believe there is an opportunity. “There is a segment of the population which is not as bad, but has just been hit very badly by the pandemic,” Agarwal said.

The lender, which operates in the alternative data underwriting space, has now launched a lending vertical called Prefr, which offers pay-later loans, cash advances and term loans to the self-employed.

It found that traditional NBFCs’ unsecured loan disbursements had dropped by 70% after the Covid-19 outbreak and also that private banks were lending primarily to their customers. Also, they they raised income cut-offs for borrowers to be able to access loans. Another player in this segment is ePayLater, which has tied up with Metro Cash & Carry, Walmart’s Best Price and Reliance Market to lend to their customers.

In order to better the chances of recovering their loans, fintech lenders are asking specifically for the end use of funds. In some cases, this could take the shape of small-scale supply chain financing, where the funds are disbursed to a distributor in the retail supply chain and the repayment is made by the merchant. In others, merchants are loaning money to sustain operations running until the online sales result in payments. Others are funding cash-starved freelancers and gig-economy workers. Delinquencies remain elevated in this segment. Many of the loanees were untraceable post the lockdown despite Aadhaar eKYC having been done. Unlike banks and large NBFCs, digital-only lenders do not have field agents to make recoveries for them and are, therefore, far worse off at collections.

Industry executives like Tarun Kumar Kalra, global head of sales, CredoLab said fintechs are mushrooming, with freelancers as the main customer segment because they know these people need help and their existing lenders are turning them down. “ They are using all sorts of alternative data and behaviour to assess this segment because that’s where the biggest consumption will happen, but where the biggest risk also lies,” Kalra said.

The full impact of the pandemic on the economy in terms of employment levels and small and medium enterprises (SME) profitability will play out over a much longer period of time. These risks are likely to manifest themselves thereafter, Kalra said.

The sole explanation behind the increased lending to riskier segments amid an economic crisis is the venture money invested into fintechs. This money allows them to lend and, in the process, obtain the digital footprint of lakhs of people. “So if one year after launch, the fintech can claim it has 100,000 freelance customers, its valuation will be more, as compared to how many of those customers have actually paid back,” Kalra said.

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