Gaurav Jalan is the Founder and CEO of mPokket, a one-of-its-kind digital lending platform for college students and young professionals. A fintech, management, and value investing enthusiast, Gaurav has been leveraging technology, analytics, and his rich professional experience to supplement cost-effective delivery of credit to those segments of the population that are often disregarded by traditional financial institutions, through mPokket.
Due to the impact of coronavirus-induced lockdowns and allied restrictions, worldwide, credit uptake had gone through an extremely lean period in 2020. But this year, economic activity has begun to pick up as the lockdowns were eased in diverse geographies.
The pandemic has already triggered unprecedented changes in how people live and work. As families were house-bound for much of last year, the outbreak acted as a catalyst in the adoption of digital technology, especially in health and education, where millions took to telemedicine and online classes.
Coming to the fintech industry, most companies made all efforts to mitigate the crisis by deploying a positive approach in meeting customers’ financial needs despite market uncertainty and volatility. Overall, major fintech players were shoring up their capital by tapping funds from investors and other lenders. With more than $2.4 billion invested in various Indian lending tech startups between 2014 and Q3 of 2020, digital lending emerged as a frontrunner in the Indian fintech ecosystem.
As ongoing events indicate, the first impact of lockdowns on the lending ecosystem is on the recovery cycle. According to a Redseer report, loan disbursals from all the top players were impacted by almost 90% between March and April 2020, following the immediate aftermath of the nationwide lockdown. At this juncture, MSMEs were the worst impacted borrowers.
Significantly, after last year’s hit on recoveries, all-India average collection efficiency had stabilized at 90–94% in December 2020, as per the April 2021 report of rating agency Crisil. But as the states began lockdowns once again in April, collection efficiency has again been impacted.
No doubt, the lockdown took its toll on the rates of loan approvals across digital lenders as these players moved to prevent huge defaults. Considering the second wave’s virulence, fintech startups may also be operationally hit during this period.
Although all kinds of loans could be affected one way or the other, in the case of fintech startups, unsecured loans such as consumer durables and personal loans form the majority of their portfolio and will also be impacted. These loans help customers fulfil their plans for discretionary spending.
Considering the possibility of another round of job losses and salary reductions, affected consumers may exercise caution in borrowing and only consider taking loans out of sheer necessity in the case of medical emergencies, educational needs and other essential scenarios. In short, consumers will switch to need-based borrowings instead of want-based ones.
According to a recent report from Care Ratings, non-banking finance companies could likely see higher credit costs during the current financial year because of the disruptions arising from the second wave’s intensity. However, it noted that the impact is expected to remain lesser in the low-risk retail secured loan book while being higher in the high-risk unsecured lending segment.
The report states that across the sector, the asset quality metrics are expected to receive support in FY2021 by the RBI’s restructuring schemes and the post-September 2020 economic revival. Big banks and NBFCs may not have any immediate cause for concern because of the large provisioning the RBI mandated due to the COVID impact.
Conversely, if the ground situation doesn’t improve, such measures won’t help smaller digital lenders survive the second wave as they lack the huge cash reserves of bigger players.
Varied Products and Needs
Given the job losses cutting across all sectors and the entrepreneurial spirit still being weighed down, demand for big-ticket loans will remain muted for some more time. However, the credit market is expected to be driven by MSMEs and the youth, particularly new recruits.
Meanwhile, given the rigid underwriting approach of traditional lenders, digital lending companies have come up with varied products in the past two to three years. These offerings have increasingly been catering to millennial cohorts who seek credit access and have numerous other consumer and business-centric credit needs.
It may be noted that the COVID-19 outbreak fast-forwarded the growth of BNPL (buy-now-pay-later) products by further impacting income continuity and financial stability while simultaneously driving consumers into adopting digital platforms. Thanks to this underlying increase in adoption, digital lending players have gathered confidence that they can bounce back more speedily from the 2021 lockdowns.