FinTechs lend to high-risk segments as banks, lenders crack down on unsecured lending
Armed with capital, a handful of fintechs are settling in to finance the self-employed and the self-employed at a time when banks and other lenders are cracking down on unsecured lending. The risks are high given that even before the pandemic the share of loans in the 90 day past due (dpd) category was high.
A study by Equifax and the Small Industries Development Bank of India (Sidbi) put the bad debt ratio in the personal segment at 6.15% for fintechs in December 2019, well above 0.71 % for industry.
However, lenders like Abhishek Agarwal, co-founder and CEO of CreditVidya, believe there is an opportunity. “There is a segment of the population that is not as serious, but has just been hit very hard 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 late payment loans, cash advances and term loans to the self-employed.
He revealed that unsecured loan disbursements from traditional NBFCs fell by 70% after the Covid-19 outbreak and that private banks were mainly lending to their customers. In addition, they have raised the income thresholds for borrowers to access loans. Another player in this segment is ePayLater, which has partnered with Metro Cash & Carry, Walmart’s Best Price and Reliance Market to lend to their customers.
In order to improve the chances of getting their loans back, fintech lenders specifically ask for the end use of the funds. In some cases, this could take the form of small-scale supply chain finance, where the funds are paid to a distributor in the retail supply chain and the reimbursement is made by the merchant. In others, merchants lend money to support operations until online sales result in payments. Others fund freelancers and cash-strapped gig economy workers. Payment defaults remain high in this segment. Many lenders were nowhere to be found after the foreclosure despite having Aadhaar eKYC done. Unlike banks and large NBFCs, digital-only lenders do not have agents in the field to perform collections for them and are therefore far worse off when it comes to collections.
Industry executives like Tarun Kumar Kalra, Global Sales Manager, CredoLab, have said fintechs are on the rise, with freelancers as the main customer segment as they know these people need help and their lenders existing ones refuse them. “They’re using all kinds of data and alternative behaviors to assess this segment, because that’s where the greatest consumption will happen, but where the greatest risk is also,” Kalra said.
The full impact of the pandemic on the economy in terms of employment levels and profitability of small and medium-sized enterprises (SMEs) will play out over a much longer period. These risks are likely to emerge later, Kalra said.
The only explanation behind the increase in lending to riskier segments in times of economic crisis is the venture capital invested in fintechs. This money allows them to lend and, in so doing, obtain the digital footprint of hundreds of thousands of people. “So if a year after its launch, fintech can claim that it has 100,000 independent customers, its valuation will be higher than the number of those customers who have actually paid back,” Kalra said.