Written By: Sameer Aggarwal, CEO and Founder, RevFin
What is FinTech Lending?
Fintech lending is the use of new and innovative technologies to create new business models to improve and ease lending processes and underwriting. Popular fintech lending business models in India include Peer to Peer (P2P), Aggregator/Marketplace, Point of Sale, Direct and Indirect (bank/NBFC partnerships) Lending. It is expected to top USD 1 trillion in lending in the next 3-5 years, generating employment for thousands and contributing significantly to the GDP.
Impact of Covid-19 on fintech lending
Most businesses around the globe will suffer significantly in the aftermath of Covid-19, however, a few sectors will bear a disproportionate impact, of which lending is one. For lending sector generally and for the fintech lending specifically, with several fintech start-ups folding-up, the adverse impact is expected tolast for a few years.
Since the current events are unprecedented, assessing future cash flows of individuals and businesses will not be easy and short-term loans will pose significant risk. Loan demand will rise with loss of revenues for businesses and job loss for individuals, hence, the main issue for the sector will be how to underwrite the leads in an effective manner.
Collections, including capital deployed and interests accrued, will be under tremendous pressure which in turn will severely reduce cash flows, leading to very less or no money to pay salaries, bills or makenew loan disbursements. The recent announcement by RBI permitting lenders to give a moratorium of three months on loan repayments has led to a misconception that loan installments have been waived for three months. It is incumbent upon lenders to explain the modalities to their customers and collect installmentsfrom them. People who have lost earning opportuities, including contract workers, other daily wage earners or even businesses will take time to recover and will not be able to pay loan installments. The backlog of loan installments will take 6-12 months to get back on track. Needless to say, many people and businesses will not be able to get pay back loans, leading to NPAs.
Many Fintech companies rely on tie ups with banks and NBFCs for lending and in most cases even guarantee a portion of the loan. In the event of losses on loans, such Fintech lenders will lose their capital and eventually the tie-ups will end. Banks/NBFCs will facetheir own existential crisis, with many of them opting to reduce lending through the Fintech sector, especially because most Fintech players operate in niche underserved segments which are seen as higher risk segments which are being severely impacted as the spread of virus continues unabated.
The Fintech lending sector was already struggling to raise money due to several crises hitting it hard, including the IL&FS and Yes Bank debacles. With this new crisis, most investors will shy away from this sector, because the recovery cycle will be long, and several business models will no longer be seen as viable and sustainable. Fintechs will have to prove the efficacy of theirbusiness models all over again, especially their ability to underwrite and collect effectively, before funding resumes in the sector.
Future proofing Fintech lenders
To manage the present crisis and to future-proof Fintech lenders will need to focus on three Cs – Capability, Customer and Capital.
Fintech players will have to reshape their business models and build new capabilities. An important aspect will be to create diversified portfolios. This will mean providing new products, entering new customer segments and new geographies. A well-diversified portfolio may result in lower yields but will enable business sustainability and immunity from external circumstances. This is a good time for fintech lenders to build better technology for underwriting as well. Since traditional data like credit history and banking transactions will no longer be sufficient, off-beat techniques like psychometrics and gamification should be tested for underwriting.
Most players focus on technology and centrally managed operations with little or no feet on the ground. This will need to change as physical touchpoints with customers will become important. Fintech lenders will need to connect with their customers at regular intervals to understand their situation and changed needs. Customers will be looking for a solution to help them ease out of their financial turbulence. Fintech lenders will have to offer several solutions like loan rescheduling, reduction in interest rates, waiving-off late payment charges, converting revolving lines into close-ended products etc.
Finally, Fintech lenders will have to reduce leverage. Where Fintech lenders have given loss guarantees, they must offer a guarantee on a higher proportion of assets to build more confidence in their business models. Direct lenders must gradually reduce their debt. It would also be a wise idea for Fintech lenders to build a rainy-day fund to tide over difficult times. The money will need to be in liquid fixed return funds, which means lower yield but nevertheless a good practice.