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Aggressive growth in personal loans leads to higher defaults among fintechs: DLAI-CIBIL report

The rapid growth in fintech lending has helped first time borrowers access formal credit channels. But loan repayment collections have been poor, leading to higher delinquencies or defaults for these lenders post the pandemic, according a report by TransUnion CIBIL and the Digital Lenders Association of India.

While traditional lenders cater to different customer risk segments, fintech lenders operate in a lean mode primarily acquiring higher-risk customers through smartphones. “FinTechs were focused on a consumer segment untapped by traditional lenders which aided this rapid growth. Their streamlined loan decision process, combined with alternate data and reliance on latest analytics techniques, helped achieve faster disbursals,” the report said. Fintech lenders now account for 50% of fresh personal loans originations compared to just 10% two years ago, it says.

“FinTech NBFCs, that leverage technology and digital channels heavily, have been instrumental in easing and accelerating lending in India by making it convenient and faster for end-consumers to access credit,” said Rajesh Kumar, managing director and chief executive officer TransUnion CIBIL. The report was released at the Digital Lenders Association of India’s 2021 Conclave on Thursday.

“With the onset of the pandemic and the increase in people migrating to their hometowns, collections have become a stressful and challenging activity. Fintechs need to increase focus on collections and build analytics driven models which will help them collect profitably,” said Anurag Jain, president of DLAI and founder and executive director, KredX.

Higher loan originations by fintechs

While personal loan origination volumes by all lenders grew by 150% year-on-year during 2019, personal loan originations by fintechs grew by 650% during the same period. In August 2020, around 54% of all personal loans originated by fintechs went to the below prime-risk customer segment whereas in the previous year around 49% of loans when to this segment. In comparison, banks provided only 19-25% of their personal loans to the below prime-risk customer segment segment while regular non-banking finance companies (NBFCs) provided 38% of personal loans to this segment, the report says.

“Banks have generally been lending to consumers in prime and above risk tiers, and those with a relatively stable flow of income, and leveraging their liability base to acquire personal loans. At the same time, fintechs have onboarded consumers with low credit scores and leveraged more alternative data,” the report said.

Higher delinquencies among fintechs

But the structural difference between traditional lenders and fintechs has allowed the former to keep their loan collections in tact, while fintechs have witnessed higher defaults in the wake of the COVID-19 pandemic, the report says. The report studied the collection practices of 35 fintech lenders and found that on average fintechs have 8x more delinquent accounts compared to private banks, for instance.

Delinquency rates

  • Fintechs: 43% in August 2020 compared to 22% in August 2019
  • NBFCs: 18% in August 2020 compared to 9% in August 2019
  • Public sector banks: 3% in August 2020 compared to 8% in August 2019
  • Private sector banks: 5% in August 2020 compared to 7% in August 2019

“The onboarding of a riskier consumer base translated into a more delinquent portfolio compared to peer lenders. Although interest rates charged by FinTechs
are comparatively high, portfolio quality has deteriorated over the past year —seeing a huge spike in delinquent accounts after the onset of the pandemic,” the report says. It is important to note that while in January 2020 there were 3,185 active personal loan accounts, fintechs began scaling back fresh lending which led to the overall number of active loan accounts coming down by 29% to 2,266 by August 2020.

Loan accounts in default

  • August 2020: 43% or 968 accounts were in default or 90 days past due (DPD)
  • April 2020: 23% or 648 accounts were in default or 90 DPD
  • January 2020: 11% or 373 accounts were in default or 90 DPD

“In the current situation, as the moratorium has ended, more consumers will enter delinquency buckets and make the collection process even more challenging. Traditional collection strategies work well for banks due to their superior physical reach, larger team sizes, and multitude and size of loans. FinTech lenders need a different approach. They require policies to implement loan restructuring for consumers based on certain criteria — encouraging consumers to at least partially repay their debts,” the report says.

Other key findings

  • Older borrowers are more likely to repay their loans on time compared to younger borrowers
  • Improvement rate or the propensity for a borrower to repay their loan (30 to 59 DPD) for large-value loans (20,000 and above) is similar for mid-value loans (5,000 to 10,000)
  • Post pandemic fintechs began investing in in-house collection technologies to improve collection efficiencies and automate processes
  • Fintechs who stopped fresh lending during the early months of the pandemic could repurpose sales and credit  resources to assist with collections
  • Borrowers with multiple live loans (different products from different lenders) that were not in default showed better cure rate compared to borrowers with fewer non-delinquent loans

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