Fintech NBFCs See Delinquencies Double On Risky Lending: DLAI-CIBIL Report

Delinquent accounts for fintech non-banking financial companies in India nearly doubled in the year up to August 2020 as riskier lending compared to banks hurt during the Covid-19 pandemic.

Nearly 43% of personal loan accounts were in the overdue buckets for fintech NBFCs compared to 22% such accounts in August 2019, according to a research report titled ‘Fintech Collections, Trends and Strategies’, released on Thursday by credit bureau Transunion CIBIL and Digital Lenders Association of India.

Soon after the Covid crisis hit, the Reserve Bank of India permitted all lenders to offer borrowers a moratorium on payments. This lasted from March to August. As such, a jump in the share of overdue loans may reflect borrowers who had chosen to avail the moratorium. Just like in the case of banks, all these loans may not have remained overdue after the moratorium ended.

The report, however, attributed the increase in overdue loans for fintech firms to a riskier consumer base.

More than half of the personal loans originated by fintech firms in August were from below prime-risk tier customers (with credit scores of 730 or below), compared to 38% such customers for NBFCs, 25% for public sector banks and 19% for private sector lenders, according to the report.

"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," it said.

As risk rose, loan origingation volumes for fintech NBFCs, fell sharply.

“Fintechs reduced new loan originations and sourcing of customers drastically just after the pandemic hit, resulting in fewer fresh accounts. This, coupled with higher run-offs due to short-tenure loans, led to a drop in the number of accounts in the standard (0 days per due) bucket," the report said.

New personal loan volumes contracted 39% in August 2020. While it's better than 94% contraction in may, it's way behind 822% growth a year earlier.

"In the current situation, as the moratorium has ended, more consumers will enter delinquency buckets and make the collection process even more challenging," the report said.

While traditional collection strategies, it said, may work well for banks due to their superior physical reach, larger team sizes, and size of loans, fintech firms will need a different approach based on implementing loan restructuring policies for customers.

"With credit demand expected to climb during and after the festive season, partial repayments will help lenders manage their balance sheets. Most pressing is the need for a robust and cost-effective collection mechanism to maintain overall profitability," it said.