Over the past few years, many people, especially millennials, have embraced the idea of easy credit. Whether it was the frequent swiping of a credit card or using a lending app to get a quick loan to buy the latest smartphone, borrowing had become extremely easy and accessible.
This was, in part, fuelled by the mushrooming of many online lending platforms. Given the quick turnaround time of these platforms, combined with the limited amount of paperwork they required, they became a favourite, especially among students and young professionals.
All that seems to be changing ever since the covid-19 pandemic hit, with most people being forced to cut back on discretionary spending. “Digital lending is one of the most hard-hit sectors from both the demand and supply side," said Vivek Belgavi, partner and leader, fintech, PwC India, an advisory firm.
Could this be a nail in the coffin for easy loans, or will the financial crunch only mean increased borrowing in the future?
Borrowers more cautious
There was a time when borrowing to fund lifestyle expenses was unheard of. But over the past decade or so, Indians have been borrowing more. Not only has the number of borrowers increased, the ticket sizes of loans have also shot up. Millennials particularly tend to finance their lifestyle by taking short-term loans or using their credit cards. With the advent of easy loans offered by digital lending platforms, this trend witnessed a further spike.
Discretionary spending, however, came to a grinding halt for many after the pandemic broke out. As a result, lending has been affected. “Consumer loans will be more affected in the short to medium term as discretionary spending on electronics, apparel and travel would be impacted by pay cuts, job losses and fear of prolonged uncertainty," said Belgavi. According to Kotak Institutional Equities analysis, as of 20 March 2020, unsecured retail credit and consumer loan enquiries dropped by 10-29% week-on-week, indicating a sharp drop in demand, he added.
Though demand for loans taken for discretionary spending has taken a hit, that’s not the case with all loans. According to Bala Parthasarathy, co-founder and CEO, MoneyTap, an online lending platform, “Consumer durables financing, where people take EMIs to buy the latest smartphone or go on vacations, has seen a big demand drop. But other areas such as education and medical emergencies have seen an uptick," he said.
Lenders tighten the norms
It’s not just the borrowers who have become cautious. Lenders too have had to tighten their norms to stay on the safe side. “In light of layoffs and salary cuts, lenders have issued statements that non-performing assets (NPAs) might go up and they might become more conservative in lending in the post-covid world. At the same time, the demand for credit continues to grow even as people are reluctant to initiate physical contact. So, while the business might become more conservative, lenders are focusing more and more on digital to tackle this demand," said Adhil Shetty, CEO, BankBazaar.
Madhusudan Ekambaram, CEO, KreditBee, an instant personal loan app and credit platform agrees. “One of the most important changes to expect post-covid is the tightening of credit assessment among digital platforms. Many smaller non-banking financial companies (NBFCs) would face liquidity issues due to lean cash reserves, which would lead to consolidation in the market. But it is also a huge opportunity for digital lending platforms since a lot of consumers would shift from offline to online propositions," he said.
Offering an alternative
While the short-term outlook looks bleak, according to Ekambaram, fintech lending apps have provided an alternative to customers to whom banks didn’t traditionally lend, and this trend is likely to continue, even strengthen. “The opportunity would be much larger right now, since banks would now be even more conservative in lending, which would open up new opportunities for the digital lending platforms," he said.
In fact, some are of the opinion that the sea change brought about by covid-19 will work to the advantage of the digital lending sector. “The entire banking ecosystem and the way customers interact with the financial organizations have completely shifted as a result of covid-19. In the new normal period, we will witness a substantial decline in the conventional method of banking," said Parthasarathy.
Digital lending firms, with adequate government push, could fill the void that will be created as new needs and customer habits evolve in the post-covid era, he added.
The way forward
So what lies ahead for easy loans?
According to Ekambaram, the macroeconomic slowdown has caused the demand to drop, but it will eventually recover. “In the short term, the demand generation for loans among creditworthy customers would be much less than the pre-covid times. But in the medium to long term, people are expected to venture out as usual, and hence we expect the demand to go back to the normal levels. However, it could take six to eight months," he said.
But according to Bhavesh Gupta, CEO, Clix Capital, an NBFC, while the overall digital lending space may see development, some of the platforms may see their demise.
“Some online lending platforms were not NBFCs, they worked with them because the latter did not have digital technologies. The post-covid environment will force some old-school banks and NBFCs to get their own online platforms since it has become an integral part of the lending business," said Gupta.
While it might not be the end of easy loans and lending platforms, the demand for consumer loans has certainly fallen for now. With people becoming reluctant to borrow for luxuries given income insecurity in the wake of the pandemic, as well as the need to tighten norms on the part of the lenders, the industry might struggle to regain the footprint it had established before covid-19 hit.
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