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Photo: iStock
Photo: iStock

Riskier customers led to surge in fintech delinquencies, says report

  • After the onset of the covid-19 pandemic, digital lenders have seen a surge in delinquencies to 43%, as against 5% in private banks, in August 2020
  • As pointed out by analysts and bankers, the auto-debit bounce data is a key indicator of distress among borrowers of fintech and other non-bank lenders

India’s fintech lenders saw delinquent accounts nearly double between August 2019 and 2020 as a result of lending to risker customers, according to a joint report by credit bureau TransUnion Cibil and the Digital Lenders Association of India (DLAI).

After the onset of the covid-19 pandemic, these lenders have seen a surge in delinquencies to 43%, as against 5% in private banks, in August 2020. By delinquent, the report takes into account any loan where repayments are overdue even by a day. In August 2019, 22% of fintech loan accounts were delinquent.

“Compared to peer members, the huge volumes sourced by fintechs were largely small-ticket loans and from riskier segments. 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," the report said.

As the pandemic left millions jobless and impacted cashflows, borrowers struggled to repay existing loans. Lender with large concentration of borrowers with lower credit scores were badly hit.

“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.

The report said that the rise in delinquent accounts (post-February 2020) is due to accounts flowing to a higher delinquency bucket each month — bloating the 90+ DPD (days past due) bucket. For instance, while the number of live accounts in the over 90-day overdue bracket stood at 373,000 in January, it gradually rose to 947,000 in June and then stood at over 1 million in July, before a decline to 938,000 in August 2020.

“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 (zero day overdue) bucket," the report said.

It added that with fewer accounts in lower delinquency buckets, collections teams had fewer accounts to manage. "At the same time, the consumer cash crunch caused older accounts to roll forward to higher delinquency buckets — driving a rise in 90+ DPD buckets and impacting collections efficiency," it said.

As pointed out by analysts and bankers, the auto-debit bounce data is a key indicator of distress among borrowers of fintech and other non-bank lenders. In August 2020, 40.3% of all auto-debit transactions had failed, largely owing to insufficient funds in borrowers’ bank account.

Faced with a growing distress owing to the onset of covid-19, the Reserve Bank of India (RBI) had announced a six-month moratorium on loan repayments that ended on 31 August. The report cautioned that in 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," it said.

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