6 min read.Updated: 13 Sep 2020, 11:28 AM ISTSrinath Sridharan,Bhaven Shah
As a greater number of disputes are expected to flood the market in the aftermath of this healthcare crisis, online dispute resolution is probably the missing piece in the digital transformation journey
The Reserve Bank of India (RBI) announced the three-month loan moratorium beginning 1 March to help businesses and individuals fight the cash crunch owing to the outbreak of the covid-19 pandemic. Subsequently, the RBI extended it by three months which expired on 31 August. Several parties approached the Supreme Court of India seeking a further extension. The apex court is dealing with two other crucial issues -- no interest payment on loans during the moratorium period and no interest to be charged on interest. The court has asked all parties to maintain status-quo on the loan repayment moratorium till 28 September, when it will give its verdict. Meanwhile, the government has appointed a special committee to assess the impact of any further waiver of interest, etc on the banking system.
The non-bank industry in India has seen a slowdown over the past few quarters, thanks to shallow debt markets and sentiment-driven non-availability of credit from the banking system. To add to this stress, the current moratorium has brought to fore the conundrum of borrower behaviour and their intent and ability to pay back the loans. The regulations have favoured the banks over their non-bank competitors.
A few weeks ago, India had a rude awakening with the June quarter GDP slippage of a deep 23.9%, the worst contraction in the history of the country's economy since independence. Unemployment numbers have risen and if demand does not pick up, this is bound to increase. More than 45% of households across the nation have reported an income drop as compared to the previous year. Under complete lockdown, less than a quarter of India's $2.8 trillion economic movement was functional. Up to 53% of businesses in the country were projected to be significantly affected.
One way to look at the emerging data is how this crisis has pushed us back economically by a few years. A positive way to look at this narrative is how it brought us to the 'Digital First' era quicker than all the marketing big-bucks ever could. Covid-19 has truly been a catalyst for the digital transformation philosophy, across the spectrum.
Small-ticket borrowers and digital lending
Traditionally, financial institutions have been averse to serving small-ticket and formal-credit-score-devoid consumer segments. It was left to the public sector undertakings and few of the local private players.
The large volumes of this consumer base has attracted the new-age digital lenders, despite the regulatory arbitrage that’s loaded against them vis-a-vis banks; to employ concepts such as cluster-centered funding, point-of-sale lending, peer-to-peer lending, invoice-based lending, cash flow-based lending and online microcredit. They began leveraging cutting-edge technology and alternative credit assessment models (deploying technologies like data analytics, AI, ML and open APIs for insights into consumer behavior and spending to build alternative credit models and provide credit) to quickly fill the credit availability gap and reach out to a wider customer base.
Fintech lenders have digitized and innovatively simplified the pain points of consumers across the lending value chain. Take for instance contactless onboarding, e-KYC processes, technology-assisted credit evaluation and assessment, instant disbursals, digital underwriting etc. The fintech lending market is forecast to exhibit exponential growth due to increasing internet and smartphone penetration, thrust from digitization and regulatory reforms. Credit demand from MSMEs and consumers presents an addressable opportunity of more than $1 trillion by 2023.
The advent of 'open banking' would allow FinTech platforms to have fair access to consumers that traditional banking system has had and yet could not serve adequately well. In fact, this could put the liberty of choice to the consumers, which in essential would mean “consumer empowerment". The availability of choice and the ability to choose with freewill is, after all true financial inclusion.
With a total of 85% of all Indian banking customers using digital banking services for their day-to-day activities and considering that India’s digital lending market is poised to grow from $110 billion in 2019 to $350 billion in 2023, digital lending would play a key role in improving the accessibility, availability and affordability of credit for the unbanked and the underbanked.
Recoveries key to revival
The coronavirus pandemic is proving to be an existential threat to the lending sector and more so, for digital lending players. As per RBI’s Financial Stability Report released on 24 July, non-performing assets (NPAs) may increase in the coming months. It reported that the gross NPA ratio may increase to 12.5% by March 2021 and can test 14.7% if the economic environment worsens. The lending sector in India stood at $1.35 trillion in FY19. Extrapolating the 12.5% expected gross NPA rate for FY21, we are looking at theoretically-probable defaults amounting to a staggering USD 168.75 billion for this sector.
On the recoveries side, with average case disposal rates ranging from 5 to 15 years in Indian courts and tribunals, a judicial logjam of over 35 million cases, the economic cost of delay pegged at 0.77% of the GDP, the current process of dispute resolution is resource-heavy. The cost in terms of time, effort and money in dispute proceedings far outweigh the reward of the final resolution.
The need for digital transformation in the ‘recovery and redressal’ space (better known as collections) is felt more now than ever before. Every percentage point of additional collections completed in time is a lesser strain on the capital base of the lending platforms.
Technology-driven resolution in a contactless society
Considering the virus-forced lockdown, the incumbent setup of in-person or physical dispute resolution has come to a standstill and is expected to continue for the foreseeable future. Covid or not, the need to turn to digital technology for dispute-resolution is inevitable. Technology-driven redressal mechanisms that are rule-based, transparent and acceptable under the legal system, popularly referred to as online dispute resolution (ODR), involves minimal human intervention which is made possible by higher level of automation using digital technologies like AI, ML, NLP, data analytics, blockchain.
The use of ODR in India is at a nascent stage and has received a big boost in the past few months, especially due to the travel restrictions – another byproduct of the virus. More importantly, the consumers have been exposed to various digital communication interfaces over the past 6 months and the mental block of having a meeting over a video conference has been removed. ODR has the potential to drastically reduce resolution costs by an estimated 80% and provide enforceable outcomes in up to 45 days. Even our legal system has embraced the concept of ODR as a binding resolution mechanism. All this while providing all parties to the dispute, an effective and convenient platform to participate in the process, remotely in a contactless, safe and secure manner.
As a greater number of disputes are expected to flood the market in the aftermath of this healthcare crisis, ODR is probably the missing piece in the digital transformation journey; the integration of which, will digitalize the entire transaction trail, from credit assessment to underwriting, application to disbursal to collections, and resolution to recovery.
With so much stress on the financial system and the lending platforms all around, the question is not whether digitized dispute resolution should be integrated or not, but ‘by when’. It’s time that lending institutions look at the last-mile (collections and related disputes) using fully integrated digital solutions.
(Srinath Sridharan is an independent markets expert and Bhaven Shah is co-founder of a tech platform. Views expressed are their own and do not reflect Mints'.)
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