COVID-19 has affected everyone. However, the digital lending community has had to confront a particularly stressful time. Digital lenders, a critical part of the FinTech landscape in India, lend mostly small value loans to the SME, MSME and retail segments. Digital lenders themselves rely on a mix of both debt and equity capital to support their loan books. The RBI in March this year, introduced a scheme allowing banks and NBFCs to offer a three-month moratorium to borrowers (which was subsequently extended until August 2020) on repayment of principal, interest, and EMI instalments.
There was no clarity on whether NBFCs (as a borrower group) would be extended the benefit of this moratorium from their own lenders. Digital lenders (many of whom operate as NBFCs) found themselves facing a severe asset-liability mismatch. While digital lenders were expected to offer a moratorium on payments to their customers, no such relief was being granted to them in respect of their own borrowings from banks. COVID-19 linked disruptions to businesses and salaries also meant that many digital lenders were seeing higher stress in their loan portfolios, making access to further capital even more difficult.
The RBI did introduce certain relief measures via its targeted long-term repo operations intended to extend liquidity to NBFCs via bank finance. However, the smaller digital lender NBFCs (viewed to be more high risk) did not benefit significantly from these liquidity measures announced by the RBI. The Government also extended a partial guarantee scheme to provide more liquidity to smaller NBFCs, but more support may be needed. The sector should also evaluate effective post-origination liquidity structures such as securitization or back-end participation in loan portfolios.
The digital lending business model is an important one in an economy trying to solve for the many problems triggered by COVID-19. Digital lending has all the elements required to adapt to a post-COVID-19 system of delivering contactless financial services. Many digital lenders seek to on-board customers remotely, with minimal paperwork (where loan agreements are executed electronically) and are able to complete document verification procedures digitally. The Video KYC framework issued by the RBI has allowed digital lenders to on-board customers via a completely non face-to-face format allowing for “contactless” financial services, access to a wider customer base and lowering costs of KYC.
Following the withdrawal of eKYC as a KYC method available to NBFCs (which was a result of the Supreme Court decision in the Aadhaar case), customer on-boarding costs have become a significant concern. While the Video KYC framework does to a large extent, solve for this problem, there is still an ask from the digital lending community that NBFCs be allowed to use Aadhaar based eKYC given that Aadhaar based eKYC is one of the most cost-effective and convenient methods to onboard customers. Given the stresses triggered by COVID-19, lowering costs of operations becomes an even more important objective, and the regulators should evaluate extending the use of eKYC to digital lenders and other NBFCs.
Many digital lenders use non-conventional models to identify customers and assess credit risk relying to a large extent on big data analytics and artificial intelligence. Given the disruption caused by COVID- 19 to businesses, cash flow of borrower groups and the economy as a whole, digital lenders may need to adapt their models to assess COVID-19 linked specific credit risk.
The digital lending community has come into sharp focus recently linked to a few players adopting aggressive recovery strategies and inadequate disclosure re: loan terms. The RBI, on June 24 2020, released a Fair Practices Code requiring all digital lenders to comply with certain standards in loan disbursement and recovery procedures. As it responds to the COVID-19 effects on doing business, the digital lending community will also need to evolve a code of conduct to “check” bad behaviour by certain players and demonstrate to the regulator that it is committed to a fair and transparent digital lending business model.
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
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