COVID-19 has resulted in an unprecedented economic crisis, and there has been many disruptions and dramatic changes right from consumer spending to government operations. The lending sector in India is no exception to this rule, and it will also undergo a paradigm shift. There will be a change in the way lenders approach customers and interact with customers, how people take loans, the use of modern technology, and so on.
Let’s take a look at the pre-COVID period as a tipping point and examine how things will change in the future in the Indian lending industry.
How the Indian Credit Industry fared before and after the Pandemic?
The credit economy in India has witnessed unprecedented growth in the last few years. New loan origination in 2019 got a 30% boost over 2018.
The increase was mainly on account of higher consumer loans, personal loans, and finance as well as consumer durable loans. There was a proliferation of the credit card market into the rural and semi-urban part of the country. Digital lending started picking up especially with the millennial population and fintech companies too wooed the millennial and Gen Z with specialised loan products. Just as the entire loan management sector was looking for a bright future and technological advancement, the pandemic struck and sudden brakes had to be applied.
Credit uptake witnessed a lean period. Retail credit rates fell by 15%. New loan originations stopped post-February 2020 and inquiries too fell in April. The approval rates for home loans, property loans, credit cards and personal loans dropped by more than 10% with the personal loans segment witnessing a sharp decline of 30%.
Research on the borrowing patterns of people post-COVID was conducted across 7 cities by Home Credit India (a local wing of an international consumer finance provider). The research showed that 46% of borrowings were made primarily to run the household as there were pay cuts and delayed payments, 27% of respondents borrowed to pay their earlier loan instalments and 17% borrowed as they lost their job. Most people preferred borrowing from their family and friends as it gave them the flexibility to return the money.
The government’s infusion of capital, the introduction of various liquidity breathers, RBI’s liquidity infusion measures through open market operations (OMO), and loan moratoriums were the proactive measures taken to increase the demand for credit. In fact, towards the end of August 2020, 40% of the outstanding loans in the financial system availed moratorium.
However, such moratoriums also led to an increase in delinquency everywhere as borrowers across the country stopped paying loans. In fact, a survey by the digital lending platform Paisabazaar found that 23% of Indians who had no pay cuts also opted for stopping their loan repayment as a cautious approach to preserve liquidity.
Though the delinquency rates are coming back to pre-COVID rates now, with borrowers resuming repayment of their loan instalments, the Indian loan management system will never be the same again. Various economic, technological and human factors will redefine or rather control the Indian loan management system hereon. Read on to know more.
The Issues faced and the Trends that will redefine the Loan Management System in India
[1] Moving to an Entirely Digital Platform
With a change in consumer behaviour and more activities being carried on digital platforms, the loan management system will also undergo a massive change: from a mix of a physical and digital combo to a completely digital pathway. Prior to COVID, turning digital was a distant goal for many. But once the pandemic hit, everything changed overnight. People became used to digital and virtual and understood its benefits.
Lenders were forced to offer consumers digital alternatives and employees were and consumers were forced to learn to do digital transactions. Whatever was possible online was done online. All those who were not prepared lost out many opportunities, their customers became negligible and employees became redundant.
In fact, according to a leading market research company Forrester, Indian consumers are most open to switching over to digital-only banks in the Asia-Pacific region with 59% considering switching over to digitised banks in the next two years.
[2] More Credit and FinTech Companies will make use of Government Interventions for Digitisation of Consumer Credit
The necessity to go digital has made the government create significant interventions in the payment ecosystem and the Federated Consent Architecture that enable enhanced digital lending processes.
The RBI has already played an important role with the introduction of an Aadhar-based Video Customer Identification process and video-based know-your-customer (KYC) identification process that facilitates more efficient customer onboarding. Post-COVID, one can witness many banks and financial institutions resort to this method to compensate for the past slowdown.
In this conjunction, digital platforms that are dealing with lending activities will get huge prominence post-COVID-19.
Fintechs are capitalising on this opportunity by enabling hassle-free loan disbursals by way of digital data captures and by leveraging technologies like Artificial Intelligence (AI) and Machine learning (ML). Thus there will be lesser in-person visits in future. There will also be instant decision making and prompt loan disbursals. Customised credit assessment models that use behavioural data to analyse typical attributes for deciding on interest rates will become popular.
[3] Banks and their Lending Systems will Undergo a Drastic Change
Bad loans (NPAs) are on the rise and the credit costs are also expected to increase. There will be a complete deterioration in the quality of existing portfolios.
The pool of borrowers (with good credit quality) will shrink, making disbursements of new loans in the future riskier. Another major problem faced by credit and risk managers is the non-availability of repayment data from borrowers who have been granted moratoriums and the absence of off-book loan data.
Furthermore, the nature of risk can no longer depend on credit history alone (as it was before COVID), but a variety of factors like the financials of the borrowers, the industry in which they work, etc. will have to be taken into account. Thus the entire pre-existing risk-score cards will have to be reworked and existing risk assessment models will have to be updated at once.
Machine learning models will be in great demand as these can help to segregate the safe loans from the risky ones.
Given the tough social distancing measures, banks will also upgrade their mobile banking applications and net banking portals and make them more user-friendly with better functionality. There are already popular banking apps witnessing heavy downloads like SBI’s Yono Lite and ICICI bank’s iMobile.
On the lending side, one can also witness paperless innovation because one cannot go for traditional field visits or in-house visits now. Banks like Kotak Mahindra and Bajaj Finserv are already offering paperless loans to a prime section of salaried customers.
The advantage of these methods is that they not only cut down costs but also bring in data for the analytics team to develop enhanced machine learning models that can help with credit scoring, underwriting etc.
Thus in the future various user-friendly interfaces and things like integration on cloud platforms will enhance the credit–lending scenario. Banks will focus more on identifying the lifetime profitability of their existing customers (by way of behavioural analytics using credit bureau data) and this will help in making better interactions to enhance customer loyalty.
[4] Small Ticket loans to Gain Preference
With many job losses and a decrease in customer spending, the demand for large scale loans will mellow down for a period of time. Small ticket loans or nano loans will see an uptake, especially for emergency purposes and to finance immediate financial requirements. The advantage of these types of loans is that they will not have the risk of NPA (non-performing assets), which is a major boon for financial institutions.
[5] The Reason for borrowing will undergo a Shift
As the economic growth (including the people’s disposable income) has been severely hampered post covid, the discretionary spending by individuals has reduced. There will be more need-based borrowing (like for medical emergencies, education, essential personal loans) rather than want or indulgence-based borrowing.
[6] Increase in the popularity of Embedded-Finance post-COVID
Embedded finance (the integration of tech and financial services ) will become more popular as it helps in opening up opportunities in areas that were difficult to be served by the traditional banks and financial institutions. For instance, through UPI, every technology platform like Ola, Amazon, Google or even WhatsApp has a payment service, Khata apps offer cash advances and business loans to its SME (Small and medium enterprises ) and also to MSME (Micro small and medium enterprises) customer base.
To Sum Up
In summary, the future landscape of Loan Management in India seems to be trending towards a more digitally and customer-friendly economy. This is an opportune time for the lending community to re-evaluate their technology and use the data and credit decision tools to enhance their competitiveness.
The after-effects of COVID-19 will reinstate enhanced digital adoption by the credit industry compared to what demonetization forced it to.
A better and holistic end-to-end loan management solution like that of Finezza will greatly enable in digitally managing the lending solution portfolio. Finezza is a leading credit evaluation service provider and offers a comprehensive solution in the loan management system, loan origination and collection delinquency management. It also offers bank statement analysis, credit bureau data analysis, and document analysis services as its verticals. Finezza also offers GST A and ITR A verification framework that help one make safe financial decisions.
Leave a Reply