NPAs for the lending industry are like the dark lord, Voldemort – one who must not be named. Made uglier by the recent multi crore defaults in the main line banks that have been much in the news recently. According to the CARE Rating Report of December 2017, India’s NPA ratio is fifth highest in the world, behind only the 4 European economies – Portugal, Italy, Ireland & Greece. And these were the economies which were the worst hit after the Eurozone Debt crisis. The 21 Indian PSUs have a gross bad loans of Rs 7.33 lakh crore (as on December 31, 2017). The importance of controlling the NPAs can hardly be overemphasized.
The good news ironically is that with Rs 80,000 crores in NPA, the MSME segment has a relatively cleaner record than the larger corporations. The contribution of the MSME sector to the NPA is low despite this sector having been the hardest hit by the effects of demonetisation and GST implementation. And yet the organized lenders have greater comfort with the larger corporations. There are 6.4 Crore MSMEs (MSME Annual Report 2017-18) as compared to 32 Lakh large corporations. The Economic Survey 2017-18, shows that large enterprises got 82.6% of the total credit disbursed by Banks, as against 17.4 % to the MSME.
The MSMEs, more specifically the micro enterprises have been ignored by Banks and formal lending institutions because they do not maintain standard documents for their business and their banking and often have no credit histories, making their credit assessment a challenge. Also the small loan requirements demands a low unit cost of servicing, something that formal lenders have not developed their procedures for. This is a vicious cycle, as the lack of formal lending provides no incentive to micro enterprises to improve their business documents and banking records.
The entry of new age fintech lenders in the last decade brought about a transformation of the MSME lending landscape in India. They have come armed with innovative methods to assess the risks of the lending to micro and small scale enterprises. They have started delivering customised credit solutions with shorter turnaround times and offer better customer engagement. And these lenders are managing to address the credit requirements of these underserved albeit credit worthy enterprises without compromising on the health of their portfolio.
How Can Fintech Players Make Lending Immune to NPAs?
Robust data aggregation and underwriting – The Fintech Lenders make use of a variety of data types well beyond what is used by traditional lenders. Use of socio demographic data or behavioural data along with digital extractions of insights from credit bureaus and bank statements gives them advantage in assessing ‘non standard’ customers. The use of machine algorithms and big data analysis complemented by the traditional credit assessment methods, can provide better assessment of the working model and cash flows of the micro enterprises. These alternate data models helps the lender gauge both, the payback ability and intent of the borrowers to honour their obligations. They have thus moved beyond the conventional approaches of risk assessment based on Cibil Scores and financial documentation review and created a holistic approach to risk assessment which has not only deepened credit penetration but also helped the lender maintain a good quality portfolio.
Default Management using Predictive and Psychometric Models – The data–driven analytics led fintech players are also leveraging technology to create predictive models to pre-empt the occurrence of default to maintain the quality of their portfolio. A few of the lenders are also using psychometric analysis, which is typically conducted to pre-screen loan applications. These tools come handy in mitigating the instances of overdues and if the overdue does occur, they often predict the possibility and quantum of likely loss. Such tools can significantly improve the confidence of a lender when lending to first-time borrowers and when screening high-risk segments.
Last mile connect with borrowers – Recognising that relying purely on a distance relationship with the customers might increase the risk of default or even customer attrition, a few of these fintech lenders have also created an optimal network of branches to hand hold the borrowers through the pre and post loan process. Many of the borrowers are first time borrowers and are not aware of the repercussions of defaulting on their repayment obligations and how it adversely impacts their credit histories. Through the branch sales and servicing teams the Fintech Lenders have created multiple customer touchpoints with the borrowers to educate them on the benefits of making timely payments which has reduced the incidence of default and increased customer retention rates.
There is no silver bullet to slay the NPA monster. The good old discipline of consistent and focused efforts on managing the loan book remains the key. The fintech revolution however has brought to the table new weapons that use data based insights and provide early warnings and predictions to help the lenders respond speedily and focus their efforts in effectively dealing with defaults.
– Sanjay Sharma