Covid financial crisis hits easy loans
This has been, in part, fueled by the proliferation of many online lending platforms. Considering the quick turnaround time of these platforms, combined with the limited amount of paperwork they required, they have become favorites, especially among students and young professionals.
This all seems to be changing since the start of the covid-19 pandemic, with most people being forced to cut back on their discretionary spending. âDigital lending is one of the hardest hit sectors on both the demand and supply side,â said Vivek Belgavi, Partner and Leader, FinTech, PwC India, a consultancy firm.
Would that be a nail in the coffin for easy loans, or will the financial crisis only mean more borrowing in the future?
More cautious borrowers
There was a time when borrowing to finance lifestyle expenses was unthinkable. But over the past decade Indians have borrowed more. Not only has the number of borrowers increased, but the amount of loans has also increased. Millennials in particular tend to finance their lifestyle by taking out short-term loans or using their credit cards. With the advent of easy loans offered by digital lending platforms, this trend has seen a new peak.
Discretionary spending, however, came to a halt for many after the outbreak of the pandemic. As a result, loans have been affected. “Consumer loans will be more affected in the short to medium term, as discretionary spending on electronics, clothing and travel would be affected by wage cuts, job losses and fears of prolonged uncertainty,” Belgavi said. According to Kotak Institutional Equities analysis, as of March 20, 2020, retail credit and unsecured consumer loan applications have fallen 10-29% week-on-week, indicating a strong declining demand, he added.
While demand for loans for discretionary spending has taken a hit, not all loans have. According to Bala Parthasarathy, co-founder and CEO of MoneyTap, an online lending platform, âconsumer durables finance, where people use IMEs to buy the latest smartphone or go on vacation, has seen a sharp drop in Requirement. But other areas such as education and medical emergencies saw a slight increase, âhe said.
Lenders toughen standards
It’s not just borrowers who have become cautious. Lenders have also had to tighten their standards to remain cautious. âIn light of the layoffs and pay cuts, lenders have released statements that non-performing assets (NPAs) may rise and they may become more conservative in lending in the post-covid world. At the same time, the demand for credit continues to grow even as people hesitate to initiate physical contact. So while the business may become more conservative, lenders are increasingly focusing on digital to meet this demand, âsaid Adhil Shetty, CEO of BankBazaar.
Madhusudan Ekambaram, CEO of KreditBee, an instant personal loan app and credit platform, agrees. âOne of the biggest changes to look forward to after covid is the tightening of credit ratings among digital platforms. Many small non-bank financial corporations (NBFCs) would face liquidity problems due to reduced liquidity reserves, which would lead to consolidation in the market. But it’s also a huge opportunity for digital lending platforms, as many consumers would switch from offline to online proposals, âhe said.
Offer an alternative
While the near-term outlook looks bleak, according to Ekambaram, fintech lending apps have provided an alternative to customers that banks have traditionally not lent to, and this trend is expected to continue or even strengthen. âThe opportunity would be much greater right now, as banks would now be even more conservative when it comes to lending, which would open up new opportunities for digital lending platforms,â he said.
In fact, some believe the drastic change brought about by covid-19 will benefit the digital lending industry. âThe entire banking ecosystem and the way customers interact with financial organizations has completely changed as a result of covid-19. In the new normal period, we will see a substantial decline in the conventional banking method, âParthasarathy said.
Digital lending companies, with the right government pressure, could fill the void that will be created as new customer needs and habits evolve in the post-covid era, he added.
The path to follow
So, what in front of us for easy loans?
According to Ekambaram, the macroeconomic slowdown has caused demand to fall, but it will eventually recover. âIn the short term, the generation of loan demand among creditworthy clients would be much less than in the pre-covid era. But in the medium to long term, people should venture out as usual, so we expect demand to return to normal levels. However, it could take six to eight months, âhe said.
But according to Bhavesh Gupta, CEO of Clix Capital, an NBFC, while the global digital lending space may see development, some of the platforms may see their demise.
âSome online lending platforms weren’t NBFCs, they worked with them because they didn’t have digital technologies. The post-covid environment will force some old-school banks and NBFCs to have their own online platforms, as they are now an integral part of lending activities, âGupta said.
While this may not be the end of easy lending and lending platforms, the demand for consumer loans has certainly declined for the time being. With people becoming reluctant to borrow for luxury given the insecurity of income in the wake of the pandemic, as well as the need to tighten standards from lenders, the industry may struggle to regain the footprint it makes. ‘she had established before the covid-19 hit.
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