Written by: Madhusudan Ekambaram

The coronavirus pandemic has severely disrupted the global economy, causing a significant downturn. The Indian economy, too, is witnessing a sharp slowdown with far-reaching consequences. The subsequent lockdown extensions in India have brought almost all economic activities, except essential services, to a halt. And like every other sector, the financial sector, especially the NBFCs, too, are reeling from the severe impact of the shutdown.

COVID-19 has presented an unprecedented challenge, especially to digital lenders who disburse small-ticket loans to customers mostly not catered to by the banks. As more and more people face layoffs and pay cuts, and small businesses are adversely impacted by the slowdown, these lenders will struggle to maintain liquidity and asset-liability mismatch. The reasons are manifold.

On the one hand, the digital lenders have to extend the moratorium to their borrowers as per the RBI’s declaration. On the other hand, since, in many cases, the banks have not extended the moratorium to the lenders, they’ll have to pay the banks as well from their cash reserves, failing which they are likely to default. This will result in their downgrade, making it difficult for them to raise further funds. Also, the aberrations in customer payment behavior are likely to increase the delinquency and default rates. This may erode the net worth of these NBFCs, which would again lead to further downgrades.

It’s time for digital lenders to brace themselves and take the necessary measures to prepare for the long-term impact. The lenders must overhaul their strategies and reassess their loan disbursal processes. They must keep in mind that since salary cuts or cash flow problems can hamper the eligibility criteria of borrowers, most of them will need to rethink their underwriting methodologies and employ stricter conditions to assess the creditworthiness of prospective borrowers.

Prospective customers will now need to be evaluated on the basis of new parameters based on their location, current employment status, monthly earnings, the reputation of their employers, and the sectors they are employed in, among others. Even existing customers will undergo strict scrutiny of these parameters along with their loan repayment records.

Lenders must also adopt cutting-edge technology such as big data analytics, artificial intelligence, and machine learning to make a sound judgment about potential customers, especially first-time borrowers like millennials and Gen-Z. Through new-age technologies, they can track a borrower’s digital payment activities such as shopping habits, bill payments, and other online expenses, to determine his/her creditworthiness as well as identify potential credit risks. Since digital lenders often cater to customers, many of whom don’t even have a credit history, these technologies can help with loan assessment and risk mitigation.

In a post-COVID era, debt collection processes will need to be more customer-focused, efficient, easily scalable, and less manpower intensive. Physical collections will give way to more innovative collection methods where game-changing technologies such as robotics and automation will be used at the forefront. Lenders may need to consider offering debtors with easy-to-use and 100 percent secure self-service portals. They should also look at investing in centralised debt management systems to facilitate workflow, quicker decision-making, and customer-centric services, among others.

Disbursement wise, the lenders will need to look at diversifying their portfolio to include loan products like gold loan or securities-backed loan that can provide a better guarantee of payment. Keeping in mind the financial constraints imposed on the borrowers due to partial or total loss in income, the credit lines and loan tenures will also need to be revisited.

The lenders are also expected to provide additional benefits or value-added services to their loyal customers to ensure retention. Last but not least, they must reach out to customers to understand their situation. This will help establish trust and brand loyalty, one interaction at a time, which is critical in these uncertain times.

The definition of ‘business as usual’ has changed. The ongoing economic slump is going to be a tough time for digital lenders in terms of resuming usual business as well as debt collection. The players who ensure survival and business continuity in this period with minimal damages and learn to adapt to the new normal will emerge stronger as potential market leaders over the next few years.

-Madhusudan Ekambaram is CEO, KreditBee. The views expressed are personal

First Published:Jun 12, 2020 3:53 PM IST