Aggressive growth in personal loans leads to increase in fintech defaults: DLAI-CIBIL report


The rapid growth of fintech loans has helped new borrowers access formal credit channels. But loan repayment collections have been poor, leading to an increase in arrears or defaults for these lenders after the pandemic, according to a report by TransUnion CIBIL and the Digital Lenders Association of India.

Although traditional lenders cater to different segments of client risk, FINTECH lenders operate in a poor mode primarily acquiring high risk clients through smartphones. “FinTechs focused on a consumer segment untapped by traditional lenders that facilitated this rapid growth. Their streamlined loan decision process, combined with alternative data and use of the latest analytical techniques, made it possible to achieve faster disbursals, ”the report said. Fintech lenders now account for 50% of new personal loans compared to just 10% two years ago, he says.

“NBFC FinTechs, which make extensive use of technology and digital channels, have been instrumental in facilitating and accelerating lending in India by facilitating and faster access to credit for end consumers,” said said Rajesh Kumar, Managing Director and CEO of TransUnion CIBIL. The report was published at the India 2021 Conclave Digital Lender Association Thursday.

“With the onset of the pandemic and the increase in people migrating to their hometowns, collections have become a stressful and difficult activity. Fintechs need to focus more on collections and create analytics-based models that will help them collect profitably, ”said Anurag Jain, President of DLAI and Founder and CEO of KredX.

Increase in loan initiations by fintechs

While personal loan origination volumes by all lenders increased 150% year over year in 2019, personal loan initiations by fintechs increased 650% over the same period. As of August 2020, around 54% of all personal loans made by fintechs went to the sub-risk customer segment, while in the previous year, around 49% of loans went to this segment. In comparison, banks provided only 19-25% of their personal loans to the lower risk customer segment, while mainstream non-bank financial corporations (NBFCs) provided 38% of personal loans to this segment, the report.

“Banks typically provide loans to consumers at preferential and higher risk levels, and to those with relatively stable income streams, and leverage their liability base to acquire personal loans. At the same time, fintechs have onboarded consumers with low credit scores and more alternative leverage data, ”the report said.

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Higher delinquencies among fintechs

But the structural difference between traditional lenders and fintechs has allowed the former to keep their loan collections intact, while fintechs have experienced higher defaults in the wake of the COVID-19 pandemic, the report says. The report studied the collection practices of 35 fintech lenders and found that on average fintechs have 8 times more delinquent accounts than private banks, for example.

Delinquency rate

  • FinTechs: 43% in August 2020 against 22% in August 2019
  • NBFC: 18% in August 2020 against 9% in August 2019
  • Public sector banks: 3% in August 2020 against 8% in August 2019
  • Private sector banks: 5% in August 2020 against 7% in August 2019

“Onboarding a riskier consumer base translates into a more delinquent portfolio compared to peer lenders. Although the interest rates charged by FinTechs
are comparatively high, the quality of the portfolio has deteriorated over the past year – seeing a huge spike in delinquent accounts after the start of the pandemic, ”the report said. It is important to note that in January 2020 there were 3,185 active personal loan accounts, fintechs started to reduce new loans, which led to a decrease in the total number of active loan accounts from 29% to 2266 in August 2020.

Defaulted loan accounts

  • August 2020: 43% or 968 accounts were in default or overdue for 90 days (DPD)
  • April 2020: 23% or 648 accounts were in default or 90 DPOs
  • January 2020: 11% or 373 accounts were in default or 90 DPOs

“In the current situation, with the end of the moratorium, more consumers will enter the delinquency buckets and make the collection process even more difficult. Traditional collection strategies work well for banks because of their greater physical reach, larger team size, and the multitude and size of loans. FinTech lenders need a different approach. They demand policies to implement consumer loan restructuring based on certain criteria – encouraging consumers to at least partially repay their debts, ”the report said.

Other key results

  • Older borrowers are more likely to repay their loans on time than younger borrowers
  • improvement rate or propensity for a borrower to repay their loan (30 to 59 years DPD) for high value loans (20,000 and over) is similar for medium-value loans (5000 to 10,000)
  • Post-pandemic fintechs have started investing in in-house collection technologies to improve collection efficiency and automate processes
  • Fintechs that pulled off new loans in the early months of the pandemic could reallocate sales and credit resources to help collections
  • Borrowers with multiple direct loans (different products from different lenders) who were not in default showed a better recovery rate compared to borrowers with fewer loans not in default

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