Fin-techs see spike in delinquent accounts after Covid-19 pandemic

With a huge spike in delinquent accounts after the pandemic, fin-techs have seen a sharp deterioration in their portfolios. At 43%, fin-techs had eight times more delinquent accounts than private banks for whom the comparable figure was 5% for August 2020, TransUnion Cibil said in a joint report with the Digital Lenders’ Association of India (DLAI).

There is a need for fin-techs to place greater focus on collections in the light of heightened delinquencies and a riskier customer base, the report said. “Compared to peer members, the huge volumes sourced by fin-techs were largely small-ticket loans and from riskier segments,” the report said.

It added that in contrast, banks have generally been lending to consumers in prime and above risk tiers and those with a relatively stable flow of income, while also leveraging their liability base to acquire personal loans. “At the same time, fin-techs have onboarded consumers with low credit scores and leveraged more alternative data.”

The rise in delinquent accounts calls for a closer look at portfolios and emphasises the need for better collection strategies, the report said. It also observed that the upsurge in delinquent accounts after February 2020 is attributable to accounts flowing to a higher delinquency bucket each month — bloating the 90+ days past due (DPD) bucket. To avoid high non-performing assets (NPAs), fin-techs need to manage delinquent accounts in early collections buckets, the report said.

In the current situation, as the moratorium has ended, more consumers will enter delinquency buckets and make the collection process even more challenging, the report said. Traditional collection strategies work well for banks due to their superior physical reach, larger team sizes, and multitude and size of loans. Fin-tech lenders need a different approach.

“They require policies to implement loan restructuring for consumers based on certain criteria — encouraging consumers to at least partially repay their debts,” the report said.

With credit for demand expected to climb during and after the festive season, partial repayments will help lenders manage their balance sheets. There is a pressing need for a robust and cost-effective collection mechanism to maintain overall profitability, according to the report.