Fintechs have done a better job of addressing the credit gap in the country than their private peers, by lending more to under-served and new-to-credit (NTC) customers. However, these entities face higher risk build-up in their portfolios and are prone to higher delinquencies.
“Digital lending has grown rapidly in recent years, but some post-lending procedures that require physical effort, such as collection, have not matured that rapidly. Due to this, fintech sees an increased delinquency rate and lower roll-back,” according to a report titled ‘Fintech-led Digital Lending: Coming of Age’ by credit bureau Experian and industry body Digital Lenders’ Association of India (DLAI).
Fintech sourcing from sub-prime customers, or those with a bureau score of less than 700, continues to be higher at 26 per cent, compared with 19 per cent for the rest of the industry. Forty per cent of these sourced customers have moved to the prime or super prime categories, but the majority remain sub-prime.
NTC customers comprised 36 per cent of fintechs’ portfolio, higher than 24 per cent for NBFCs and 22 per cent for banks. Fintech and fintech-enabled companies held 47 per cent market share in the less than Rs 1 lakh unsecured personal loans sourced as at the end of FY23, up from 13 per cent in FY18.
An analysis of personal loans sourced between FY19 and FY23 indicates that the book built by fintechs have higher levels of stress and “deep delinquency risk”. Expected Credit Loss (ECL) is estimated to be around 2 per cent higher than that with private counterparts. Further, they face challenges in collection due to their limited physical presence.
As a result, fintecs face a tough job in maintaining margins given the increased share of high-risk borrower segments. While risk-based pricing and higher loan rates address some of these issues, fintechs need to identify new revenue streams to offset their higher funding cost, such as collaborating with lenders on non-compete products, the report said.
Even so, fintechs’ popularity is only increasing, with nearly 27 per cent of the subsequent loans disbursed going to the same fintech lender and 34 per cent to a different lender, but staying within the fintech ecosystem. For 29 per cent of BNPL transactions, the sanction amount was over Rs 20,000, reflecting high-value purchases.
However, the segments fintechs cater to have high incidence of application fraud, with the highest rate for the less than Rs 50,000 segment is at 5.82 per cent. Millennials, who account for the bulk of customers, had an application fraud rate of 2.27 per cent, whereas post-graduate customers had a rate of 3.06 per cent, the report showed.
Going forward, fintechs will need to invest in fraud mitigation services, and expand into asset-backed or secured product segments. For this, digitisation of land records and properties, field verification of borrower authenticity, and collection digitisation are areas that need investment.
Currently, new age fintechs are largely focused on personal loans of below Rs 50,000, including Buy Now Pay Later (BNPL), supply chain finance, and business loan sanctions of less than Rs 5 lakh.