Kung Flu Fighting: Lenders stare at a fight between NPAs and NPS
What does the latest economic data tell us about the lending battlefield?
Thing with numbers is - they will tell the story you want. But to get the big picture right, these numbers need to be grounded in context.
India is set to record a world-beating economic growth of 9.2% in FY22, despite hitting a four-month low employment rate, a stickier-than-ever inflation and a decade-long muted private investment. And these numbers have not factored in the recent curbs that will limit both mobility and economic activity to stem the ongoing COVID-19 spread. What’s stoking this growth, then? First, a low-growth base owing to a massive economic contraction in the first year of the pandemic that makes this year seem like a stellar rebound. And second, there are hopes a resurgent household spending, which had been forced to stay retrenched for over two years now, will carry us through. As a fillip, the Reserve Bank of India (RBI) has kept borrowing costs at a record low throughout the pandemic - to help small businesses and households stay afloat and to keep the economic wheels turning. As per RBI, the number of loan accounts with scheduled commercial banks increased by 9.5% during 2020-21 to 29.8 crore in March 2021; the household sector accounted for 96.6% of these accounts and held 53.7% of the outstanding credit amount. This while, industrial loan growth, which has been decelerating during the last decade, turned negative for the first time during 2020-21.
Banks warmed up to retail loans and digital lending gathered steam, riding on the allure of instant loans to one billion credit-invisible Indians. Only that’s turned out to be a can of worms. Last year, the RBI deemed close to half the digital lending apps in India as illegal - for beguiling credit-illiterate Indians into paying interest as high as 500%. This came after a slew of complaints around predatory collection policies, from blackmailing to abetting suicides and everything in between. Banks turned to personal loans to diversify loan portfolios, in a bid to offset the slowing growth on the business loans side. But, with no real improvement in income or employment conditions for most Indians and a very real inflation threat looming, these personal loans could soon become unserviceable, skewing the already-skewed loan books with NPAs.
Graphic sourced from Bloomberg
Balancing economic risk-taking with financial risk-taking
Prolonged periods of low interest rates tend to follow economic crises. That’s how governments and central banks seek to induce economic activity - by keeping the system flush with low-cost capital and making borrowing seem attractive. The flip side is - inflation goes up, since everyone has access to more money than they couldn’t normally afford.
And just when central banks decide to rein in interest rates, easy money is no longer easy, demand drops and the economy tanks. It’s for a reason they say that most recessions are caused by central banks.
So kicks in a vicious cycle that keeps inflation high, and economic activity dependent on low borrowing costs. It’s a thin line to tread - balancing economic risk-taking (keeping interest rates low despite visible inflationary pressures: especially from the supply side) and financial risk-taking (indiscriminate lending in hopes for boosting GDP growth).
But here’s how banks can keep a check on financial stability while meeting credit demand in the retail loan segment:
Be comprehensive: Banks need to posit new personal loans against a wider backdrop of economic and sectoral factors, going further beyond the currently used personal indicators such as monthly income or pledgeable collaterals. For instance, lenders should ideally prioritize borrowers who have linked their salary account with loan repayment account for greater transparency.
Segment borrowers, consolidate branches: Borrower segmentation based on credit scores is archaic, to say the least. Banks need to move beyond credit scores while assessing creditworthiness and bring into purview aspects such as geographical spread, industries or even market-linked parameters. Consolidating intra-bank data across branches can also help meet bank-level targets on NPAs and portfolio mix, which are typically executed in silos across branches.
Real-time monitoring, all the time: If banks have to offset corporate loan NPAs with a growth in retail portfolio, they have to institute measures to report and monitor changes in borrower behaviour, in near-real time bases. By supplementing financial analysis with behavioural trends, lenders can better assess risks to collections and take preemptive steps before a default happens.
A new world order
While lenders seek to monetize excess liquidity on their hands, a rethink around the lending lifecycle is in order. While it is tempting to incentivize existing borrowers to take on more loans, the smarter lenders are using this liquidity cushion to instead explore newer, more promising borrower pools.
For instance, borrower pools are unserved because they haven’t been formally included in the credit ecosystems. However, with the right underwriting prowess and optimization of policy engines, lenders can build expertise in alternative and combined credit assessment models and thereby begin servicing an entirely new class of borrowers.
These borrowers may or may not be big-ticket but certainly offer a glimmer of hope of not just loan book growth but a more sustainable and cycle-resilient lending regime.
Agricultural credit, merchant credit, cash flow based lending, agri-vehicle financing, e-mobility finance and credit solutions for commute - these are just some of the vistas digital enterprises, FinTechs and lenders are exploring with FinBox. We are assessing one million new-to-credit borrowers every month. Our digital credit infrastructure is enabling dozens of companies and lenders to deliver digital credit across the country, effortlessly.
While we continue to build sustainable and viable lending models across risk, technology, onboarding and collections, here’s hoping that indiscriminate unsecured lending doesn’t become the very monster akin to the informal moneylenders, sharks and debt traps that it seeks to defeat.
Ultimately, it boils down to this: The chase after the magic NPA number shouldn’t leave the NPS behind.