Authored by Matthew Flannery
The COVID-19 pandemic isn’t over yet but we have hopefully moved beyond its worst phase and with several vaccines faring well in clinical trials, the hopes of the economies bouncing back have become strong.
As a consequence of the coronavirus-induced lockdowns, credit uptake all around the world had witnessed a very lean period but momentum in economic activity has been recorded in the past few months. In fact, a recent market analysis suggests that credit lending is nearing 80 percent of its pre-COVID-19 level.
This good turn-around has been catapulted by safe and instant access to credit through digital KYC. Not just the urban centres but the non-metros too have reported a healthy spike in contactless credit uptake.
Lockdown and its effect on Delinquency
“Even World War I and II did not affect as many countries as coronavirus has done. All are currently not well, but for it to be well we need to fight together” — Prime Minister Narendra Modi, March 19, 2020
India — like many Asian countries — took the strongest action during the lockdown. On March 24, the PM ordered all people to stay inside except when conducting essential activities. The lockdown was enforced by police blocking traffic interviewing people about their activities. The penalty for lockdown violation included imprisonment.
Business stopped. To compound the situation, the central bank issued a moratorium on lenders reporting defaults. The results were extreme. Borrowers across the country stopped repaying immediately. Everywhere we saw a near immediate spike in delinquency. This is a delinquency chart below for Branch Personal Finance App. It essentially measures the amount of principal that is late for loans that are outstanding at a given time.
The positive is that the worst is over and the rates of delinquency have come back to the pre-COVID rates.
Digital Platforms and Credit Lending
A defining trend in the credit lending process in the post-pandemic era will be its completely digital journey. The Government of India has also made many interventions in recent times to encourage banks, NBFCs, and FinTechs towards providing digital loans. The focus of the future will be on quick processing of loan applications and making the process seamless for consumers.
As people have become habitual of doing a number of activities on digital platforms, they would prefer the same in the post Covid-19 era as well. Also, health and hygiene have now become one of the most significant concerns of people and thus, not many people will like standing in queues and visiting lenders again and again to complete a number of formalities for securing a loan. Therefore, digital platforms that are engaged in lending activities will be of huge prominence in the post COVID-19 era as well.
Banks and Lending activities
Most of the banks already had their banking apps which offered services like balance check, transfer facilities, PIN Generation but during the pandemic, the banks have updated their digital platforms and are now offering loan facilities via apps as well. This has not only reduced their labour but also has made things easier for the customers.
In the coming times, the banks providing services like user-friendly interface and cloud integration will take up the lion's share of the credit-lending market. Those units which have not changed their traditional way of banking may have to undergo a complete transformation to deliver on the expectations of the consumers.
Everything being online, digital platforms have been chosen for the procurement of loans. Digital tools like artificial intelligence and analytics will not only help lenders monitor their prospects but also provide competitive benefits to present-day lenders.
Even the process to review a loan application will heavily rely upon data analytics and machine learning technologies.
Small loans to take the front seat
With job losses across all sectors and entrepreneurial spirit in the chain, the demand for big size loans will probably remain diffused for some time.
However, the youths, especially the new recruits, and the MSMEs are expected to drive the credit market. Their loan demand would be small but the recovery would hardly ever be an issue for the banks. People with no credit history will secure loans for immediate requirements.
The trend of nano loans (from Rs 500 to Rs 50,000) may also see an uptick in the coming times. So, the onus will be upon the banks and the NBFCs to ensure that their loan supplication is processed smoothly and they are provided with the amount in the shortest time possible. It is worth mentioning that these small loans will not come with risks of NPAs, a major positive for financial institutions.
In contrast to conventional credit channels, the digitally empowered financial institutions depend less on credit history details, bank statements, tax returns, and physical engagement with customers. The new-age banks create a digital ecosystem to make the loan disbursal process quick, seamless, and risk-free.
Thus, credit lending will soon become completely digital and the institutions which miss the bus will miss their market share.
Matthew Flannery is CEO and Co-Founder at Branch International Personal Finance App. Views are personal