Unsecured Lenders Learn A Key Lesson: Burn-And-Churn Is A No-No

For the last two years, borrowers had a gala time availing unsecured loans, one after another through digital apps without any hassle, leading to overleverage. Now, the party seems to be over for these borrowers, according to 10 people working across banks, non-banks, fintechs and data analytics.

To combat overleveraging, banks have elevated their credit criteria in terms of the size of loans disbursed, depending upon several variables put together into a model to assess creditworthiness, according to one of the two bankers who spoke on the condition of anonymity.

For example, if the minimum credit score for loan eligibility was 700, it has been upped to 720. If a borrower has delayed payment of credit card EMI by over 60 days, even once in 12 months, the loan application will be rejected.

Banks are also recaliberating their co-lending arrangements with fintech platforms based on the latter's business model and underwriting standards.

It makes business tough for fintech companies who were exceedingly reliant on co-lending partnerships with banks and NBFCs.

Fintech companies are left with no other option than to strengthen their underwriting models, which would in turn, make short-term unsecured loans difficult to avail.

"The key thresholds have been strengthened... certain entities are looking at it from risk-based approach point of view," KreditBee's Vishwanathan said.

RBI defines risk-based approach as risk identification, prioritising audit areas and decisioning based on the extent of risk build-up.

Fintechs Scramble For Growth

Kreditbee is focused on offering longer tenure loans for salaried borrowers to ensure sustainable business growth, while ensuring a optimal credit risk, Vishwanathan said.

"We are aligned towards building-the-book model instead of the churn-and-burn model," Vishwanathan said. "It makes logical sense to be conservative, and essentially the choice of data sources, the authoritativeness of each of the data sources also bringing up utility across on the business model."

Some fintech platforms are exploring other avenues for lending to micro, small and medium enterprises, and loans against property.

One of Kreditbee's key products for salaried borrowers has a ticket size of Rs 70,000, which accounts for more than 50% of the total disbursements. For micro enterprise segment, KreditBee offers both secured and unsecured loans of up to Rs 25 lakh.

"I think the industry is kind of getting broken or teared into different business models...mono-line business models from the fintech point of view may not make sense in the future," Vishwanathan said.

Similarly, for Kissht, stricter underwriting process resulted in the lender rejecting 6-7% of its customers, Ranvir Singh, founder and chief executive officer told NDTV Profit. In some cases, where the risk was higher, the company reduced its exposure. While this was a "conscious call," at an overall portfolio level, Singh said, the business volumes came down by 15%.

"Whatever was our natural growth rate, we decided an year back to reject customers where overleverage was building up," Singh said. "This was done to ensure the company remains very strong from a risk management standpoint."

Beyond unsecured loans, Kissht is also looking to enter into other products such as loans against property, he said.

The rejig in lenders' risk analysis is likely to stifle credit availability for new-to-credit borrowers, wherein the lenders have limited data sets and higher expectation of risk, according to Vinay Narkar, financial advisory partner at KPMG.

Unsecured loans to first-time borrowers was pinned upon the idea that small-ticket loans would create behavioural data for them, and help them avail secured large ticket size loans, he said.

"That may get impacted, because no one directly gives them a secured loan at a competitive interest rate," Narkar said. "If I had to give a secured loan to a new credit customer where I don't know his behavior, then I will give it at a high interest rate."