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.

Post the Covid-19 pandemic, there was a spurt in demand for small-value loans to fulfill aspirational consumption in the middle and lower segment of borrowers. This paved way for rampant disbursals of about Rs 25,000-50,000 for a short period of time, and mostly without any collateral.

In effect, such borrowers ended up with five or six simultaneous small value loans, which exceeded their repayment capacity.

Unlike banks and NBFCs, fintech platforms did not have a risk control unit to check the borrowers' creditworthiness before, or even after giving the loan amount, Aalesh Avlani, director and co-founder of Credit Wise Capital told NDTV Profit. A risk control unit would mean higher costs, and more time, which in turn could hamper the instant loans feature for fintech lenders.

To ensure sustainability, fintech players have begun reviewing their business models and have started migrating towards traditional underwriting models, Sidharth Vishwanathan, chief risk officer of KreditBee said.

"In lending, if you're burning (cash), you're doing something wrong," Avlani, who has worked with 70-odd fintech players, explained. "That itself was a core way of thinking which fintechs needed to adapt to much earlier. The failure to do so has caused them so much panic and impacted the entire industry."

Lenders have access to all sorts of data available on digital stack and account aggregator framework, including thousands of variables such as device data, telecommunications data, PAN card details, bank statements, income growth. Credit bureaus also offer score card models based on behavioural data related to spending patterns, repayment history and more.

The idea is to stitch up the relevant variables into several statistical models, privy to each lender, and use for decision-making when disbursing loans, according to Vishwanathan of KreditBee.

Tackling Overleveraging In The System

Overleveraging is when an individual has too much debt compared to the ability to repay or manage that debt. At the time of applying a loan, every lender assesses borrower's leverage through fix obligation income ratio, or FOIR.

Here's an example to show how this would work in the real world:

• Monthly income: Rs 20,000

• Loan amount sought: Rs 1 lakh

• Interest levied: 9%

• Tenure: 12 months

• Monthly installment: Rs 9,000

• FOIR: Rs 5,000

In this case, the lender through its credit risk analysis model would advise the borrower to extend the period of the loan. The lender would then scour for other obligations that the borrower has with other platforms through account aggregator system. If the debt obligation exceeds 25% FOIR, on an aggregate basis, the loan application is rejected.

FOIR differs for every lender depending on risk-taking ability, the kind of borrowers lender wants to offer loans to, creditworthiness of the borrower, and so on. For banks, the FOIR is low and for fintech platforms, the FOIR goes as high as 50%.

Banks Fine-Tune Their Credit Risk Analysis

In principle, fine-tuning of credit underwriting models is an evolving process depending on several factors. Most lenders scaled back on unsecured lending since August when the RBI Governor Shaktikanta Das cautioned banks and NBFCs against stellar growth in the segment, according to people that NDTV Profit spoke to.

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."