Fintechs need to focus on curtailing losses, new growth areas

Fintechs have seen exponential growth in personal and business loan segments, but are now seeing some stress, especially in more recent sourcing. This warrants a need to control aggression in new sourcing, according to an Experian whitepaper released in collaboration with the Digital Lenders’ Association of India (DLAI).

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“The current focus of fintech lending is largely focussed on small ticket segments. There are some signs of stress in the portfolio and hence active monitoring is required,” said Manish Jain, Country MD, Experian India, adding that focus needs to be on curtailing losses and maintaining asset quality.

Fintech lending for personal loans under ₹1 lakh has grown at a CAGR of 75 per cent across FY18 to FY23, whereas fintech-enabled lending rose at a CAGR of 101 per cent. Both these lender categories have almost doubled their original market of 2018.

The major reason for deterioration in asset quality is the performance of under ₹35,000-₹50,000 ticket size loans where 90+ day delinquencies for fintechs lag those of other lender categories. While the business loans portfolio has superior asset quality compared with personal loans, here too, new sourcing is not in sync with other lending segments in terms of early asset performance, the paper said.

Further, collection performance of fintechs lags the rest of the industry as collections need on-ground interventions or a strong collection workforce, an area where fintechs haven’t invested so far and need to build capacity.

“Fintechs need to work on unit economies e.g., syndicate approach to get desired RoI on collection investment,” the paper said, adding that collections are a ‘high touch’ function, especially in deep delinquency buckets.

For personal loans, the 90+ day delinquency rate for fintechs was 87.08 per cent as of September 2023 compared with 74.83 per cent for the rest of the industry. For business loans, the delinquency rate for fintechs was 95.46 per cent, significantly higher than 68.17 per cent for other lenders. Further, recovery is subdued for NPA accounts and is expected to remain in single digits even after a long recovery period.

Add to that, private lenders, through their investment in technology, have leaned closer to a ‘fintech model’ thereby reducing differentiation benefit to fintechs, Jain said. This implies that fintech lending is at a “crossroads” and lenders need to identify new ‘blue oceans’ of growth and new revenue streams and partnerships to help build a sustainable business model, he added.

“Expected Credit Loss (ECL) for fintechs was around 2 per cent higher compared to their private counterpart. Fintechs offset this by positioning their products at a higher interest rate.

However, fintechs have higher cost of fund and need new revenue lines to maintain margin,” the paper said, adding that future growth will be driven by co-lending models and their ability to enhance customer experience during the acquisition journey.

Currently, about 75 per cent of fintech lending is in the below ₹10,000 segment, 21 per cent is between ₹10,000 and ₹50,000 and 2 per cent is for loans of ₹50,000 to ₹1 lakh. For fintech-enabled lending, 57 per cent loans were under ₹10,000, another 40 per cent were between ₹10,000-50,000 and 4 per cent in the under ₹1 lakh bucket.

This indicates fintechs’ dominance in the under ₹1 lakh loan category, which accounted for 85 per cent of the loans disbursed in FY23. Within this segment, fintechs had a market share of 77 per cent in terms of volume of loans and 51 per cent in terms of quantum of loans as of September 2023. Fintech-enabled lending comprised for 11 per cent of the volumes and 12 per cent of the amount of loans disbursed.

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