Faced with challenges in recovering money from defaulting small ticket retail borrowers, digital or fintech lenders are reducing their exposure to new-to-credit (NTC) customers and relying more on higher credit score segments to boost profitability.

A recent report by TransUnion CIBIL showed that while the volume of loans to NTC customers has increased in line with the expansion of the portfolio, the share of NTC loan originations has fallen significantly to 13 per cent in FY23 from 29 per cent in FY19.

“Pre-Covid, banks may have been hesitant to lend to NTC customers, as data and analytics was not as evolved as it is today. Fintechs with better ability to use data analytics and superior user experience took the plunge, which got a further fillip during the Covid period. But the critical element in unsecured lending is collection,” said Virat Diwanji, Group President and Head – Consumer Banking, Kotak Mahindra Bank, adding that in small ticket loans it does not always make economic sense to run after small EMI tickets. 

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“If the proportion of such low ticket unsecured lending  is high, and your ability to collect is low, portfolio performance will always be a challenge,” he added, saying that Kotak’s unsecured portfolio has been performing well due to well-defined guardrails around the share of unsecured lending as a percentage of overall incremental lending, and the share of NTC customers.

The 90-day plus delinquency rate for fintechs was the highest in the under-25-year age segment at 5 per cent, followed by 3 per cent for the 26-35-year segment, according to the TransUnion report, based on insights by NPCI and FCC.

Also read: Digital lending disbursement volume up 31%, crosses 2.2 crore loans in Q1 FY24: Report

Delinquencies for borrowers in the 36-45-year age bracket were 2 per cent, and for those over 45 years at 1 per cent as of March 2023. The delinquency rate for urban and rural areas was higher at 3 per cent each, whereas for the metro and semi-urban areas it was 2 per cent.

Fintechs’ default rate was highest in the personal loan segment at 3.2 per cent, compared with 0.9 per cent for other lenders. For consumer loans, the rate was 2.8 per cent, also higher than 1.4 per cent for other lenders. 

“Lenders like Bajaj Finance and banks, and you can see it in their results, are way ahead because they’ve learned how to collect money over 40-50 years. These skills cannot be built overnight. Some companies are trying because a lot of PE/VC money is flowing into this space, but it is difficult,” said Ramesh Narasimhan, CEO, Worldline India.

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Loan originations of ‘Prime Consumers’ in fintech loans has increased over two-fold, with 18 per cent prime customers borrowing from a digital lender in FY23, compared with 3 per cent in FY19.

“Now fintechs, having garnered enough data from their earlier lending experience, are trying to get better credit quality customers so that the overall portfolio performance looks much better,” Diwanji said.

The share of ‘prime plus’ customers with a higher credit score increased to 9 per cent and of ‘super prime’ customers to 6 per cent from 1 per cent each in FY19.

Narasimhan added that a lot of NBFCs are now focussing on profitability because the industry has “seen some spectacular failures -- figures like over 20 per cent NPAs and companies being shut down overnight”. “That ability to burn somebody else’s money is slowly coming down and will continue through this year,” he said.

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