Digital lenders are strengthening their loan underwriting processes in order to manage their delinquency risk. Currently, they are working on improving their customer assessment standards and utilising more data technology to make better lending decisions, said industry players.
“We are focusing on underwriting. In the digital world, there is a lot of new-age examples of fraud like identity theft and others, which cause loan losses. So we try to eliminate fraud, we try to evaluate customers on the intent to repay and ability to repay. We have tried to minimise riskier loans on the front-end. Once you have strong fraud management and fraud mitigation practices, it helps the quality of loan book in the digital lending world,” says Anil Pinapala, founder and chief executive officer, Vivifi India Finance.
“Secondly, we are focusing on consumer education. A lot of these consumers are getting formal credit for the first time. They need to be constantly told when is the payment due, how much is due, how do you want to pay and create an environment where they completely know their obligation and cost of not paying. We also make sure that the customer has a digital footprint. We have also focused on loan size and ticket size management as a way to manage risk. Our ticket size has dropped by 25-30% on an average,” he added.
Typically, delinquencies in the digital lending industry surpass 10-12% and are much higher than those of traditional lenders.
In a recent report, credit rating agency Experian highlighted that while digital lending has grown at a rapid pace in recent years, post-collection processes have not evolved as much. Due to this, customers of digital lenders have a lower roll-back across collection buckets than traditional lenders. These lenders also have lower collection efficiency rate than traditional ones.
In such a scenario, digital lenders, who have prioritised risk management over growing their disbursements, have fared better on the asset quality.
“We have been able risk-rank our customer base in a much more efficient manner than peers. Our customers tend to repeat with us. A continuing customer’s delinquency is three times lower than a first time origin customer. This is the primary reason why we have done a good job,” Akshay Mehrotra, co-founder and chief executive officer, Fibe, said.
“Also, we have a clear focus on a particular category. Today, average customer of ours earns Rs 40,000, borrows Rs 40,000 and has an average tenure of 3-6 months. Because of that singular focus, our average equated monthly instalment is Rs 7,000. It is efficient to collect Rs 7,000. The minute you start giving 10,000 rupees to people on a 12-month EMI, it is impossible to collect. Efficiencies just fall apart. You are able to do good business on the basis of how you design your product and customer segment,” he added.
Lenders like Niro and KreditBee are looking to move to a “phygital” model from a “purely” digital one in order to cater to and underwrite for a larger customer base.
“Niro’s strategy was phygital from the start – a combination of ‘soft collections’ (digital, tele calling) which is managed in house, and ‘hard collections’ which is managed by a pan-India network of agencies that have “boots on the ground” in over 14,000 pin codes that we service,” Aditya Kumar, co-founder and chief executive officer, Niro, said.
“Any perceived rise in operating costs can be directly and wholly offset by reduction in delinquencies and an improvement in penal interest and charges from customers. Additionally, reduced delinquencies and better portfolio quality will enable access to lower cost of funds which results in a direct improvement in customer quality and resultant margins.”