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How India Needs To Redefine Lending Post Covid-19

Digital lenders can play a critical role in the post-Covid ecosystem owing to their capabilities of facilitating seamless, remote on-boarding, minimal paperwork and digital document verification.

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As the world continues to grapple with the global health crisis brought on by Covid-19, we are simultaneously coping with the onslaught of an economic crisis. Global financial markets have come under strain from the ongoing impact of the pandemic. Now, considering the pandemic crisis and its comprehensive impact, the industry needs to outline a new strategic framework while making significant interventions and adjusting to the changing needs of customers, employees, suppliers, while also navigating the financial and operational challenges.

For instance, the BFSI sector in the country, which is already feeling the repercussions, will need to reconsider accounting and reporting requirements while addressing the financial implications which are expected to stay longer than previously anticipated. Over 328 companies have sought moratorium from banks. While on one hand, existing loan portfolios of banks and NBFCs are facing increased stress, the disruptions in the economy on the other hand have led to job losses, salary cuts and furloughs, consequentially affecting cash flows and the sector’s loan servicing capabilities.

Now, as the end of the moratorium period nears and the government prepares lockdown exit strategies, it is critical that banks and financial institutions rethink lending strategies, and look at alternative ways of evaluating credit risk and security packages factoring in the COVID-19 linked disruptions.

Large banks have indicated the likelihood of a spike in their non-performing assets ratio by 1.9% and credit cost ratios by 130 basis point in 2020. Considering an indiscriminate dearth of buyers for stressed assets and fresh loans, critical segments such as the SMEs/MSMEs will be at an even higher risk owing to hassled cash flows, which would eventually lower their loan repayment ability. According to RBI data, credit growth in almost every sector decelerated in March 2020 from a year ago as the economy was put on near standstill with the country going into a nationwide lockdown. Microfinance lenders are hit even harder as their operations are highly field-intensive, requiring home visits and physical collection of cash – activities rendered impossible due to the lockdown. 

In such a dreary scenario, it is imperative for the sector to take cognisance of the importance of consumer centricity.  Weaving purpose, resilience, and adaptability into the lending fabric, one of the main pillars of the economy, is the need of the hour. Banks must focus on systemic collaboration with Fintechs that have the agility to come up with frugal innovations as well as an affinity for last-mile consumers. Several FinTech and digital lending platforms are capable of offering banks access to customer segments that they may not have traditionally lent to. FinTech platforms typically rely on big data analytics, newer technology-based tools, and non-traditional data sets to evaluate credit risk and provide banks with newer low-cost strategies for customer acquisition and on-boarding. 

Therefore collaborations and partnerships should be sought after even more actively, which will help traditional banks gain access to new distribution channels. This is possibly one of the most effective ways to diversify and expand financial services footprint in Tier-II, semi-rural, and rural areas. 

Additionally, the lending industry must look towards sharpening their product portfolio hinged on a robust digital framework. The pandemic has led to an exponential increase in digital services. API integration, automation, cloud computing, and leveraging cloud and pay-per-use models among others can substantially reduce capital investments. Furthermore, adoption of bots to conduct financial processes such as accounts payable, account reconciliation, debt management, and salary processing reduces human dependency while addressing risk mitigation more effectively. 

Digital lenders can play a critical role in the post-Covid ecosystem owing to their capabilities of facilitating seamless, remote on-boarding, minimal paperwork and digital document verification. The Video KYC framework issued by the RBI has allowed financial institutions to onboard customers via a completely non-face-to-face format allowing for a “contactless” experience. This will offer access to a wider customer base, while lowering costs of KYC. Even though eKYC has been withdrawn as a processing method for NBFCs, in a post-COVID-19 world, lowering costs of operations is critical and therefore regulators should evaluate extending the use of eKYC to digital financial services providers and other NBFCs.

Despite the burgeoning popularity of digital delivery of financial products, it is absolutely critical to ensure adequate security measures to ensure data privacy. Digital lenders typically rely on non-conventional models to analyze customer behaviour, evaluate customer eligibility for various financial products, and used web-based or mobile-based applications to onboard customers. There has been an alarming rise in the number of cyber frauds during the pandemic, with miscreants taking advantage of fearful consumers. Therefore creating a secure roadmap for digital transformation, is an urgent need while regulating the access, use, processing, and storage of personal data of individuals. In the meanwhile, organisations must strive to ensure they follow protocol mandated on data protection, reduce cyber delinquencies and forecast strategically, while planning for the future.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Digital lenders BSFI

Ranvir Singh

The author is Co-Founder & MD, Kissht

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