Rising delinquencies, aggressive lending put retail credit at risk

The stress in parts of retail lending is leading to business opportunities for those associated with the ecosystem

“Despite housing being a potentially appreciating asset, delinquencies are inching up in certain pockets. Lenders are targeting the informal self-employed segment where delinquencies are higher,” says Mahesh Misra, leading you into a relatively little-known irritant which has the potential to balloon. The managing director (MD) and chief executive officer (CEO) of Indian Mortgage Guarantee Company – the country’s sole mortgage guarantee firm – identifies a key pain point: The reluctance to up the loan-to-value to more than 80 per cent even where permissible. It leads to customers sourcing personal loans to bring in their contribution to purchase a home (or furnish it), pushing costs higher. And if this happens to be in affordable housing segment, you are on the road to delinquencies. IMGC plans to offer credit scoring for home loans.

 

And if you thought know-your-customer (KYC) protocols for those with “thin-files” (poor or little by way of credit histories) can be a delinquency-arrester, think again. According to Joydip Gupta, head (Asia Pacific) at Scienaptic – a provider of AI-powered credit solutions – unlike their urban counterparts, customers in rural areas may lack conventional identity documents such as passports, PAN cards, or drivers’ licenses. “While Aadhaar has been a significant enabler for digital KYC, issues arise when biometrics don’t register correctly, or discrepancies exist in records.” Lenders are now examining fresh ways to tighten KYC. You may soon see biometric-based portable KYC kits: Equipped with fingerprint scanners and iris-recognition technology, these allow in-person biometric verification in areas with limited digital connectivity. The likes of Scientaptic or IDfy will be more in demand for their services; the latter – an integrated identity verification company – recently raised $27 million in funding from Elev8 Venture Partners, KB Investment, and Tenacity Ventures. 

 

Open for business

 

The move by the Reserve Bank of India (RBI) to take away the punchbowl by hiking risk weighting and calling attention to usurious lending rates is opening up business opportunities for associated entities in retail credit. These range from those who help with KYC solutions, debt settlement platforms, digital debt collectors and asset reconstruction companies (ARCs). That is, right from on-boarding customers to resolution of delinquencies – be at the individual or portfolio level.

 

Let’s situate retail credit as it stands. For well over a decade, retail has been the go-to segment given the stress in corporate lending. Most top banks today have a nearly 50:50 split between retail and corporate loans on their books (a few have a tilt in excess of 50 towards retail). Lenders are pushing retail credit given the higher spreads on offer. This is contested though. “I don’t think legacy players are pushing credit over-aggressively. We work with some of them and have not seen such a trend,” says Raj Khosla, founder and managing director, MoneyMantra.com – one of the largest direct sales agents and marketplaces. But he concedes that even as the mature players, having seen four to five cycles in retail lending, are well aware of the dangers involved in the business, “it could be that some of the fintechs are playing it aggressively, fuelled by private equity.”

 

According to CRISIL Ratings, personal loans have also seen  deterioration in asset quality. While gross non-performing assets (GNPAs) had been declining since FY21, they increased as of FY24 due to declining collections. “Moreover, in the softer time buckets (30- and 60-days past due or the time passed since servicing of loans) – delinquencies have been rising since the first half of last fiscal, indicating borrower stress from increasing leverage, higher inflation, and loan pricing hikes. Owing to the increasing concerns on asset quality, credit growth momentum for unsecured loans is expected to moderate across banks and non-banks,” says Aniket Dani, director - research, CRISIL Market Intelligence & Analytics.

 

A report by Mckinsey (May 21, 2020) pointed to the strategic and operational reasons to modernise customer assistance which can lead to significant bottom-line value. 

 

Take FREED, a debt resolution platform. Ritesh Srivastava, founder and CEO, bemoans the lack of consumer advocacy body despite the boom in retail loans. “It can offer guidance, mediate disputes and promote awareness about responsible borrowing which will ultimately foster a balanced approach between lenders and borrowers and help individuals find fair, sustainable solutions to their debt challenges.” For now, FREED is very much in business: In March, it raised $7.5 million.  

 

Regulatory review

 

The RBI has been proactive. During 2023-25, the Consumer Education and Protection Department is to review, consolidate and update regulatory guidelines on customer service; review internal ombudsman schemes applicable to different regulatory entities and establish RBI contact centres at two more locations for local languages, including disaster recovery and business continuity facility. Measures such as debt moratoria, communications and tailored messaging have become basic requirements in many markets. 

 

One way is digital collections: it is not intrusive, helps cut down huge costs like when sending recovery agents to check out on you. A single field visit costs anywhere between Rs 250 to Rs 500, but there’s no surety it will lead to settlement even after a few tries. “A big issue is that data is incorrect. The Aadhar card details are wrong in 30 per cent of the cases where customers are not reachable. I feel the entire KYC process has to be fine-tuned for collections to improve, be it digital or physical,” says Rishabh Goel, co-founder and CEO, Credgenics.

 

“Digital is not only a modern necessity, but also the most efficient way for banks to scale their collections without inflating costs. By letting specialised partners like us handle collections digitally, banks can focus on growth, confident that collections are being managed effectively and efficiently,” says Nitin Purswani, co-founder and CEO, Medius. But then, this route too is not cheap as it calls for investments in technology; and there are strict RBI norms on how lenders employ outsourcing firms, whichever be the business vertical they are engaged in.