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Changing Dynamics Of the Lending Industry: Post-Pandemic Overview There is now an increased emphasis on building resilience, improving delivery, and streamlining processes

By Ankush Aggarwal

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More than a year since the pandemic hit our shores, it is now clear that it has dramatically altered the global business environment. Given its scale and impact, some disruptions were inevitable. For the lending industry, it has meant a year of turbulence where the status quo seems to be in a constant state of flux. As we move towards post-pandemic recovery, there is now an increased emphasis on building resilience, improving delivery, and streamlining processes. We have seen the emergence of some new players with a greater acceptance of technology and new methodologies. Fintechs, in particular, have led this transition, rapidly changing the dynamics within the industry. Some of these changing dynamics include:

Taking a conservative approach

Given a turbulent market, it is not surprising that most lenders are currently taking a risk-off or conservative approach. This approach prioritizes the safety of the investment capital over high returns. As a result, it gives preference to customers who have an assured track record, rather than backing riskier investments even if the latter promise high returns. This approach offers an opportunity to underwrite a good quality customer at lower credit costs, even if their current performance may not be up to par. While there may be an initial spike in delinquencies, customers with a long-standing and good credit history are more likely to repay their loans.

Consolidation of services

One of the disruptions caused by fintechs is the consolidation of financial services on one platform. In the lending industry, neobanks started by offering a host of services that would often go across the entire spectrum, combining lending with guidance on investment and insurance products. Consequently, customers are also looking for a one-stop-shop for their financial requirements. This should be seen as an opportunity to gain a larger engagement by cross-selling and upselling to the customer.

Rise in paperless transactions

While paperless transactions have been around for some time, the pandemic assured a greater customer acceptance of these options. Given the concerns around infection prevention, there has been a concentrated effort to introduce touchless services across various industries wherever possible. Digital lenders who offer services with minimal touchpoints provide consumers not just convenience, but also the security of completing their transactions from the safety of their home. With growing digital adoption, we will see more touchless services across the board.

Limited applicability of bureau data

The pandemic has exposed certain limitations in bureau data. Credit bureaus assign credit ratings or scores on the basis of an individual or business' due loans and payments. It has been one of the key deciding factors for lending agencies, whether it is NBFCs or banks. However, credit bureaus have seen a challenging time in their data updation in recent months due to the changing dynamics in lending regulations, particularly in moratorium and restructuring. On the positive side, it has allowed lending organizations to make a more individual assessment of applicants.

Innovation in lending models

Adversary is the mother of innovation. The pandemic has seen growing innovation in lending models, particularly in assessing and utilizing transactional data. This includes using GST for MSME, banking for personal loans, underlying asset values to secure loans, using data from alternate sources, such as apps.

In a recovering economy, these innovations can be critical in ensuring momentum within the industry. We may see further changes, such as flexible EMI structures that can accommodate income fluctuations. Using predictive models to ensure repayments according to the borrower's income schedule not only helps in maintaining a positive outlook, it can also lower delinquencies, thereby improving loan recovery rates.

Focus on ethical practices

One of the unwelcome perceptions often associated with the lending industry is the unethical use of coercion for loan recovery. It can induce fear, leading to a negative association, which can result in the loss of customers. Instead, collections must be driven through customer engagement and education on maintaining good credit behavior.

Preparing for fraud

The flip side of the rise in online transactions is the spike in internet fraud. Reports from around the world suggest a sharp uptick in digital fraud during the COVID outbreak. According to one study, such fraudulent attempts went up by 28.32 per cent in India when comparing the period of March 2019-20 with March 2020-21. Consequently, we can predict more stringent action in ensuring cybersecurity measures.

The pandemic exposed the lacunae within the industry and the urgent need for innovation. This challenge was first taken up by fintechs who led the transition towards a more flexible, open and digitally-adept lending industry. As we prepare for a post-pandemic economy, these changes will influence the flow of funds in the economy, thereby deciding its recovery.

Ankush Aggarwal

Founder, Avail Finance


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