Is Liquidity Crisis Hampering Digital Lending Industry's Prospective Growth?

According to the Bloomberg Data, earlier this year in August, liquidity in the banking sector was INR 20,200 crore, which by the end the October, tumbled down to 1.16 trillion.

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Digital lending is one of the most promising industries in India, which is catering to the demands of the unbanked SMEs and consumers segment. Yet, the upcoming segment is not immune to the much talked about the liquidity crisis that impaired the NBFC sector and hampered overall lending in the country.

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According to the Bloomberg Data, earlier this year in August, liquidity in the banking sector was INR 20,200 crore, which by the end the October tumbled down to INR 1.16 trillion. And since then, the NBFC sector is facing the brunt as the liquidity in the country is tighten.

The crisis is a result of INR 91,000 crore debt-ridden Infrastructure Leasing and Financial Services Ltd (IL&FS) have failed to service its dues and have also defaulted on multiple occasion since last the July.

Soumen Chatterjee, Director- Research, Guiness Securities says, "Our system faced the liquidity squeeze that got triggered with the crisis in the financial services sector evolving around debt-laden IL&FS came out."

The Impact on Digital Lending

According to Statista, alternative lenders have disbursed loans worth USD249 million in 2018. While on the other side, as per Boston Consulting Group, digital lending will become USD 1 trillion opportunity in India over the next five year. Having said that, the industry's growth is now hampered and all thanks to the liquidity crisis in India!

Alok Mittal, CEO, Indifi says the liquidity crunch affects all NBFC and digital lenders in the market, even though many of them may not have the specific asset-liability mismatch issues that triggered the crisis.

"Digital lenders are equally affected by it, to the extent that they operate in the NBFC model. Marketplace lenders working through banks are less affected by this liquidity crunch," added Mittal, who is also the part of the management committee of Digital Lender Association of India.

He also opines that there is a sharp focus from within government and RBI to find solutions to this crisis, by unlocking liquidity in the market.

"The expectation is that such measures will help provide a glide path in managing the Asset Liability Management issue, but more importantly restore confidence in the market and hence mitigate the current level of uncertainty. This should help both digital lenders, as well as other NBFCs, resume their growth plans," he added.

Litmus Test for Digital Lenders

But this crisis has also turned out to prove to be a litmus test for the various digital lender.

As a majority of the digital lenders derive a large part of their credit lines from the NBFCs, Amit Sachdev, CEO, Co-Founder, CoinTribe says this crisis is distinguishing the digital lenders with fundamentally strong business models from the crowd.

"While quite a few of the digital lenders have had to stop disbursements in the absence of lack of credit lines, the stronger ones with demonstrated core capabilities and credit quality performance continue to grow with possibly additional credit lines being available in even current," he said while adding that, "As business models and loan portfolios of various lenders season, this differentiation as seen from lens of NPAs and operating metrics will become even more stark."