How COVID-19 is Impacting Alternative Lending in SEA

Many Micro, Small and Medium Enterprises (MSMEs) faced liquidity challenges and business hardships when the COVID-19 pandemic hit. The lockdowns further aggravated the economy, and the pandemic-induced global recession made it nearly impossible for such MSMEs to tide through.

Alternative loan originators took swift action to curb the impact of COVID-19 on their loan books, imposing strict underwriting criteria in Q1 2020. As a result, origination volumes plummeted in Q2 and Q3 of 2020, and the size of outstanding loan books decreased as originators prioritised collection efforts and allowed disbursements to select prime borrowers only. However, originators still saw an increasing number of existing loan books going into arrears, which subsequently affected their Non-Performing Loan (NPL) ratios. These developments led to a liquidity crisis for the weaker digital lenders with lower quality loan books, with several forced to cease operations and exit the industry. Consolidation also became inevitable in an uneven industry as smaller platforms were acquired, as demonstrated in Empatkali and Minterest.

On the other hand, larger originators with strong balance sheets and proactive risk management measures were able to tide through the pandemic successfully, turning the threats posed by COVID-19 into an opportunity to strengthen their leadership positions and improve their internal processes. As they start to scale up disbursements again and expand into new regions and product segments, many observers expect the larger platforms to continue to grow faster than their peers in 2021.

By Q4 2020, established digital lending platforms were extending lifeline loans to MSMEs and promoting consumer spending recovery. Many of these platforms have raised fresh rounds of financing to be extended as debt facilities. One important factor enabling these platforms to raise funds was the investors’ rising appetite for higher returns in a low-yield environment, supported by the credibility of these larger digital lending platforms.

On the brighter side, COVID-19 has accelerated the adoption rates of digital financial services, fostered collaboration among FinTechs and Traditional Financial Institutions, and promoted scalability across multiple channels. For instance, Mastercard and the Asian Development Bank, with partners Finastra, N-Frnds and SGeBIZ, have launched a project to help build a new digital pathway to credit for wholesalers. Through the application of technology, the program aims to help MSMEs digitise trade, making it easier for them to participate in global supply chains. The program will start in Indonesia with 500 retailers and aims to build to 5,000 retailers by the end of Q1 2021.

While further regulation of digital lenders will most likely be forthcoming given the industry’s expected growth projections in SEA, such oversight will serve to weed out bad players and enhance confidence in the quality of loan origination, thus attracting more investment into the alternative lending space.

For the full article, please check out our Heli-pad Blog for more educational content on alternative lending. https://blog.helicap.com/the-growing-role-of-digital-lenders-in-southeast-asia/