Indian Consumer Lending in 2021

Regardless of industry, 2020 has been a tumultuous year for all of us. I’m sure nearly all the predictions that were written at the end of last year would’ve gone for a toss the moment that odd shaped virus came into our collective consciousness. The dispersion of the size of the impact was immense; some businesses received an unprecedented boost, while for others it was terminal.

Lending, being highly correlated with overall health of the economy, had a front row seat of the crisis. As unemployment soared and the Indian economy fell into a recession for the first time in 40 years, lenders’ balance sheets were hit hard. The moratorium provided a temporary reprieve, and with some signs of a recovery, not to mention the vaccine now present, there is some room for optimism when looking forward.

They say forecasting is a fool’s game and is fraught with risk. Those same people would say that about entrepreneurship! That was enough of a motivation for me to try hand making my own predictions for next year. Hopefully I’ll be on point with a few predictions, but I’m sure some will be wide of the mark and there will be important themes or trends that emerge that I haven’t even thought of. 

With no further ado, let’s get started. Below are my thoughts on various facets of Indian consumer lending, particularly fintechs, and some adjacent spaces, for 2021:

Consolidation

The COVID induced economic shock rippled through lenders’ balance sheets as borrowers suffered from strained finances. In both banks and fintechs alike, it was common to see more than 30% of loans be put into moratorium. This respite has now expired, and any one time restructuring notwithstanding, the day of reckoning is coming.

With the large number of loans now being recognised as NPAs, many fintechs will see a large hole in their balance sheet which was once filled with equity capital, and also find it difficult to raise debt funding as conservative lenders pull back their funding where performance has been weak. 

Over the coming months I expect to see a number of fintechs shut down due to inability to raise new funds or make the economics work. There will also be a number of fintech startups who’ll look for an exit through an acquisition.

Flight to Quality

In times of high volatility or uncertainty, there is always a capital flight to quality. This time is no exception. 

Banks will concentrate their lending efforts towards the highest quality lenders, and growth efforts will be modest. Interest rates on secured loans will stay low since lenders need to put their balance sheet to work and will double down where they are most comfortable (incidentally, the same thing happened after demonetisation, when banks were flooded with liquidity).

Well performing NBFCs will see their funding costs normalise. Similarly, fintechs with good performance will be able to source debt, while weaker performers will either find it harder to raise debt or face higher funding costs.

Payday Loans

There has been an explosion in the number of payday loan apps in the last couple of years. Many are Chinese entrants, who entered the Indian market after getting squeezed out of China following a clamp down on high interest rates by their regulator.

I expect a number of these Chinese backed players will exit India due to the escalated  international tensions between India and China, and the subsequent tightening of capital flows from China.

We could also see more scrutiny around interest rates. I don’t think the RBI would like to see the legitimisation of very high interest rates under their watch.

Lastly, we may also see extra scrutiny around collections practices. A number of cases that are not in adherence to RBI guidelines have been exposed in 2020. 

Buy-Now-Pay-Later (BNPL)

Is BNPL the new buzzword for EMIs? I expect to see a number of startups adopt this language in their positioning since it’s seen as “hot”.

Strictly speaking, BNPL is a short term payment consolidation without interest, where fees are paid by the merchant to the payment provider. The most prominent Indian examples are Simpl, LazyPay and e-PayLater.

Without interest charges, the economics for very short tenors are difficult to make work due to thin margins and high(ish) NPAs, since underwriting is not that thorough.

BNPLs  might need to offer longer loans, which means actually acknowledging they’re giving loans and thus also becoming or using licensed lenders. You can’t have a valuation like Klarna unless you go the whole hog and act like Klarna (they actually have a full banking licence).

Consumer Neobanks

This is another hot space that’s attracted plenty of VC funding over the last couple of years. Many of these new neobanks will launch amid much fanfare in 2021. Initial offerings will include savings and investment products with a digital onboarding process. The offerings are not very differentiated so “success” will be determined in the short run by edge in acquisition. Even there, I haven’t really seen a unique strategy (although I have limited visibility) so probably the ones that grow are the handful that have already raised sizeable funding rounds on the back of the founders’ pedigree.

Eventually the focus will move towards whether they’re really able to achieve scale by showing a clear uplift in experience vs. existing offerings, and the ability to show a viable economic model. In their current incarnation of simply being a platform that plugs into services from end providers, I’m sceptical. To really extract value you have to create more value. 

Tech Giants in Lending

Some of the big names will participate in the market as facilitators rather than direct players themselves. Their key asset is their distribution, so they’ll look to monetise that rather than get involved in the messy business of underwriting and collecting. Platforms like Whatsapp and Paytm will charge lenders fees for using them to originate leads and onboard customers.

Quality Growth

In a world of excess liquidity and low risk, everything was a land grab. Keep acquiring new customers, keep launching new products… just keep growing. You figure out what to do with all the new users later.     

The crisis will release air from the balloon of excessive exuberance. There is now a greater focus on fundamental performance, unit economics, and a path to profitability. In lending in particular, there will be a greater emphasis on the quality of growth. If growth is not accompanied by good performance, then it will not be seen as particularly meaningful. 

This won’t last forever. At some point greed will once again overcome fear, but in the near term fintechs will focus on getting something done really well rather than spreading themselves too thinly.

Opportunity

Despite all the aforementioned challenges, the fact remains that India is underpenetrated with respect to credit. In current times, with traditional lenders retrenching, the situation is even more acute. Some commentators say that the situation has played out and it’s too late to enter the market. I don’t accept this stance. In the context of the overall evolution of the market, we’re still pretty close to ground zero. You don’t need to be first, but you do need to be able to execute with precision and discipline. If you have a good idea for a credit business, and the wherewithal to execute it, there is absolutely an opportunity for you.

Good luck to everyone for 2021!