India’s lending technology startups, which have been providing personal loans to blue-collared workers, and unsecured loans to micro, small and medium enterprises, are facing a bleak future, with consolidations and shuttering of operations anticipated across the space, even as they look to survive the Covid-19 pandemic.
A substantial number of fintech lending companies, which also hold non-banking financial company (NBFC) licenses, are expected to take a significant hit to their loans books, as repayment collections slow down, while for others the flow of credit from larger NBFCs and banks grind to a halt.
With investors unlikely to pump in more capital on the back of dismal loan recoveries, businesses and portfolio managers have already started approaching larger players in the space for a potential deal.
“We have already been approached by a few players who have a dire cash position, to acquire them. We expect both the financial services and fintech industries to consolidate,” Bala Parthasarathy, CEO and co-founder of MoneyTap, told ET. MoneyTap has a loan book of Rs 1,400 crore.
“The VCs are mentally prepared for a few companies to go bust. They will prefer companies, where the founder has the ability to, not just save the company, but also be able to raise a new round. VCs are reaching out, and have been scouting for potential M&As, or even aqui-hires,” Jitendra Gupta, chief executive of digital banking startup Jupiter, said.
This comes at a time when the country’s larger shadow banking industry continues to be under pressure post the default by cash-strapped IL&FS in September 2018, followed by the Dewan Housing Finance and Yes Bank crises, which in turn, has forced the central government to step in and manage the crisis.
Fintech lending startups were among the major beneficiaries of venture capital funding during 2019 with as many as 69 companies having raised more than $593 million across 92 rounds, as per data provided by Tracxn to ET. Prior to that, in 2018, 79 companies raised about $582 million, spread over 100 rounds.
“VCs are looking at their entire portfolios, and stress-testing all of them. They’re also looking at the companies which can get them maximum gains. It’s a pure optimisation problem. They will be selective. A few of them will actually go under. The writing is already on the wall for them,” Siddarth Pai, founding partner at 3one4 Capital, told ET.
3one4 Capital is an investor in online NBFC LoanTap, personal loan provider MoneyOnClick and SME and startup-focused digital banking startup Bank Open.
Ganesh Rengaswamy, founding partner at Quona Capital, said younger companies that are less than two years old and disbursing Rs 10-15 crore a month are more at risk. “How will they convince their lenders on their own creditworthiness, risk models and collectibility from their target segment? Their business models are not mature enough when it comes to underwriting,” said Rengaswamy.
The lending tech NBFCs in the last two years have aggressively gone after markets that were traditionally unbanked, with last-mile financing as their core strength. According to industry experts, with the focus on creating larger loan books, the loans to SMEs were based on cash flows, and not on assets, while personal loans to individuals were based on salaries, psychometric profiles and spending behaviour.
Saurabh Jhalaria, chief executive – SME Business at InCred, expects early bounce rates for April going up by 50% across the market. “Delinquencies across the board is expected to go up in the first half…but this could be temporary till June,” he said. Four other startups that ET spoke to shared similar estimates.
According to Khushboo Maheshwari, CEO, Kaarva, a micro-lending startup, delayed payments are almost double in direct-to-consumer retail business. “Unsecured retail lending business is considering the risk to increase 5 times on a cohort level. NPAs may double if we are in this for 3-6 months…If we are in for a slow recovery, we will see the worst impact in 6 months from now, not necessarily today,” she said.
It’s not just the fear of upcoming loan book defaults but also the larger fear that raising further debt for future disbursement will be tough given that banks and NBFCs are much more circumspect in who they lend to.
Additionally, the misconception surrounding the Reserve Bank of India’s three-month moratorium on loan repayment does not include NBFCs, leaving them out in the cold.
“Startup NBFCs, particularly, rely on other NBFCs for their credit cheques…For them it’s now an incredibly tough situation, as there’s no cash flow from the people you have lent to earlier, whereas your creditors are asking for what you owe them. Unless there is more clarity, and a pause on both sides of the balance sheet, these guys will get hit,” Pai said.