Bad loans are set to spike in the coming days due to the coronavirus crisis
RBI recently announced a three-month moratorium on term loans
The ability to underwrite better loans will differentiate men from the boys, says Sequoia’s Ravishankar
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With businesses smarting under the body blow delivered by the Covid-19 pandemic, quick access to loans and credit is on everyone’s mind. The lending market is expected to pick up, across the country once a semblance of normalcy returns.
However, industry experts believe that lending has always been about recovery rather than the total addressable market (TAM). Opportunities do exist, however, it becomes imperative for financial institutions and NBFCs to assess behaviour of existing and new customers and provide a product which fits in the present-day market scenario.
In a recent episode of Inc42’s ‘Ask Me Anything’ (AMA) series, GV Ravishankar, managing director at Sequoia Capital India, said it’s beyond doubt that demand will generate but adds that banks have to be cautious while underwriting loans to small and medium-sized enterprises (SMEs).
“TAM is going to increase dramatically for people who are able to do a good job of dispensing and collecting money,” said Ravishankar. The question, however, you need to ask here is how can enterprises do business with real profits and return on equity, he added.
In other words, depending on segments, businesses need to have a return on equity anywhere between 15 to 20%. That is possible if companies are able to generate 2.5-4% return on assets on a continuous basis.
For instance, if businesses are operating in the consumer segment, the non-performing assets (NPAs) or bad loans are less than 1%. For SMEs, it is 3% or lower. In the coming days, bad loans are going to increase due to the coronavirus crisis.
NPAs or bad loans refers to assets of a bank (loans are given to customers) that do not bring any return.
Citing the microfinance world, Ravishankar said that this is not the first time it is happening. In the past, bad loans have shot up because of issues related to the economy, particular geography, where there were setbacks, be it floods, monsoon failure and natural calamity.
Similarly, Covid-19 is one such environment, where people’s incomes are going to be affected for the next couple of months. Therefore, their ability to repay will also get affected. “But, thanks to the government’s three-months moratorium initiative, there is a semblance of relief for people. Of course, once things return to normalcy, businesses have to pay the interest for the given period,” said Ravishankar.
The New Wave Of Fintech Lending
“This is an opportunity for people who can underwrite loans that can recover really well. This environment will separate men from the boys,” said Ravishankar.
Alok Mittal, cofounder and CEO at Indifi Technologies — a platform which offers debt financing for Indian SMEs — said that the ability to absorb this risk in order to bring businesses back and running is quite an opportunity in itself, however, many fintech players are not married to the idea. “A better product structure in loans can alter the way how lending takes place in the country,” said Mittal.
While most SME lending companies give 1-3 years term loans with an internet rate of 15-20% or higher, it becomes crucial for the government to underwrite similar kind of loans for private, NBFCs and lending companies, which gives them larger bandwidth in terms of credit risk and longer-term loans (6-9 years) with a lower interest rate. “This will accelerate the lending business to a whole new level,” said Ravishankar.
At the same time, most people if given a choice would like to run their business independently. Therefore, the government’s intervention in this matter is more critical than ever. “It will take a little bit more time, and as clarity emerges, some of these schemes could be really beneficial for SMEs and MSMEs, but, it will take some time before things settle down,” he added.
Speaking about the opportunity in the fintech landscape, Ravishankar said that since banks are receding from this market, the possibility to start a lending product is much larger today than it was in the pre-Covid era. However, before getting into this, the question one needs to ask here is — do you have superior insights to underwrite a particular enterprise better?” he added.