Digital lenders reduce exposure to new-to-credit customers

Digital or fintech lenders are shifting their focus away from new-to-credit (NTC) customers and instead targeting higher credit score segments in order to improve profitability. According to a recent report TransUnion CIBIL, the share of NTC loan originations has dropped significantly from 29% in FY19 to 13% in FY23.

One of the main challenges in lending to NTC customers is the collection process. Small ticket loans often involve small EMI payments, making it economically unviable for lenders to chase after defaulting borrowers. Virat Diwanji from Kotak Mahindra Bank explained that fintechs, with their advanced data analytics capabilities and superior user experience, initially took on the risk of lending to NTC customers. However, their ability to collect payments became a major obstacle.

Delinquency rates among fintech borrowers are highest among those under the age of 25, with a 5% delinquency rate. The delinquency rates gradually decrease with age, with borrowers over the age of 45 having a delinquency rate of 1%. Urban and rural borrowers have higher delinquency rates compared to those in metro and semi-urban areas.

Fintechs have a higher default rate in the personal loan segment compared to other lenders, at 3.2% versus 0.9%. For consumer loans, the rate is 2.8%, again higher than the 1.4% for other lenders. Ramesh Narasimhan, CEO of Worldline India, highlighted that established lenders like Bajaj Finance and banks have built their collection strategies over decades, giving them a competitive advantage.

In response to these challenges, digital lenders are now focusing on attracting prime customers with higher credit scores. Prime borrowers accounted for 18% of fintech loan originations in FY23, compared to just 3% in FY19. The share of prime plus customers and super prime customers also increased significantly.

It is clear that the digital lending industry is evolving and adapting to improve portfolio performance and profitability. Lenders are learning from past experiences and leveraging data analytics to target customers with better credit quality. As the industry matures, profitability and risk management are becoming top priorities, leading to a shift away from NTC customers and towards more established borrowers.

Sources:
– TransUnion CIBIL report
– Insights from NPCI and FCC