Opinion: Third COVID Wave and its potential to derail the improved Lending Ecosystem

Rishabh Goel, CEO and Co-Founder at Credgenics

If the lockdown and the restriction-frustrated world is ready to pack bags and leave for a vacation to rejuvenate and feel alive, the reality is that COVID and especially the threatening ‘long COVID’ is also knocking on the doors. As UK and US, the rest of the world is still in the state of the dilemma of how to keep the economy alive and battle the pandemic that is in all likeliness turning into an endemic.

The standard approach, to address the topic, would be to sigh about the foils of the second wave and the speculation on the third. But we can always try a different approach. For instance, let us discuss the shadow banks and the banking industry at large since the pandemic hit.

Who knew that a nation which watched the red suitcase of the Finance Minister for gifts like tax relaxations, prices of commodities, etc., would also wait and watch how the technology receives a boost and how the overall economy and its sustenance and revival is being planned.

This financial knowledge and seeking to know more about the field is a little sunshine.

We could see experts and householders alike celebrate the setting up of bad banks and some of the short-term solutions with the long-term impacts being acknowledged by all and sundry.

For instance, we as the digitizers of debt recollection saw the phase from the age-old recovery practices move towards enhanced data management as the risk of increased defaulters threatened the creditors. We also saw how the debtors are better aware of their rights against being harassed for loan repayment, with many even waking up to the benefit of moratorium and the loan restructuring facilities, the loan restructuring being the gift to both the creditors and debtors alike.

Also Read: Growing Relevance of NBFCs in Driving Micro-enterprises Amid Covid Pandemic

People are fast gaining better financial knowledge true, but the idea of shadow banking might still sound strange to them, even those who are or can benefit from it. Most people would probably fail to understand the difference between the ARC or Bad Bank and a shadow bank. The concept in simplest terms is in the Non-banking financial Companies or NBFCs, and the birth of shadow banking began after the financial deregulation in the 1990s (yes, three decades!). These institutions, with the help of the financiers and investors backing their lending capacity, provide credit to those who cannot get credit facilities from the banks, owing to the traditional lending methods requiring arduous paperwork and approvals at every stage. Usually, these debtors are from the less or least favored tiers of the demographics and lack credible paperwork (in a majority of the cases). Even these quick salary loans being gifted to the new age earners is a part of shadow banking.

Shadow banking, like most of the loans, has lost favor, as compared to the increased likeliness of the people favoring monetary or health investments, yet the slashed paychecks or the financial blow stricken by the onslaught of the second wave in the spring and summer of 2021 has led to some gain in the momentum. And in this scenario, shadow banking or seeking easier and smaller credit lines from the fintech and NBFCs has been gaining favors with the reduced paperwork and the quickness of the loan amount being delivered directly into the accounts. Hence, one has ample reasons to believe the Bloomberg reports saying the same thing.

However, with the gain in momentum, one has to be aware that the pandemic is far from over, even now, each day one can read about the surge in cases as the markets and tourism have started opening for the respite seekers.

The one thing that not just the banks, but the entire financial ecosystem needs to wake up to is default-proofing their loan system. But why?

The word defaulter is an everyday word for all of us from the financial ecosystem. The general milieu thinks that the big-ticket defaulters make an impact. Yes, it is the quicksand. Undeniably. The financiers’ default and the loan frauds or scams cause a huge tectonic blow to the banking ecosystem and the financial health of the country at large. Shadow banking has had its crisis when in 2018 due to a financier’s default and we cannot forget that. A major default from the financier or the big-ticket debtors derailed the growth of shadow banking in our country. However, the brunt borne by the economy owing to each default, whatever be the size of the loan amount is what we need to focus on.

While it is imperative that the country gets a financial counseling agency of its own and not just rely on the banks and creditors educating the people about the loans, types, and repayment schemes. Having such an agency would help people plan their loan requirements and maintain the CIBIL scores better, but for the traditional and technology-driven credit facilities also, managing the risk profiles and thereafter the loan recovery would be easier. One can identify the huge benefit it will cause in reducing the bad debts situation. This education will help the emerging shadow banking better.

But we need to look at the larger issues of the shadow banking industry and how they are being remedied, especially that we must acknowledge the potential this segment has in spurring the growth of the economy by increasing the span of financial inclusiveness.

Also Read: Insurance industry is witnessing a positive shift post-Covid: Vinit Kapahi, Head of Marketing, Aviva India

One of the major fault lines is the unregulated or under-regulated lending systems of the NBFCs, where the government also acknowledged that the central bank has not done much to control the lending habits of the prominent NBFCs, and the central bank is also not showing any keenness in doing so. So the lack of on-balance sheet liquidity is still a cause of worry, as the threat in repaying their own liabilities puts a huge question mark on their reliability factor in the larger picture. This has already caused the steep rise to the NPS, with the NBFCs contributing a major chunk to the massive bad loans and lost assets situation. Yes, there have been corrective measures, especially since the record low that the industry saw in February 2021.

The central bank declared the structuring of risk-based internal audits while it promised a huge sum of 01 trillion Rupees of corporate bond purchases by banks in October 2020. This definitely caused some favorable stir and the momentum though slow, yet some relief is better than permanent despair. Yet, we cannot say that the steps having been taken to date can support the cause if the third wave strikes.

The interest rates being lowered is not the only blow to the recollection process. The judiciary and the RBI have been tightening the noose over the recollection methods and with technology yet to make its presence in the debt recovery and related legal processes, the worry still looms large.

Also Read: Three Ways Covid-19 Is Changing the Insurance Industry

Yes, the lowering of the Days Past Dues (DPD) threshold from 180 days to 90 days is a huge step. Also, initiating the framework to regulate and tighten the scope for new entities from entering the domain by increasing the entry of new names in the NBFC domain by increasing the net-owned threshold by ten times could prevent the increasing cases of unsecured loans. The banks and NBFCs are also resorting to some measures. The adoption of recovery mechanisms such as SARFAESI by the banks and NBFCs as a resort to cover the losses in case of accepted bankruptcy or inability to repay loans has helped in expediting the recovery process. In the case of the corporate defaulters, the restructuring and reorganization of the defaulter entity, endowed by the Insolvency and Bankruptcy Code has had a blow with the reduced creditor’s power could cause some issues in resolving the insolvency, the need to overhaul the judicial process with more technology aiding to increase the importance of the Online Dispute Resolution and resolve the defaulter’s cases could also help.

But these are for the longer run.

For now, we can feel better in realizing that the banks and the NBFCs have gained momentum despite the morbid mortality caused by the second wave.

The third wave is a looming threat, just as much as the estimated steep rise in the NPA. We can only hope that the stability we pictured from the budget manages to hold true and the RBI and judiciary are able to foolproof the pace of recovery, but if the pandemic causes another round of mortality and brings along pay cuts and job losses for the masses, the conclusion we are trying to prevent from saying aloud could again be the stark reality.

Views expressed in this article are the personal opinion of Rishabh Goel, CEO, and Co-Founder at Credgenics.

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