This is the experience of a fintech founder which may resonate with many entities involved in the lending space, particularly digital lending and small-sized retail loans. When Aniket Sharma (name changed) was bit by the fintech-oriented entrepreneurial bug, he was initially at the crossroads. There was a lot to do, but most players were already neck deep in it. That’s when the idea of recovering credit through tech-enabled solutions germinated. Three years down the road, it turns out that his bet was just right. With lending as a business booming in India, it has led to the need for more debt recovery platforms.

Entities which started off with lending as their pivot took a detour to debt recovery as they had the tech-stacks in-built to do the business, and as a percentage of loan outstanding, this had the potential to reward more than the lending per se. “This sector will be the main growth engine with a very high possibility to become India’s next sunset industry,” Sharma emphasised.

His view is backed by numbers. Reports suggest India’s debt collection software market could touch over $272 million by 2027, and the numbers of companies getting added to this list is expanding by the month. What’s giving the idea wings is that over 60 per cent of loans lent by non-banks is though digital lending apps that are well equipped to handle sales, but barely the collections, the critical loop which completes the lending journey.

Addressing the issue

The need to think differently on collections emanates from the issue that banks and NBFCs don’t necessarily have the most efficient way of segregating customers, and tend to treat them with the same level of severity when it comes to collections. The result: major capital loss.

Once a borrower (mainly retail) misses a repayment milestone, lenders employ their resources to collection without identifying which mode would work best. In the process, there is also little differentiation made between situational defaulters and willful ones. Start-ups are attempting to rationalise this complex and murky world of recoveries, a business vertical which drills a hole of approximately $7 billion a year, and yet, gross recoveries are not even 10 per cent to the outstanding loan value. Remove the layer of costs, debt recovery in the retail segment turns out to be a cost center than a revenue center.

 Traditionally, banks have outsourced collection to debt management, and non-performing assets (NPA) resolution platforms have relied on collection agencies to recover debts (telemarketers and field agents).

How fintechs work

Modern technological developments can generate enormous amounts of data that can be utilised to better understand borrower behaviour which, in turn, improves the ability of the lender and/or debt recovery entity to have a better understanding of the borrowers’ behaviour.

Three factors lend themselves to operate remotely and technologically in this space.

Mobile phones are now widely used because India has the lowest data costs in the world. Add to that the large number of no-frills savings accounts opened in recent years, which have resulted in a strong push for financial inclusion, enabling fintechs to confidently enter the lending terrain.

The third factor is that banks have becomean integral part of a national network for quick and seamless digital payments and fintech platforms providing hassle-free and flexible microcredit and short-term credit options.

Using a combination of domain expertise and technology, fintechs are stitching tech-based solutions for debt resolution and collections. “The best way a bank could lose a customer was by handing them to the collections team. Harassment and high-handedness have traditionally stained recovery activities, because customer satisfaction has never been the agent’s priority, nor there are incentives for the agents to treat customers well,” said the CEO of a debt recovery fintech company, adding that the human aspect is something companies like his are strongly focussing on. “Our platforms aim to minimise human touchpoints and the resulting.“

Copious state-of-the-art technology, artificial intelligence (AI) and machine learning (ML) are deployed for fintechs to improve processes, increase productivity and skip trace.

The first stage of work for fintechs is throwing early warning signals. In most cases, EMIs fall due towards the month-end, and if a customer habitually pays 7-8 days after the due date, the data is acted upon by the recovery platform or relayed to the lender.

Demonstrating examples  

One of the major players in this segment is Credgenics, a collect-tech company founded in 2019. The company’s platform provides actionable insights on borrower segmentation, behavioural patterns, risk-based strategy and efficacy of digital engagements by analysing past data. It has over 100-plus clients across banks, NBFCs, fintech lenders and ARCs, and its marque clients include ICICI Bank, HDFC Bank, IDFC First Bank, Mahindra Finance, IIFL Finance, DMI Finance, IREP Credit Capital, and Reliance ARC.

 “With Credgenics, lenders have increased resolution rates by 20 per cent, improved collections by 25 per cent per cent, reduced collections costs by 40 per cent, reduced collection time by 30 per cent, and improved legal efficiencies by 60 per cent. The company has touched an overall loan book worth $60 billion in FY23 and handles 11 million retail loan accounts and dispatches 60 million digital communications every month,” explains Rishabh Goel, co-founder & CEO, Credgenics.

Explaining the revenue model, Mswipe, new entrant in the space, adds that the commercial agreement between the lender and the fintech is first put in place. Data is shared for collections and the fintech is paid a success fee.

“⁠We have 17 clients, including banks, NBFCs, other fintechs and ARCs. Our focus is only on NPAs and write-offs. Our resolution rate is between 1-1.5 per cent a month,” said Rishikesh Pillai, CEO, Mswipe Capital.

Hindrances persist

But the work isn’t all rosy, insist the industry players. “Fintechs cater to a category of lenders who serve a more urban and informed set of customers,” said a CEO, who didn’t want to be named, adding that the second category of lenders primarily focus on Tier­2 cities and beyond who prefer to work in the old­-fashioned way, not wanting to engage with fintech partnerships to solve the recovery problem.

Clearly, with the young and old divide prominent among lenders, the next challenge for these fintechs would be to find ways to work around a less tech-savvy borrowers and lender who prefer paperwork over AI and ML. The other challenge is also that now with the asset quality shocks stabilising, fintechs are concerned if lenders may be prompted to go back to their old ways. “Collection technology needs to showcase solid results in order to sustain,” says a CEO quoted above. This will reveal whether the category ends up creating a prominent space in the fintech and lending world.

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