Coronavirus puts booming online lending industry in Asia to a screeching halt

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HONG KONG / MUMBAI / SINGAPORE (Reuters) – Spring has started auspiciously for the Indian arm of ClearScore, a company that offers online credit scores and lending.

FILE PHOTO: A general view of the central financial district in Mumbai, India, June 13, 2017. REUTERS / Danish Siddiqui / File Photo

Within weeks, the coronavirus pandemic had taken hold, radically changing the image of the online lending industry in Asia.

“In the second week of March we were talking about what it would be a good quarter and a month later I had to drop out of the team,” said Hrushikesh Mehta, country manager for India at ClearScore.

The UK-based company shut down operations in India on April 13 as 10 of 14 loan partners withdrew their products within three days of launching a nationwide lockdown.

Alternative lending companies and platforms across Asia scramble to raise funds and avoid bankruptcy as they face a wave of bad debts.

Sixteen lenders and investors in Asia-Pacific markets said companies are laying off staff and cutting costs to survive.

Online lending had been one of the hottest industries in recent years, as new players bet that a digital approach meant they could profitably lend to entities that banks found too expensive or inconvenient.

Asian online lenders raised more than $ 4 billion in 2017 and 2018, with Indian and Indonesian companies being the largest, according to the results of data provider Tracxn.

In India, there are nearly 500 online lending start-ups, and around 160 in Indonesia, many of which are backed by Chinese money.

Some are peer-to-peer (P2P) platforms, which pair borrowers with individual lenders who hope to achieve a higher return on savings; others use their own funds or join forces with other institutions. Many combine all three approaches.

But as economies across Asia have clamped down to limit the spread of the novel coronavirus, many borrowers have defaulted.

“I think only 20-30% of (Indian online lenders) are well capitalized, and the rest are going to struggle. 70% are facing an existential crisis, ”said a general manager of online loans, speaking on condition of anonymity because of the sensitivity of the issue. “Since the start of containment, demand has fallen by 90% and loans are now down 95%.

Dima Djani, CEO of Indonesian Sharia-compliant P2P lender ALAMI, called the situation “natural selection.”

“It’s a test. Those who come out unscathed will be champions in a more saturated P2P landscape in the future,” he said.

PARTICULARLY VULNERABLE

The IMF expects Asia to post zero growth for the first time in 60 years, as lockdowns end service sectors, exports plunge and businesses and individuals stop spending.

Small and medium-sized enterprises and workers in the informal economy have been particularly affected. Asia-focused banks including HSBC and DBS have taken more action against bad loans, but alternative online lenders are worse off than their traditional competitors.

Indonesian online lenders had an NPL ratio of 4.22% in March, according to data from financial regulator OJK, down from 3.65% in December, compared to 2.77% for traditional banks.

“Most fintech companies offer smaller loans to mid-to-low borrowers to fill the void that banks couldn’t fill. This cohort is unfortunately one of the most affected by the pandemic, ”said Markus Rahardja of BRI Ventures, the venture capital arm of state-owned Bank Rakyat Indonesia.

It is also more difficult for some lenders to be reimbursed.

“Because everything from paperwork to loans is done online, consumers have an easier time defaulting,” said Ashvin Parekh, a Mumbai-based independent financial consultant.

Online lenders who do not fall under traditional banking regulations have fewer requirements in many markets for how much capital they need to have. This makes them more vulnerable to a wave of defaults, said Etelka Bogardi, Hong Kong-based financial services regulatory partner at law firm Norton Rose Fullbright.

SURVIVAL OF THE STRONGEST

Lenders must decide whether to lend more – there is a demand from businesses and individuals desperate for money – or squat.

“If you have a lot of money and have reporting requirements, you can choose the approach of issuing more loans,” said Jianggan Li of Momentum Works, a Singapore-based venture capital firm. “But it’s dangerous, the minute the loans are issued, people can’t pay them back on time.”

Abheek Anand, head of Southeast Asia investments at Sequoia Capital, told a DealStreet Asia event that he warned portfolio companies to be cautious and avoid temptation.

More money is needed for either strategy. But venture capital funds invested just $ 388 million in online lenders in Asia in the year through May, a steeper drop than overall investment in fintech.

“The last thing I want to get into right now is online lending,” said a China-based venture capitalist. “It’s just a glass trick and you go from being the good guy supporting microfinance to supporting loan sharks. “

Additional reporting by Tabita Diela in Jakarta, Kane Wu in Hong Kong and Anshuman Daga in Singapore; Editing by Gerry Doyle

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