Why we continued to lend during COVID: Answers Mr Rohit Sen, CEO & Co-Founder “NIRA”

With COVID, the world economy is going through its largest economic shock in 100 years. The US, saw more than 40 million Americans file for unemployment benefits in the first couple of months of the crisis. Indians were even harder hit. After parrying the effects of the Great Recession in 2008, the Indian economy has been considered one of the world’s bright spots. That is, until now. The severe lockdown sent shockwaves through businesses large and small, formal and informal alike. The unemployment rate spiked from 8.7% to a staggering 27.1% at the start of May, leaving 120 million Indians out of work (source: CMIE). There has been some recovery since then, but the recent announcement that GDP shrank by 23.9% in Q2 brings into stark reality the economic distress.

Against this backdrop, with credit performance being highly correlated to the state of the economy, and with the RBI announcing a loan repayment moratorium, surely, it is obvious that lending should be suspended?

It is unambiguously clear that the deep recession that we are currently living through will have a negative impact on credit performance, so it is imperative that we reduce our risk. But lend we must. My contention here is that the optimal volume of new origination in this new environment is not zero.

Rough Seas

We are sailing through uncharted waters. We must respect the conditions and stay away from the proverbial rocks to keep the ship afloat. For new lending, we at NIRA, have adopted a defensive strategy and, among other things, implemented the following rules or actions:

• Sectoral restrictions: The economic impact of the lockdown has affected everyone, but the extent of the impact varies across sectors. For example, IT workers who can work from home have been relatively insulated from the crisis, while the tourism industry (airlines, hotels) on the other hand is in deep distress.
• Real-time employment checks. It is usually sufficient to surmise that if you were employed at the start of the month, you are probably still working. With things changing so quickly, we cannot afford the luxury of assumptions. We want to know whether you are working today.
• Treading softly. We are erring on the side of caution both with respect to consideration to borrower debt coverage serviceability, ability to deal with income shocks, and the maximum loan size we are willing to offer. The downside of increasing exposure beyond a conservative level, far exceeds the incremental gain in potential revenue.
• Graded pricing to a flat model. Pre-COVID we would employ risk-based pricing; for a qualifying borrower, the interest rate they incur is a function of their riskiness as determined by our proprietary credit model. Those models are no longer valid, now it’s a simple yes/no. All qualifying borrowers incur the same interest rate.

So far, NIRA has managed the COVID crisis well. Pre-covid we would typically collect 96-98% of what is due within 30 days. During COVID, our lowest collection rate (in April) was 75% (most fin-techs were less than 50%), after which we’ve seen steady improvements. Collections rates on the portfolio are now almost back to pre-COVID levels. On new lending, they are already back.

Furthermore, we only have 2% of loans in moratorium (compared to >25% at most fin-techs) so there’s no day of reckoning now that the RBI’s moratorium has expired.

All said and done, the key point is that we have continued to lend, albeit with lower volumes, and have managed to keep our books in order.

Keeping a finger on the pulse

Through continued contact with prospective borrowers, we still have our finger on the pulse of the market. We get to see what sort of people are applying and in particular need for credit, what is happening to borrower income across sectors, and examine borrowers beyond our existing pool. This helps us form an understanding of the extent of the distress across sectors, but also where the opportunities are.

We also get a real time feedback loop on collection efficiency. We will of course try to maximize our collections on the existing pool to keep our overall performance in check, but the collection rate on new origination gives us an insight into whether there is an opportunity even in this brave new world.

Small Bets Yield Big Rewards

By making numerous small bets, testing the market through experiments, we can gather data on what works and what does not. It allows us to shine a light into a space which would remain dark in the absence of this information.

These insights allow us to increase the flow of credit in a risk-controlled manner, once macro conditions stabilise. The cue for restarting in earnest will come from a sufficiently strong improvement in our collections rate on our portfolio.

Looking Ahead

Our strong collections performance over the last 3 months has given us the confidence to increase our credit supply. There seems now to be a clear stance from the govt. that the economy will gradually re-open, reducing the risk of large economic shocks in the future. That being said, cases are still rising in India with no peak in sight, and the economy is not yet on a strong footing. We must be respectful of risk. Even as we increase our production, we’ll keep an eye on our collections rates. There’s a tremendous opportunity ahead to those who can navigate this crisis intact. We hope to see you on the other side.