06 October 2020 | PROBITASREPORT
• Operators pulling back as systemic risk weighs on lending
• Job insecurity posing a major challenge
• Lending firms explore regulatory loopholes
• ‘Increasing loan default not peculiar to smart lenders’
The risk-based growth of Nigeria’s financial technology (fintech) companies may be facing its first major test as they struggle to keep the loan default rates at a tolerable level amid growing economic uncertainty.
The Guardian learned on Monday that the default rate was growing at the same breakneck speed the sector’s lending had witnessed in recent years, compelling companies to reconsider their business models.
According to findings, the operators have become more cautious in their lending campaign just as they have stepped up their loan recovery campaign. Notwithstanding the new operational strategies, sources said the default rate was growing faster than the companies initially expected.
“They are becoming increasingly risk-averse but I think this is coming too late,” a startup operator who said he “does not listen to loan applicants with savings accounts” with his company told The Guardian Sunday evening.
The source also said he does not grant loan amounts above the applicant’s savings, which serves as collateral. “In that case, I lose nothing if there is a default. This is my model, I do not know about others,” the source explained.
For many operators, the conditions and processes of loan applications are as flexible as picking an item off a supermarket shelf. Most applicants go through the process in the comfort of their homes and offices and only visit the lenders’ offices to file a few documents such as passports, utility bills, account statements, and identity cards. The majority of the lenders access applicants’ account standards via apps, though with the customers’ authorisation.
Borrowers are credited in most cases without address (residential or official) confirmed. Whereas some of the companies ask borrowers to drop the phone lines of their colleagues who could be reached to confirm their employment status, others do not bother to subject the documents filed and claims made by applicants to any form of scrutiny.
For existing customers, the process could be as simple as filling only the loan application forms. Customers with running facilities are often cajoled to top-up at no documentation.
While money deposit banks (MDBs) subject loan applications to rigorous and irritating scrutiny, competition among fintech operators borders on convenience, ease, flexibility, and speed.
BUT what Nigerians, who patronise smart lenders, gain in terms of convenience and speed, they lose in cutthroat interest rates as high as 70 percent in some cases.
The lenders, which have forced a few hitherto conservative banks into smart thinking on loan product development, have built a huge clientele in the few years they have operated, leveraging the conservatism of conventional banks.
Experts who have monitored the operations of the novel credit givers say their casual approach to loan facilitation exposes them to more risk, especially in countries like Nigeria where identification is a challenge.
Indeed, the financial powerhouses they have built in the short period of their existence are falling apart. On account of rising job losses, borrowers face tough challenges repaying their facilities. Reacting to the rising risks, the lenders seem to have started to learn new trade tricks.
For instance, a pioneer operator started readjusting pre-COVID payment terms signed with customers a few months ago. Some of the emails sent during the Coronavirus lockdown informed customers that their payment dates were rescheduled, with some of them asked to repay 10 days earlier than the agreed monthly due dates.
The same operator, it was learned, has restricted loan coverage to Lagos, the Federal Capital Territory, and Rivers State. An employee in charge of a new client said the decision was taken as part of the company’s measures to “reduce the rate of default and mitigate impacts of COVID-19” on its operations.
The majority of the players are rolling back the hitherto ambush marketing the industry is known for, concentrating effort in servicing and recoiling to servicing “reliable customers.”
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A marketer also disclosed that they “no longer chase customers to top-up anymore because you may not know what may have happened to their jobs in the past six months. We also do more due diligence to be sure that a job exists. If you grant a loan and there is a default, you are in trouble. So everybody is careful.”
Top-up allows a borrower who has not defaulted in their obligation for a reasonable period to renew a running facility by taking an additional loan. Top-up applications are not supported with proof of employment and utility bills. A customer simply accepts an offer to take more loans or signifies an interest, fills the loan form and his/her bank account is credited.
NEW corporate practices are being considered by fintech companies as the days of reckoning beckons for the risk-based business model that has been a growth driver of the industry. The companies are scaling up their risk management measures. For instance, the percentage of ‘loanable’ monthly salary has been reduced by some of the companies. This, it was learned, is informed by the need to hedge against salary reduction associated risks, which has been prevalent.
A top middle management staff of one of the companies said that marketers are regularly queried over unethical practices and cover-up to meet their targets. Previously, she explained, they (marketer) could swap borrowers who could not meet the conditions of the employee loan category to a business credit window to hurriedly seal a deal and increase turnover.
Is the much-hyped smart lending going to burst any time soon? Godwin Owoh, a professor of Applied Economics and Risk Management expert, said the fintech industry was a crisis waiting to happen. He wondered how a model with zero-risk measures would survive in a country where a conventional bank fails almost regularly.
Owoh also said the model is exploring the inadequacies of borrowers, which he accused of “abandoning proper intermediation for easy incomes” under a weak regulatory framework. He warned that the industry could trigger the next crisis in the financial industry.
Also, Olaniyi Ali, a former head of Lagos Business Office, First Central Credit Bureau, observed that fintech had no regard for the most basic of creditworthiness and profiling required to determine the integrity of loan applicants. According to him, fintech must necessarily partner credit bureaux to determine the creditworthiness of those they lend to.
Ali said the relaxed regulation of the industry was responsible for poor risk management. “The absence of tight regulation of the operation is a major reason the operators have boycotted the risk management regulations,” he said.
However, Victor Ogiemwonyi, a retired Investment banker, said high loan default rate was a common feature of an economic downturn. According to him, this is not peculiar to digital banking as non-performing loans (NPLs) of MDBs are also on the upward as individuals continue to struggle with a higher cost of living and rising unemployment rate.
RENMONEY, a sister company of foreign-owned Renaissance Capital, ironically took the first shot at aggressive cost-saving strategy in the early days of COVID-19, sacking 300 employees in March. The company explained that it was going even much more digital; hence, its application would require even less human intervention. Yet, those who were close to the Russia-owned firm said the company was preparing for the evil days ahead. Perhaps, the evil days have started much earlier than predicted.
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