Tech Is Collecting Loans It Helped Create

India’s booming digital-lending business is stoking demand for a new breed of startups even as the global outlook deteriorates.

Andy Mukherjee

29 Mar 2023, 08:15 AM IST

Shoppers at a market during the Diwali festival in New Delhi, India, on Wednesday, Nov. 3, 2021. Businesses are expecting sales during Diwali -- the Hindu festival of lights -- will pick up to levels seen before the pandemic struck early last year, in part because financiers, sitting on a huge pile of excess cash, are eager to lend with outstanding consumer durable loans already at its highest in more than three years.

(Bloomberg Opinion) -- It is becoming something of a post-pandemic mantra in India: A lender whose portfolio of unsecured retail loans is not increasing by 50% annually is simply not trying hard enough.

All kinds of bank and nonbank lenders are heaping credit on household balance sheets even though the consumer economy is fragile: A tiny minority that can afford luxury goods is in great financial shape, but low-income earners, especially outside large cities, are struggling with two-wheeler purchases and smartphone upgrades.

Lenders know they have to make the most of this uneven K-shaped recovery, especially if the current crisis in US banking snowballs into something sinister. While it’s all very well to double down on consumer credit — and broaden it out to subprime borrowers — the question is collection efficiency. How will they ensure repayments to prevent a buildup of bad loans?

The answer: technology. Credgenics, a five-year-old startup on the outskirts of New Delhi, has taken a chaotic, labor-intensive activity run by tele-callers and field agents, and put the entire process on a digital collections platform. Its clients, which include large Indian banks, nonbank lenders and fintech, upload their borrower data via a programming interface, and set rules on when they want to send automated reminders and when they want tele-callers to intervene.

The app maps out the field agents’ daily routes. Collection is a cash-heavy business, but if borrowers have bank accounts, Credgenics’ gateway can process online payments, helping to cut currency-handling costs and curb fraud. And if a loan turns delinquent, the platform can help the lenders’ legal teams issue notices and monitor arbitration and settlement.

India’s consumer credit culture is rapidly changing. What started out with financing of durable goods like autos, homes and washing machines has, of late, stormed the services economy with catchy offerings like Housing.com’s rent-now-pay-later, and even marry-now-pay-later credit tailor-made for the big, fat (and very expensive) Indian wedding. Digital lending, worth $270 billion last year, will zoom to $1.3 trillion by 2030, according to Inc42.

Naysayers fret about the sustainability of the boom. But it’s unrealistic to expect lenders to sit it out. What else will they do? With low capacity utilization rates in manufacturing, wobbly global demand, tight financial conditions and increased regulatory and media scrutiny of rapidly expanding conglomerates like the Adani Group, the outlook for corporate lending is hardly great. Consumer credit is more attractive. Mumbai-based IDFC First Bank’s return on equity on retail loans is 18%-20%, double its overall ROE.

Rising smartphone penetration and falling costs of performing online credit checks have deepened the Indian consumer-finance market. Unlike just a few years ago, most customers — even those at the bottom of the pyramid — have bank accounts in which they can receive credit.

But that’s only one part of the equation. Getting money out the door is the world’s easiest business; bringing in repayments is hard. Troubles in collection stem from messy, manual processes, but they are compounded by India’s size and diversity: The chatbots of Mumbai-based Spocto Solutions, another startup that helps lenders collect from villagers, grapple with a bewildering array of languages and dialects.

Automation is also helping financiers deal with misaligned incentives. An Indian nonbank lender was puzzled by an unusual bunching of repayments even though its loan contracts were spread evenly throughout the month. It turned out the collection agents were regular in taking cash from borrowers, but they then deployed it in the informal credit market, pocketing the interest until the end of the month. In other words, they were running an unlicensed payday-loan business with someone else’s money.

Wrong incentives like these are fodder for a new breed of young entrepreneurs. Credgenics’ 28-year-old Chief Executive Officer Rishabh Goel and Chief Product and Technology Officer Anand Agrawal are engineers from the Indian Institute of Technology in Delhi. The Chief Operating Officer, Mayank Khera, 31, is a lawyer. Their ambitious goal is to build a platform that can be used to collect loans — and, in future, insurance premiums — anywhere in the world, much like Salesforce Inc.’s on-demand software.

Putting coders in the offices of global clients and managing their IT infrastructure and applications from Bengaluru was India Tech 1.0. That first chapter has lost some of its sheen ever since customers began to adopt cloud-based services. Tech 2.0, propelled by private equity as well as multinationals like Walmart Inc., is about writing code to serve domestic e-commerce. But because Indians’ experience of digital payments in the last few years has been a huge success, there’s now a third chapter in the tale: Fintech software that would work in other emerging markets. Credgenics entered Indonesia last year.

India’s tech companies are faced with two opposing forces. Raising new money is becoming very tough for startups, particularly those burning cash on digital commerce and education. At the same time, the fast-growing domestic consumer-loans market is proving to be a great incubator for firms providing business solutions. Cash flow from clients is creating room for funding future innovation. For instance, once the costs of tokenizing non-English words fall, ChatGPT can be a powerful tool to aid loan collections anywhere. Voice analysis of borrowers’ conversations with tele-callers can predict intent to pay.

India’s Tech 3.0 is just getting started. Founders who were teenagers during the 2008 financial crisis can only hope that the ongoing turmoil in the US banking industry doesn’t abruptly end their dreams.