Digital transformation: E-lenders rely on tech, not recovery agents

With the Reserve Bank of India (RBI) imposing strict rules on recovery agents and the moratorium delivering a body blow to their business, new-age digital lenders are looking to upgrade their credit assessment skills to predict defaults rather than act after the fact.

Digital lenders were earlier heavily dependent on recovery agents to get back dues, particularly in small value loans. But, with RBI getting stern in checking errant recovery practices, these lenders have started depending more on technology.

RBI, in November 2020, said lending organisations will be responsible for the actions of recovery agents, even if the agents are outsourced from a third party or agency.

The moratorium, announced in the wake of the pandemic, has put several digital lenders out of business, say people familiar with the matter. Though numbers cannot be gauged, industry sources say smaller digital lenders have shut shop as they couldn’t recover their dues after the moratorium came into effect.

For lenders, the problem area is small-ticket loans ranging between Rs 20,000 and Rs 30,000. These loans are given to people with practically no credit history, and the lenders say many such borrowers are not afraid of their credit history getting impacted in case of default. On top of that, there are fintech companies that promise to rectify credit scores. The credit bureau rules say if a customer maintains good credit discipline, that is, pays on time for three years, his past bad record is replaced by a good credit history. Many fintech companies have sprung up, tapping customers who have been barred by established names, promising to fix their credit histories. These companies, in turn, benefit as the customer repays on time to keep the credit history clean. Borrowers also head towards so-called ‘Chinese lenders’ for loans.

Registered digital lenders have been trying hard to resolve complaints against recovery agents. For example, the Digital Lenders Association of India (DLAI), has created a code of conduct for their 80 members that spell out how to minimise such complaints, according to Anuj Kacker, co-founder of MoneyTap and spokesperson of DLAI.

“One of the best practices that we follow at MoneyTap is to record all calls and conversations related to collections and recovery. All the employees/recovery agents are required to keep a recording of any call made to a customer. No calls or messages can be exchanged on any social media site. Even though these are not stipulated by RBI, we believe this brings in accountability at an individual level and helps us maintain standard protocols,” said Kacker.

Normally, defaults account for just five per cent, but there are always a few who are keen on gaming the system, and eventually build up a debt-trap by borrowing from one to repay another, say executives of digital lending firms.

Regulated lenders share details in a credit bureau, which was tapped by others before lending. That practice was hit by the pandemic as many went out of business.

This has forced the lenders to use artificial intelligence and machine learning to figure out who could default in advance. One way of doing this is by seeing if the borrower has already installed any dubious Chinese lending app on his mobile. This can be gauged when the user grants access to see the apps installed on the phone. However, accessing contacts is a practice that is fast coming to an end.

Most DLAI members also follow the rule of recording calls related to collections. In addition, DLAI in its code of conduct for members has specific guidelines for collections. Following the rules specified by RBI, it emphasises the training of staff and following ethical practices, said Kacker.

According to Ranvir Singh, co-founder and MD of Kissht and founding member of FACE (Fintech Association for Consumer Empowerment), the RBI’s rules are not tough. Rather, “these rules are adequately tough to ensure there is adherence to responsible practices in collection.”

Vimal Saboo, chief business officer of EarlySalary, a member of FACE, said the recent action towards the collection recovery process would help “cleaning out unregulated players” from the field.  

"Stricter recovery norms will eventually boost the digital lending industry as it will imbibe more trust in consumers’ minds and as a result, more and more consumers will opt for digital lending for their short-term requirements," said Yogendra Kashyap, MD, of RapiPay.