Online lenders in a fix as banks remain undecided on sharing moratorium benefits

Online lending startups in India are in a limbo with respect to the moratorium granted by the Reserve Bank of India (RBI) as private sector banks remain undecided on passing on a corresponding relief on their liabilities.

As most online players depend on large private banks and non-banking financial companies (NBFCs) for capital, they require a two-sided transmission of this relief measure to extend the moratorium to their users.

“Our members are not getting the same level of support from RBI regulated lenders -- banks and larger NBFCs on whom they depend heavily for debt capital. Some of the larger lenders have outrightly rejected our members request for moratorium while many others are procrastinating citing that they are yet to get their board approved policy in place,” Digital Lenders Association of India (DLAI) told the central bank in a letter which has been reviewed by TechCircle.

The letter said its members are being forced to make their EMI payments to these lenders while the borrowers are demanding moratorium from the members.

The DLAI was established in 2016 to set up an ecosystem to connect digital lenders and its associated players with each other. It represents more than 80 digital lenders and associated services firms including Lendingkart, Zest Money, Capital Float, IndiaLends, Kredx, Incred, and EarlySalary.

“Our members are in a flux right now as the April EMI for most of their borrowers has either become due or is about to become due over the next few days. Absence of support from the lenders is significantly hampering their ability to provider moratorium to the end borrowers,” according to the letter.

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As part of a slew of steps taken to combat the economic fallout of the Covid-19 pandemic, the RBI had granted permission to all commercial banks, co-operative banks, financial institutions and non-banking financial companies – including housing finance companies – to allow a three-month moratorium on instalment payments for term loans and shift their repayment schedules accordingly.

While RBI has left the implementation part to the banks, many of them are yet to come out with a clear clarification on their policy. Private lenders such as ICICI Bank and HDFC Bank have decided to choose the ‘opt-in’ route wherein borrowers need to make a special request to the bank to avail of the moratorium.

As they await clarity from their banking partners, lending startups are extending moratoriums to only select customers, based on a case-by-case analysis.

“Indian banking regulations do not allow liability products/savings to be accepted by digital platforms.  Majority of the digital lenders' business models, therefore, depend on NBFCs or banks for debts and funds. In absence of moratorium being passed on by banks to the digital lenders, it is practically impossible for any player to pass on the benefits of moratorium to its lenders,” a spokesperson for DLAI told TechCircle.

The concept of digital lending, a relatively new financial service in the Indian market, is only beginning to establish a strong customer base and trust in India. 

DLAI said that customers have demanded a moratorium and have abstained from paying EMIs. The non-repayment from customers in the absence of any moratorium benefits from their lender banks will hamper digital lenders’ ability to disburse future loans. They also stand to lose the confidence of their customers if they fail to offer deferment of payment during the lockdown period.

 “The foundation of digital lending was based on using technology to provide financial services to customers that were currently out of reach for formal banking services. This included customers with thin files and small business establishments.  Majority of the customers will face a sudden loss of income due to the lockdown. DLAI believes moratorium is the need of the hour. However, the impact of the moratorium will be limited if the other players in the ecosystem, particularly the private banks and NBFCs do not participate,” the DLAI spokesperson said.

In a recommendation note sent to RBI on March 25, the association has requested the central bank’s immediate intervention to maintain a flow of credit. DLAI requested a direct liquidity window through either the RBI or another government or quasi-government entity such as SIDBI for its members during the period. 

It further demanded an enhanced credit guarantee scheme to help existing lenders buy cover on the portfolios by easing the definition of accepted loans. It also sought reduction of the lock-in period from 12 months to three months for pools already submitted so that lenders don’t face an immediate cash crunch due to the moratorium/defaults. It further requested an extension of the 90 day timeline for classifying a delinquent loan as NPA to 180 days in order to avoid capital stresses on lender balance sheets.