Fintech firms in Southeast Asia, which once lured investors with the promise of profitable, low-cost financial services, are now facing the first major test of that thesis amid COVID-19.
The pandemic’s economic disruption has resulted in a spike in loan delinquencies for both new-age lenders and traditional banks. However, fintechs, which do not have the deep pockets of banks and microfinance institutions, are facing the brunt of the crisis.
“Once the cash from VCs or investors dries up and the cycle of lending money and gaining interest [payments] stops for an extended period, or even for as short as two months, it can lead to the business model potentially not working out for fintech companies,” Arun Pai, chief sales and strategy officer at the credit collection company Flow Technologies, told DealStreetAsia recently. “That’s what we’re seeing.”
He added that most of the fintech lenders that Flow works with — in Indonesia, Vietnam and India — shrank their loan book and stopped lending for a month and a half during the pandemic.
Those sentiments were echoed by Sen Ganesh, a partner at consultancy Bain & Co, handling banking and financial services. Ganesh noted that many fintechs gained a foothold in the market by focusing on small and medium-sized enterprises (SMEs) and small-ticket loans — segments banks struggled to handle profitably.
“Now that part of the book is going to be under severe stress,” Ganesh told DealStreetAsia, pointing to hard-hit sectors such as tourism in Thailand and Indonesia, and export-oriented markets.
Bad loans spike
Around $1.7 billion in investments flowed into fintechs in Southeast Asia between 2018 and the first half of 2019, up sixfold from 2017. Most of this went to payments and lending businesses, according to the e-Conomy SEA 2019 report by Google, Temasek, and Bain & Co.
The report, released in October 2019, likely before COVID-19 emerged, projected digital lending in Southeast Asia would increase threefold over the next five years, and reach a loan book size of $110 billion by 2025.
But the pandemic, and the resulting high unemployment, has taken a bite out of loan repayments in many markets.
For instance, in Indonesia around 7.99 per cent of fintech lenders’ Rp11.94 trillion ($810 million) of outstanding loans were non-performing in July, up from 3.65 per cent in December, when the outstanding loans were Rp13.16 trillion ($900 million), according to monthly data from the country’s financial services regulator OJK. Indonesia has 157 peer-to-peer lenders (P2P).
The true extent of credit stress may be worse as that default rate does not capture instances where insurance protection is tapped and when platforms provide provisional funds. That lets some platforms report low default rates.
Roberto Sumabrata, head of corporate affairs at Indonesian P2P consumer microcredit player UangTemen, said that his firm had a non-performing loan (NPL) rate of around 1-2 per cent every month, but it climbed to around 4.6 per cent in July, and to 4.9 per cent in August.
The fintech company, which connects lenders to borrowers, has been seeking new lenders because the current lenders on its books have taken a wait-and-see stance, Sumabrata said. But he added that a new South Korean lender is expected to come in with “quite a big” amount in a month or two, and that UangTeman expected to add some large domestic lenders soon as well.
UangTeman had planned to reach profitability this year and then expand to the Philippines next year, but those plans have been pushed back, Sumabrata said, noting that the Philippine expansion will likely have to wait until 2023. In addition, a planned acquisition of an unnamed P2P lender in Indonesia has been cancelled after due diligence, he said.
At Akulaku, another Indonesian P2P lender, the spike in NPLs has prompted a tightening of the loan book and credit standards. In the second quarter, Akulaku gave loans “pretty much exclusively” to existing customers and stopped nearly all new-user loans, Zhang Fan, the firm’s senior vice president told DealStreetAsia. He added there’s been a recovery in NPL figures to around pre-COVID levels in July.
The company saw a surge in retail interest in loans, while institutional interest declined, he said. Zhang said he expected fewer fintech players in Indonesia ahead, noting many players were small with only a couple of million dollars to start off.
“With these large macro shocks, it’s really about having enough cash, having the balance sheet strength to get through the hurdle,” Zhang said. “A lot of smaller guys are making very short-term loans. So when they do that, it’s like their entire loan book collapses in a week or two.”
Akulaku has also had some stumbles amid the pandemic. In April, Mintos, a global marketplace for loan originators to raise funds to grant loans, suspended Akulaku over late payments on around 4.7 million euros (then around $5.1 million) of loans.
Zhang said Akulaku has set two restructuring deals with Mintos and expects negotiations on a third and final one to be completed soon; he added the company has been consistently paying back the funds.
Banks, too, face the heat
Even for Southeast Asia’s traditional banks, which arguably land the region’s prime clients, analysts have tipped worsening asset quality ahead.
Malaysia’s Maybank Kim Eng downgraded its outlook for Southeast Asian banks to negative in a mid-September report, pointing to gross NPLs rising 23-60 basis points across Indonesia, the Philippines, and Thailand between the fourth quarter of last year and this year’s second quarter. That may not reflect the full impact, given debt moratoriums are in place in many countries, the report added.
It noted Indonesia’s percentage of restructured loans, which aren’t counted as NPLs, jumped to 17.2 per cent in the second quarter, up from 4.8 per cent in the first quarter. Analysts at UOB KayHian forecast Indonesia banks’ restructured loans would rise to 20-30 per cent of total loans.
In Thailand, gross NPLs are projected to rise 33 per cent year-on-year in 2020, UOB KayHian said, noting that the Bank of Thailand reported that as of end-July, around 36 per cent of the country’s total bank loans were registered under relief programmes, and about 30 per cent were offered relief packages, such as moratoriums and restructuring.
Varun Mittal, who is the lead for global emerging markets fintech at consultancy EY, said the true extent of the picture won’t be known until around three to four months after debt moratoriums end, which would be the first or second quarter of 2021 at the earliest.
To be sure, there’s some disconnect between the performance of consumer-focused fintech lenders and those lending to SMEs.
Business loans are holding up better than consumer ones, according to Adrian Gunadi, co-founder and CEO at Investree, an Indonesian P2P lender focused on SMEs. The fintech firm focuses on supply chain financing products, such as invoice and purchase order financing and inventory financing, with short-term loans. The company also provides capital to vendors and suppliers to Indonesia’s government using the e-procurement platform, Gunadi said.
He said his company’s TKB-90 rate — a 90-day success rate, which is essentially the opposite of an NPL rate — had slipped to 98.8 per cent, from 99 per cent in the first quarter.
Gunadi, who is also the chairman of Indonesia’s Fintech Lenders Association, said that industry-wide TKB-90 rates had fallen to around 93 per cent, compared with 96 per cent in the first quarter.
Investree was fortunate to have closed a $23.5 million C-one round, led by MUFG and BRI Ventures, in April before the pandemic fully erupted, he said, adding the C round has been restarted with plans to raise around $35 million of equity. Investree has just completed raising $30 million of debt, as well.
In contrast, at credit collection firm Flow, founder and CEO Tomasz Borowski noted that the portfolios of NPLs his company takes on are usually credit cards, payday loans and personal loans, and often clients have credit ratings at the B to D level.
Around 38 per cent of delinquent borrowers on Flow’s books tell the company the reason they can’t pay is COVID-19 related — quarantines, closed businesses, or unemployment, Borowski said. Before the pandemic, an average of around 8 per cent cited job loss as the reason for defaults.
With most lenders writing off loans after six months of delinquency, Borowski said he expected a “massive number” of written-off portfolios of bad debt on the market, which is an opportunity for Flow. In September, Flow raised a round of debt capital from Genesis Alternative Ventures to finance the acquisition of a portfolio of non-performing loans.
Investree’s and Flow’s experiences suggest that the future for fintech is not all doom and gloom.
“I don’t expect everybody to fold and collapse. Emerging out of this will be a narrow set of winners with a more proven model,” said Bain & Co’s Ganesh. He added that he didn’t expect consolidation, but potentially some tie-ups between fintechs and firms with complementary services will emerge. Payments services and credit services could join hands, for instance, he said.
Andi Haswidi contributed to this article.