Financial start-ups in Asia are bracing themselves for a storm as coronavirus hits the region’s emerging economies and exposes the limits of digital lending, until now one of the best-funded and most-hyped growth stories.
From Indonesia to India, businesses providing loans to small- to medium-sized enterprises (SMEs) and consumers are reducing loan sizes and fleeing to higher-quality borrowers to manage escalating risks such as a flight to quality from their lenders.
“We have moved into a war-room mentality,” said Jason Thompson, chief executive of Indonesia’s largest payments company Ovo, in which Lippo Group has a majority stake. “We don’t know what is ahead of us. We don’t know what the shape of this recession looks like . . . we don’t have an algorithm that can look at this environment.”
South-east Asia, a region of 655m people in 11 countries, and India, with its population of nearly 1.4bn, have had an explosion in “fintech” companies such as Ovo in recent years, fuelled by young and mobile-first populations that often do not have access to bank accounts or lines of credit.
The sector has also been hot for investors, with more than 800 fintech start-ups receiving financing between December 2016 and December 2019, according to data compiled by the Asian Venture Capital Journal.
But what happens next is “a big question mark”, according to Ausang Shukla, managing director corporate finance at brokerage Ambithat, as an early wave of distress begins to hit the industry.
Unlike risk-averse banks with little incentive to lend to those with no credit history and low incomes, the sector has based its success on using data to develop complete pictures of potential customers. But this willingness to lend to less reliable borrowers has left fintechs more exposed in an economic downturn, experts say.
Yinglan Tan, founder and managing partner of Insignia Ventures Partners in Singapore, expects that the number of customers who cannot pay their bills will go up, and that companies will have a tough time when it comes to collection and enforcement. “Their risk assessment [of borrowers’ ability to repay] will prove to be too [optimistic],” he said.
But it is the P2P industry, rather than businesses backed by big conglomerates like Indonesia’s Ovo, that has been the canary in the coal mine for the stress in the system.
Eddi Danusaputro, chief executive of Mandiri Capital Indonesia, the venture-capital arm of the country’s largest state-owned bank in terms of assets, Bank Mandir, said he was already seeing evidence of lenders becoming more risk-averse.
“One of my P2P portfolio companies asked my help speaking to one of its institutional lenders — a regional bank — which was becoming more cautious in providing loan channelling,” he said. The lobbying was successful but the agreement is now being reviewed on a much shorter basis, he added.
Raghavendra Pratap Singh, founder of i2iFunding, a P2P business which provides lending to many gig economy workers such as drivers employed by ride-hailing company Ola, told the Financial Times that “since no one is working, we can’t force anyone to pay”.
“We are a start-up, we are still not cash positive. We raised money through equity so now the burn will be even higher,” Mr Singh added.
Meanwhile, Validus Capital, which provides invoice financing to SMEs in Singapore, Indonesia, Vietnam and Thailand, said it was “judiciously” raising interest rates and had stopped lending to some repeat customers. “We see banks really judging their lines to us,” said co-founder Nikhilesh Goel.
Mr Shukla said that, ultimately, the threat from economic stress would be greater for smaller ticket lenders, since they had never before been tested by a downturn.
“Everyone had gone out and raised money with insane valuations. There was some fluff in there,” he said.
Additional reporting by Henny Sender in Hong Kong