Impact of Covid-19 on Financial Services and Fin-tech
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14th Apr, 2020

To understand the impact of the Covid-19 specifically on India’s fin-tech space, we hosted a call with Gautam Chhugani, Director, India Financial Services and Fin-tech at Bernstein. 30+ fin-tech founders from the Matrix India portfolio, as well as others joined the discussion. While the Financial Services sector has been acutely impacted and we are seeing a correction, all is not lost. There is a fair chance that those who take the right steps and emerge out of this crisis relatively unscathed, will end up creating large value for all stakeholders. 

 

Here are the key learnings from the session:
 

1. Covid-19 will have a long-term impact on the global economy. While we may see some normalcy returning in the coming weeks (post    lockdown), the underlying economy has sustained structural impact and will take time to recover.

“There is nothing short-term about this crisis. Even in Beijing and Shanghai, it has taken 3 months for people to come back on the streets. Factories in China have started but if there is even one case, they need to be shut down again. Additionally, once the labour force go back to rural areas, they don’t come back easily.”


2. Despite some normalcy returning in China, fin-tech players have been severely impacted. New disbursals are down ~70% vs. pre-Covid-19 era and fin-tech delinquencies are up anywhere between 100-200%. 

“China Merchants Bank, one of the largest providers of consumer credit, has stopped issuing new credit cards”


3. In India, credit has almost frozen. With the 3-months moratorium given to borrowers by RBI, lenders across the board have moved away from new customer acquisition. Even large corporates are requesting moratoriums, and banks are still assessing which pockets and segments will be most severely impacted.

“Everyone (lenders, corporates) is used to 8-10% nominal GDP growth in India and no one is prepared for a GDP contraction, which India might go through for the first time”
 

4. Players focused on unsecured retail lending will be the hardest hit. India had witnessed one of the longest consumer growth cycles amongst Emerging Markets on the back of unsecured credit. Since these highly profitable products will become challenging in the near-term, expect RoE, growth and hence multiples of such companies to come down significantly.

“The growth engine of India’s consumer credit companies, unsecured lending, has hit a sudden brake”


5. Lenders need to disregard their old risk models and re-assess & re-price risk. Segments considered safe traditionally (e.g. salaried class with high CIBIL score) could also be impacted. 

“Credit Bureau is not as relevant in times of crisis. It does not take into account future income potential, income shocks and hence the ability to pay in the future – which is going to be the biggest issue as corporates streamline costs and employees."


6. ​​​​​​​The supply of capital to non-bank lenders has also been severely impacted – there is uncertainty about whether RBI’s moratorium on repayments covers NBFCs or not. Fin-tech lenders should focus on collections as going forward, banks will only lend to companies who do relatively better in the current environment.

“This year will be a year of pause. Growth should be parked for now. NBFCs that are not able to manage collections will find it hard to borrow in future”


7. Banks’ and insurance companies’ systems and processes are built around physical touchpoints. They will soon be aggressively looking for partners to help them drive online/remote sales. Further, regulators will be supportive of such innovations. 

“If fin-techs can build products that can help convert sales of banking products online, especially the more complicated products, that’s a big opportunity. Fin-techs have the ability to truly become business-critical for large banks, insurance companies, etc in this time”


8. ​​​​​​​Demand for simple, protection-oriented insurance products (term insurance, health insurance etc.) will go up in the post-Covid era. However, life insurance products built around investments will be impacted. 

“Anything related to health will see an uptick.”


9. High-yield savings products and safe haven assets (e.g. gold) will be in demand as real interest rates in India head to 0% (or even negative).

“Fixed Deposits yields might come down to 4-5% in the near future.”


10. Many new retail investors are opening new trade accounts, primarily attracted by cheap valuations, however, the bear cycle maybe longer. New account additions have gone up significantly in the US and China retail stock market (A-shares) has rebounded. However, foreign institutional investors will take time to rotate back to emerging markets.

“Zerodha has opened more retail accounts in March than ever before”


11​​. ​​​​​Large fin-tech players emerged in the aftermath of the 2008 global financial crisis. The Covid-19 situation, too, can accelerate the adoption of fin-tech. Incumbents will look to partner with fin-techs for driving their core business while overall competition is likely to reduce. However, these are unprecedented times and we do not have all the answers.

In general, acceleration of fin-tech will happen, but the next six months will be chaotic as bankers are protecting their shipsPeople still haven’t figured out all the answers - it’s important to keep that in mind”