credit underwriting ai

Part 2 – Early Warning Signals for Customer Segments

The Indian consumer has been steering the economy’s growth over the last many years, but as the COVID crisis hit, incomes and consumer spending capacity took a hit as well, leading not only to a shortage of sales, but also to a potential credit default risk for digital loans and other credits that the consumers are at. Here’s a look at how the pandemic has affected the various consumer segments differently and the effects of it all.

The middle-class Indian consumer (with a monthly income of ₹15,000 – ₹2,00,000) is now divided into three broad segments:

  1. The first who are salaried individuals and continue to earn a steady income and save steadily. From a risk perspective, this segment is conservative in its approach and may have actually improved credit scores in the last few months. Algo360 observed an increase in Algo-credit for at least 17% of such customers. There has been an insignificant drop in their salary or their account activity, while their stable surplus has actually increased.

  2. The next segment observed a drop in stable surplus and nearly 90% drop in its stable monthly inflows. The average ticket size of its transaction dropped by nearly 40%. For this segment, there was a lagged drop in digital and ATM transactions, post the initial pandemic phase, as they closely monitored and managed their outflows.

  3. The third segment of customers saw a dip in both, surplus as well as inflow, along with an increase in outflows. These customers seem to be utilising their savings and are at a higher default risk.

Along with the middle class consumer, we also considered the low class consumer (with a monthly income of less than ₹15,000) and made the following observations:

  1. As the pandemic hit harder, the sources of income may have become more seasonal, especially in the lower income buckets. It has also been observed that many who subscribed to the Employees’ Provident Fund Organisation (EPFO) have withdrawn money from their accounts. As a last resort measure, salaried employees withdrew a massive ₹39,400 crore from Employees’ Provident Fund (EPF)[1]. Out of the total 10.4 million salaried workers who dipped into their retirement savings during this period, at least 8.2 million were those who earned a salary less than ₹15,000 per month.

  2. This group also comprises the migrant labourers who have had to leave their day-to-day waged jobs in cities and move back to their rural base. In urban metro cities and tier 2-tier 3 cities, as well as some rural areas, there has been an exponential increase in credit demand which has been amplified due to the formal banking sector’s complete unwillingness to lend. All that they have focused on is ‘evergreening’ old loans. In rural areas, credit is now mostly provided by informal moneylenders, pawn brokers, and gold loan companies, as these are seen as instant avenues for credit, with less rigid rules.

In a recent consumer survey conducted, 65% of the respondents said that the pandemic and the lockdown has led to a negative impact on their income. About 16% of this 65% claimed to have lost their income entirely, whereas another 28% reported that they faced an income reduction of more than half. According to the survey, 56% of the respondents availed the moratorium offered by banks and NBFCs on their loans/ credit card outstanding between March – August. (Source)

The credit risk assessment of these consumer segments are also dependent on key effects of consumption:

  1. Demand has resumed for many – these include medical supplies, pharmacies, and home gadgets.

  2. E-commerce companies have surpassed their pre-covid sales and almost every physical store has gone digital.

  3. The upcoming festive season could push festive e-sales beyond the ₹51-crore mark, which might be 50% more than what they garnered in the previous year.

  4. Aspirational categories like travelling have seen a slump, not only because of low incomes and surplus, but also because of a tourism travel ban.

The financial uncertainty, structural macroeconomic shifts in the economy, and the impact on real estate prices have also resulted in the perception of a negative wealth effect and seen people delaying big purchases. Owing to which, secured long term loans aren’t the flavour of the season.

Amidst the pandemic, Algo360 also noticed an increase on bite-sized loans (less than ₹50,000). More than 10% of the consumer base took 4-5 loans in the last 6 months, which suggests that the demand for small, unsecured loans will continue to increase, as was noticed even before the pandemic. Algo360 intends to evaluate the risk of this micro-lending spurt, better, and present it in the last part of this EWS trilogy.

[1] Between 25 March and 31 August as COVID-19 impacted lives and livelihood of millions of workers, the Union labour ministry has stated.

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