Alternate Lending Predictions

by Karan Bhatia
09 March 2021

I’m glad we had a year like 2020.

Don’t get me wrong … it has been a terrible year on most counts – a global pandemic causing over 1 MM deaths; people losing loved ones, jobs and livelihoods, and left without the ability to travel and see family and friends. BUT it has helped us answer a particularly important question: What happens to alternate lending in a bad credit cycle?

Well – we are going through one of the worst.

While we are nowhere near to being done with the downward cycle and may still see some pain to come, the worst may be behind us. We are not likely to see more lockdowns that match the magnitude and scale of the ones we have seen in 2020. Job losses have flattened and are seeing a comeback in certain economies, and with the vaccine around the corner, business optimism is growing.

Through the worst of this crisis, we have learnt one thing – alternate lending is here to stay and will ultimately survive through credit cycles.

“A crisis is a terrible thing to waste,”
Paul Romer, economist, Stanford University.

The first surge in alternate or digital lending came after the GFC. While this was mostly restricted to the US, Europe and perhaps China – the rest of Asia has seen it emerge only over the last 3 years. We are now likely to see the next surge in alternate lending in Asia, beginning in 2021, driven by disruptions caused by the current crisis. We will see small businesses and consumers adapt much faster to digital technologies. Soon all of the services they provide and consume – including credit – will be provided completely electronically. This is obviously a huge accelerator for alternate lending. We may see banks and larger non-bank lenders look to adapt and provide these services, BUT the nimbler and more innovative digital lenders are most likely to be the biggest beneficiaries. Partnerships and/or acquisitions by banks may well be on the cards, as they look to adapt to the new normal. We will begin to see this trend develop in 2021.
The world, for the short term, seems to be moving from a global economy to a bigger focus on local economies. This benefits local digital lenders who tend to be more regionally focused and have better access to borrowers. On the other hand, global capital flow will be restricted which could be a challenge for balance sheet-based lending companies. However, the emergence of local VC funds and private debt consolidators (Lend East) dissipates this to a large degree. As the gap between global capital and local lenders becomes wider, we will need a “better bridge” to overcome this. The role of local experts with their feet on the ground, such as Lend East, will be critical in 2021.

“It is not the strongest or the most intelligent who will survive but those who can best manage change.”

Lending is one of the oldest professions. We have seen various forms of lending across centuries go through crisis and credit cycles but lending never goes away. It adapts. We expect the same to come out of this crisis. There are signs of this already happening. “Incred”, Oriente”, “Kredivo”, “Akulaku, and” “FS” have raised further capital (debt and equity) to shore up their balance sheet. They have managed to keep NPAs and cash burn manageable through this crisis, aided by moratoriums and government support, but also by becoming conservative through the crisis. Once winds move in their favour, we will see these stronger balance sheets begin to grow rapidly again. Look for signs of this in 2021.

More dangerous than an unanswered question is an unquestioned answer.”
We don’t have all the answers heading into 2021. But we won’t stop asking questions.

Will banks adapt fast enough to make alternate lenders irrelevant?

We haven’t seen evidence of this so far. Large ships take time to pivot. This adoption is more likely to happen through partnerships than organically. This is positive news for the entire sector. We are seeing some of the smaller balance sheet lenders move to a “Lending as a Service” model – a precursor for things to come? Can Lend East or similar players provide the balance sheet for these models?

Digital banks – boon or bane?

We have seen the several countries – Singapore, the Philippines, and India – move towards offering digital bank licenses in some form. Will they be able to disrupt alternate lending with their cheaper access to capital? Or will they see acquisitions / partnerships between digital banks? It’s probably too soon for these to play out but watch out for signs in 2021

Will we see pre-Covid levels?

This is the question most industries are asking headed into 2021. The answer is the same – it depends. Some already are, or seem to be, headed back to those levels at a rapid pace – others may never get there. The key is to be able to pick one from the other. With our expertise in the space, our eyes and ears on the ground, Lend East puts itself in a great position to pick the winners

Like I said – I’m glad we had a year like 2020. But I am even more glad it’s behind us. If 2020 taught us anything, it’s that predictions mean nothing. You have to be able to and open to learn and adapt. We will continue to make the best decisions using data and information at hand. But if the world changes, so will we.