Nano lending is new in Pakistan and is going through a teething phase. It has both registered and unregistered companies in the business where the regulations are only faced by the registered ones. Recently, due to an unfortunate incident where suicide was committed by a distressed borrower, the regulator (SECP) made the regulations more stringent; and as a result, the registered companies lost substantial business.
Nano-lending is a well-established segment globally that helps financial inclusion and poverty reduction in developing economies, and it plays a critical role in financial uplifting. Nano loans are based on blind faith in the borrower’s willingness to pay back. The segment does digital onboarding of financially excluded segments and builds a track record of income and spending habits for more informed future credit decisions. Nano lenders are gatherers of virgin primary data, which goes a long way towards financial inclusion of the un-banked and under-banked population.
Many developing economies such as Indonesia, Mexico, India, Egypt, etc. have experienced this journey, and Digital Lending has become an established part of their economies. The sector is in the infancy stage in Pakistan and is facing teething problems.
The case is similar to what credit card and consumer lending used to be in the late 1990s and early 2000s when it was a new sector in Pakistan, and it was also going through similar problems. The disclosure about the effective interest rates and recovery processes was inadequate, and the commissioned incentive for the product-selling agent was to sell more. There were issues of fraud from bank employees and some consumers abused the product as well. There was even a case of suicide of a credit card customer under the pressure of that bank collection department. There was a media hue and cry after that. The role of SBP (the regulator) was instrumental in it, which as a mature regulator with the help of PBA made ground rules for recovery. Those guidelines are being followed to date; credit card lending never stopped and the segment thrived maturely thereafter.
A similar zest and maturity is warranted from SECP in the case of nano lending. There is no doubt that the disclosures of nano-lenders are weak, and that should be improved by making it mandatory to share certain information with the customers before disbursement. Then the recovery methods and tools deployed by lenders should be revisited, and there should be constant improvement. However, the recovery methods should not be so benign that it becomes impossible to make recovery from high-risk customers and could potentially kill the industry.
The way things are some players fear that the industry might die in the infancy stage. SECP has made the rules of the game much stricter. There is a cap of Rs25,000 loan size, which is too low under the given inflationary environment. The tenure of the loan is limited to just one month with an interest rate cap. It can only be rolled over twice. After that either the lender must forget or write off the loan. That is squeezing the industry, as they would not have enough margin to spend on acquiring new consumers. Then the players cannot advertise due to the negative image of the segment. That has significantly slowed down nano-lending.
Principally, there should be no capping of rates by the regulator. SBP has never capped interest rates. Limiting the rates, tenor, and number of times a consumer can take loans is playing with the free market, which should be avoided. For a new venture, there are startup costs and high losses, and these are to be recovered through high rates, and eventually, when the market matures, rates come down automatically.
The industry was growing fast and there used to be daily loans of around 100,000 with an average ticket size of Rs7,000. This made the daily loan disbursement at approximately Rs700 million per day. This includes two telco players and three main digital nano-lenders – 80 percent of loans were of microfinance banks-lead companies (licensed by SBP), while 20 percent was of digital nano lenders (licensed by SECP), where the average ticket size was around Rs5k for MFBs and around Rs10k for others. The vital difference between these 2 segments is that MFBs are lending through the customers’ deposits placed with them, while the Digital Lenders are using their own funds, brought in as Foreign Investment from abroad, through formal banking channels.
Now in the aftermath of the suicide incident, the pace of lending by MFBs is unchanged; but the pie of digital lenders has shrunk enormously, as their daily disbursement is reduced to one-fourth. The industry is shrinking and that is adversely impacting the foreign investment taxation contribution and employment by these players – including female employees that used to be the dominant percentage of staff. Nano borrowers are moving back to loan sharks and unregistered nano-lending players. That is killing the formal industry.
The borrowers of nano-lending are new to the formal lending system, as banks would never entertain this segment of customers who require such loans while microfinance has its niche. However, these nano borrowers need money to meet their emergency needs which used to be provided earlier by loan sharks. Their credit history was building. Credit data dealing companies were gathering the data and that could have helped them graduate to the formal banking segment – especially to newly formed digital banks. This process has now been compromised. The biggest factor to consider is the phenomenal growth in nano loans in Pakistan during the last 2 years, which attests to the fact that the public desperately needs them. While the Microfinance banking sector has acquired approximately 8 million borrowers since its inception, the Digital Lending players have catered to more than 5 million borrowers with a gross lending figure that exceeds Rs45 billion in just 2 years!
The fast growth of nano-lending implies that the demand was already there, but the formal supply was missing, and perhaps that demand was met by informal lenders including loan sharks. There was no data about customer credit history being built, but now in the organized sector, the data depository is going benefit the entire value chain where the top beneficiary would be customers with good credit history. The second biggest beneficiary would be the government, as more people are coming into the tax bracket. If the organized players are suffocated, the industry will move back to the unorganized players. The regulator should nurture the industry and help it navigate in a better form, which is a win-win for all.
The regulator needs to revisit its approach and should learn from SBP to have confidence in its registered lending companies. SECP should sit down with these companies to help them improve their loan processes and overall standards and procedures and give them breathing room to develop and grow. Otherwise, these companies that are bringing FDI and providing foreign currency-based liquidity for loans may vanish, and nano lending may turn into a failed experiment in Pakistan.
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