Financial technology (Fintech) companies may have a harsh time in loan recoveries post COVID-19 as majority of them do not have transparency mandates that would support their loan recovery process, a report has stated.
This was disclosed in the latest edition of a report by Debtors Africa – an independent searchable database of recalcitrant and delinquent debtors in Africa was at the weekend unveiled in Nigeria, that was carried out in partnership with Proshare.
It pointed out that a situation where many people would have lost their jobs during the COVID-19 period would make it difficult to enforce recovery as the delinquency would be more of a problem of revised individual cash flows than any deliberate attempt at the avoidance of loan repayment.
It stated that post COVID-19, lenders would be condemned to a new age where the character of borrowers must be established as a more critical and pronounced part of the lending process.
“The review of a borrowers’ character as depicted by a borrowing history (captured by Credit Bureaus) and a digital registry of delinquency (captured by debtorsafrica.com) will combine to add rigour and sharpness to the process of approving loans.
“In the post COVID-19 period loan default and delinquency will naturally escalate. However, part of the process of default mitigation would be debt resolution compelled by negotiations around loan workouts, this would be the preferred option for most borrowers as a digital registry of delinquency would provide a permanent public record of hardcore loan indebtedness until resolution with the lending institution.
“The register would be updated by the lending institutions as the borrower makes good on paying down agreed outstanding liabilities,” it explained.
According to the report, some sectors that would likely be most severely affected by loan delinquencies once the pandemic is over would include fintechs because they offer short-term credit payments and financial services.
“If there is one characteristic that will define the success of winners and losers in the new loan ecosystem it is transparency, banks hiding delinquency behind a stump of grass will soon discover that their nakedness is as clear as that of a day-old baby.
“The only way for banks and their borrowers to create a sustainable credit environment is for them to stand digitally undressed, with the delinquent borrower’s character open to the world to see and make judgment calls.
“A bank must become as transparent as its borrowers to validate its credit process, no bank can claim transparency without a digital footprint that enables engagement with recalcitrant and delinquent borrowers in the court of character evaluation and credit history.
“If banks do not publish the list of their delinquent debtors on a searchable data base, they create a systemic challenge that hurts all lending institutions and gives delinquent debtors an avoidable advantage in gaming the credit system,” it added.
The report represents a culmination of a detailed review of the credit experiences of local Nigerian banks in the last two decades and revealed the challenges of a local lending cycle that has seen lenders become victims of the tyranny of bad and delinquent debtors.
The report makes a case for a new approach to the lending cycle to ensure that integrity, professionalism and evidence-based best lending practices are strictly followed to guarantee the sustainability of the financial system and the prosperity of the larger economy.
Credit agencies can also make use of the data base as a source of quickly searching the credit position of a number of loan applicants across lending institutions.