You may have heard this line by J. Wellington Wimpy from the Popeye comics: “I’ll gladly pay you Tuesday for a hamburger today.” The phrase is in many ways the byword of the debtor, who seeks fiscal gratification now in exchange for payment deferred. But Wimpy had a card up his sleeve: He would never show up on Tuesday.
It is unsurprising that a character from the era of the Great Depression would see defaulting on his debts as a way of life. Times were tough. And debtors evoke sympathy. Inversely, creditors invoke aversion.
In the aftermath of COVID-19, those who default on debt include many of the poorest countries in the world: Zambia, Belize, Ecuador, Lebanon and Suriname. Not even the middle-income nations were spared: Argentina defaulted on its sovereign debt in May after failing to make a $500 million interest payment. This was the ninth time it had done so in its history.
Interestingly, many of these defaults were likely to have occurred anyway. If the cost of repayment was too high pre-COVID-19, what prospects does that leave the rest of the world in the aftermath?
When the virus prompted all from the largest to the smallest of economies to shut down or risk disaster, governments were left with little choice but to spend more: Around $12 trillion worth of fiscal action was taken in the aftermath, according to the International Monetary Fund’s Fiscal Monitor report. Global general government debt this year went up almost 100 per cent of GDP; India’s was expected to reach nearly 90 per cent by the end of 2020, up from the 72.9 per cent seen in 2019).
While this implies a looming payments crisis, the IMF report said the priority should remain on continuing fiscal stimulus in 2021, keeping in mind the 90 million people worldwide expected to have been dropped into extreme poverty. Negative interest-growth differentials are expected to allow governments to keep public debt stable until at least 2025. Given the exceptional nature of the crisis, some leeway from creditors is to be expected.
But leeway depends on who the creditor is. Low-income countries owe $102 billion to private creditors according to the World Bank, about as much to China according to the Economist with $178 billion in total to G-20 countries.
It is easy to depersonalise government debt: It after all tends to be unfathomably large numbers that tick ever-upwards (during the 2008 financial crisis, the debt clock on Times Square ran out of digits). A map of gross debt position shows much of the world veering to the red side (over 75 per cent of GDP in debt). But to paraphrase a line that became popular following the 2020 US election, land doesn’t go into debt, people do.
What of personal debt incurred in 2020—and how will this be repaid?
The challenge of repayment
In August, loan recovery agents hijacked a bus travelling from Gurgaon to Panna in Madhya Pradesh, with about 34 passengers onboard. The bus owner, who had died the night before, owed money to a finance company, who wanted their money back. According to reports, the passengers were refunded their fares and put on another bus, while the conductor was given Rs 300 by the “kidnappers”.
As loan recovery goes, this was an example of overzealousness. But loan recovery is seldom seen as a pretty affair. Centuries since Shakespeare wrote the character of Shylock the Merchant, the popular image of creditors and debt collectors remains that of a rapacious villain.
Whether a debt is unsustainable or cruel depends largely on the interest rate owed and the methods used to recover it. Who owes the debt, and to whom it is owed, matters. For the 40 crore Indians the International Labour Organisation (ILO) estimates were pushed into poverty in 2020, the informal sector they largely work in is also the most likely source of their debt.
When over one crore migrant workers walked to their homes amid the nationwide lockdown and the shutting down of their livelihoods in the cities, many—lacking access to formal credit—are likely to have been forced into bonded labour. A Reuters survey of 3,200 who were walking home found that at least a third were indebted, half of whom feared violence if they could not repay.
Sans livelihood, credit becomes a must to survive. But, sans a credit score or formal employment, it is difficult for banks to issue loans to the so-called new-to-credit. And so, like TV on the Radio sing in the song ‘DLZ’, “fortune strives to fill the vacuum that it feeds”. A slew of digital lenders made use of the moment, prompting the RBI to issue a warning as unregistered financial apps charged users interest rates between 60-100 per cent.
The pandemic has accelerated the growth of fintech. Tech platforms that can connect lenders like Non-Banking Financial Institutions (NBFCS) or banks with borrowers are making use of the new opportunities.
There is a growing demand for data to help lenders decide who is credit-worthy. As the Experian Global Insights Report notes: “Organisations are utilising digital solutions to manage customer credit risk, with 26 per cent planning to use on-demand cloud-based decisioning applications.”
Speaking to THE WEEK, Neel Juriasingani, CEO & Co-founder of DataCultr, says the pandemic has brought more interest in the debt collection side, traditionally not seen as very glamorous. “Globally, debt collection is perceived as coercion: People calling you up, walking into your homes and trying to harass you—that’s the reality. We are trying to bring to the financial world a way to use technology to make the collections process more empathetic.”
How DataCultr hopes to do this is by introducing smartphones as collateral, targeting the roughly 400 million users without one. These mostly feature phone owners are offered smartphones on loan by banks and NBFCs. The phones come with software tracking usage and repayment, creating a usable risk profile for financiers. If the borrower defaults, the phones can be remotely locked and retrieved. The goal is to reduce monthly default rates by incentivising timely repayments.
“The utility of a smartphone is clear to a lot of people. Plumbers can see photographs of what is leaking via WhatsApp, for example. But the reason many cannot own one is the affordability factor: Research shows that if the price of a smartphone is more than 2 per cent of one’s annual income, they will not buy it. [To buy a Rs 5,000 smartphone] is unaffordable. For these people, when they need a loan, that is unaffordable. That is the segment which is unbanked, which we are saying is not necessarily unbankable,” says Juriasingani.
He says the pandemic saw banks take a more empathetic approach to their customers. Incidents like the Agra hijacking are rare, he says. Aggressive loan recovery techniques are increasingly abhorred by banks, especially given regulatory interventions, leaving room for technology to make the process more humane.
Debt collection earns a bad rep, thanks in no small part to Shakespeare and Shylock, but also due to the personal experience of many: Search YouTube for “debt recovery agent” and you will find a slew of videos by borrowers filming aggressive agents in action. But, taking off the Shylock-tinted-lenses, it is evident that repayment must be the natural consequence of borrowing. And in India, with some of the highest stressed asset ratios in the world, banks have reason to be wary.
Speaking to THE WEEK, Ashish Singhal, Managing Director, Experian Credit Information Company of India, points out that in a lending scenario, banks may make just 3-4 per cent of profit while absorbing 100 per cent of the loss. “Take the example of a three-year personal loan. After accounting for cost and operational expenses, the money which the bank would make would only be the collection of the last three EMIs. For the first 33 months, if the consumer defaults, then banks would make a loss on that,” he says.
Experian’s data tells an interesting story about the landscape of formal debt in India. Says Singhal, “We have about 1.35 billion people. Close to 800 million as adults. The number of people who have formally ever taken a loan—the number of customers in the bureau—is 400-450 million. If you look at the number of people who have active trade lines, it’s a small percentage of that.”
That leaves tremendous room for growth. But what is curious is where this growth has taken place during the pandemic. “Pre-pandemic saw growth in unsecured personal loans with low ticket size and low tenures (15, 60 or 90 days to one-year). Broadly, the two segments were buy-now pay-later and payday loans,” says Singhal.
“Post lockdown saw growth on secured assets: Home loans grew due to low-interest rates (nearing pre-2005 levels) and low or stable property prices as well as cuts to the stamp duty in places like Maharashtra. Personal mobility also saw a rise as people grew to prefer private transport amid COVID concerns. Overall, there was growth in higher, longer-term debt, with the average ticket size being Rs 20 lakh,” he adds.
While consumer lending has not yet returned to pre-COVID levels, it is expected to grow as the economy rebounds.
Experian’s 2020 Global Insights Report finds that across the Asia-Pacific, consumers are reducing discretionary spending and growing their reliance on digital payments—as well as their need for secure data policies and privacy. Consumers are likely to increase their business with financiers who treat them fairly, notes the report.
DataCultr’s CEO also notes that the humane touch can increase loan recovery rates. This includes reminders, not through aggressive collectors knocking at one’s door, but through SMSes, local language reminders and even mobile phone wallpapers.
“25 per cent who see the wallpaper reminder pay up within three days, 45 per cent pay within seven days,” says Juriasingani.
So, in 2020, humanity mattered when it came to debt relief and debt collection. Organisations and governments alike have realised this. Singapore, Malaysia, Australia, Japan, China and India all instituted loan moratorium schemes to help ease the burden of repayment. 76 low-income-countries, including Pakistan, were beneficiaries of a G-20 freeze on debt repayment. Now, an equivalent effort is expected of private lenders too if the debt is to become sustainable.
Heavy-handed debt recovery tactics can backfire. The Agra hijackers probably did not get their money back. What they got instead was a booking for dacoity and kidnapping, with one hijacker even getting a bullet in the leg after the police apprehended him during an encounter.
As future governments cope with the burdens of 2020, they may be tempted to write off public and personal debt. There is cause to pay attention to informal debt—difficult to track and even more difficult to pay off. But, for the majority of Indians, this is the debt that may follow them for the next several years.
While writing off debts can normally be a sign of fiscal immaturity—spooking investors—given the unprecedented nature of this crisis, this may be what the RBI’s risk buffer is intended for. The way forward in 2021 will require governments and lenders alike to prioritise humanity first. At the end of the day, the economic benefits of funding the recovery from COVID-19 far outweigh the costs.