India debt market turbulence – Challenges and Opportunities for Fintech

The free money era is over. Atleast until the next recession. Its time India and its financial markets woke up to that. If they didn’t before, atleast the IL&FS crisis would have been a shock to the system. Infrastructure Leasing and Financial Services (IL&FS) are one of the top corporate debt issuers, and have 3% of the market.

debt-collection

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Let’s first look at the wider market factors before delving into the issue and its implications for Fintech.

Interest rates rise across the world has become the norm, and India is not alone. The Reserve Bank of India have already raised interest rates twice since June, and there is an expectation that by the time this article gets published, there might be another rate hike.

Rupee has taken a tumble this year. A 13% fall from the start of the year with a record low of 73.8188 recorded this week against the USD, doesn’t help. Rising oil prices is another factor. With all these macro factors stacking up, its hard for corporate borrowers, who have perhaps got a bit spoilt with the free money decade we have had since 2008.

Now, coming to the IL&FS crisis, these are the key points:

  • Infrastructure Leasing and Financial Services (IL&FS) provide infrastructure finance in India. With the push for infrastructure projects that happened in the last few years, they exploited the first movers advantage.
  • In August when IL&FS defaulted on a few repayments, panic hit and markets went into a selling mode.
  • The markets have taken a fall of about 6%
  • This has increased the risk of a contagion effect, and the Indian government has stepped in.

But the bigger worry, and probably the relevance for Fintechs is the failure of credit agencies that saw IL&FS as a safehouse. India Ratings and Research (A Fitch subsidiary) corrected their ratings on IL&FS from AAA to D after the defaults happened. Pointless.

There were so many warning signs. The debt size of IL&FS was $12.6 Billion. Infrastructure loans were notorious for non performance for the past three decades. And these infrastructure projects have been largely funded by short term debts. DEJA VU.

Its a failure in governance and is just a repeat of what we saw 10 years ago. If only the credit agencies had better technology to perform better analytics on firm, market and alternate data, this crisis could have been addressed differently.

What Lehman Brothers episode did to the Western world in the form of Fintech, the IL&FS saga could do to India.

My view is that the ripple this will create in the non banking financial services in India will open up new Regtech and Fintech opportunities. Some of the hyped up Fintech players in the lending space who are poorly capitalised and have bad credit models will disappear, and the fittest will survive. Better credit engines and underwriting mechanisms well supported by data analytics covering a bigger set of data to perform real time diagnosis would start to emerge.

I hope IL&FS is a blessing in disguise for Fintech in India. Once the dust settles, Fintechs should make the most of the inefficiencies in the debt markets.

 

Arunkumar Krishnakumar is a VC investor focusing on Inclusion, a writer and a speaker.

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