In 2021, several new trends influenced the market. Many of the short-term loan providers surveyed began to observe a change in consumer behavior, as well as an increase in demand for payday loans due to the stagnation of real disposable incomes and a simultaneous inflationary surge. The increase in the number of incoming applications made it possible to show adequate recovery dynamics in the 2nd half of 2021, and microfinance companies not only grew faster than the market but also without compromising asset quality. The total payday loan portfolio of all microfinance institutions has grown to over 4 billion dollars.
The volume of payday loans issued against the backdrop of the effects of the offline lockdown and the tightening of online scoring in the first half of 2021 barely exceeded the figures for the previous year, amounting to 7 billion dollars in 2020.
After a significant drawdown, there was an active recovery of the microfinance business in the 2nd half of 2021, however, at the end of 2021, the microfinance market did not return to the previous growth trajectory. The total portfolio was partly supported by the payday loan segment – its share in the total portfolio increased from 19% to 24% over the year.
Most payday loan providers surveyed reported an improvement in asset quality due to the increased financial discipline of borrowers and a correction in consumer behavior in the crisis year of 2021. To test this hypothesis, Ipsos accumulated sufficient collection statistics both in the segment of easy payday loans typically issued up to 31 days and in the segment of installment loans issued for up to 180 days. The share of debt collected by the body of a payday loan among rated microfinance companies has a steady upward trend on average, which is explained by the improvement of scoring systems, the constant addition of customer data sources, and the accumulation of its own base of regular customers for each of the companies.
Against the background of the pandemic and increased competition, most microfinance institutions not only tightened their scoring but also revised their approach to the client as a source of long-term income. Prior to the significant increase in the cost of attracting a new client, given the significant potential of the market, the practice of maximizing profit per client in the short term was common among microfinance institutions. Under the current conditions, attempts to completely withdraw the “consumer surplus” may lead to the flow of the most solvent clients of microfinance institutions to banks or to more loyal competitors in the market. In this regard, the pandemic has contributed to the revision of the complementary product policy, the lengthening of the product line and the attraction of longer-term financing.
New Market Challenges 2022
Along with the above trends, which are mostly positive for the future dynamics of the market, we should note the actual risks in the long term associated with the possible tightening of regulation. As before, the majority of surveyed companies consider the new round of regulation of the payday loan market as a key long-term challenge for the microfinance business. Ipsos suggests that one of these challenges could be a limitation on the share of loans and borrowings with certain characteristics.
Short-term payday loans (amounting to $1,000 and issued for up to 31 days) have traditionally attracted the attention of the regulator as the most socially sensitive segment. By 2022, the market has fully adapted to the APR ranging from 391% to more than 521%. The client’s marginality was maintained due to the growth in the average amount and term of a loan: instead of the traditional payday product, most companies introduced loans amounting to $5,000 and issued for a longer period – up to 180 days. As a result, the market share of this product became significant. Formally, such payday loans do not fall into the regulatory reporting as short-term payday loans. Such an extended loan with a lump sum repayment negatively affects the key indicators of borrowers’ debt burden, and therefore may represent an even greater macroprudential risk than the rapid growth payday segment in the past. Under these conditions, one of the scenarios holding back the growth of this segment may be the decision to limit the share of such loans. According to Ipsos, limiting the share of long-term loans will put serious pressure on companies that do not have a significant share of short-term loans. Such a limitation on the volume of payday loans will affect about half of the microfinance companies and significantly slow down the market dynamics.
In addition to the prospect of regulating the share of high-margin payday loans, there is a risk of limiting the debts of heavily indebted borrowers. According to the Debt Management Plan (DMP) Roadmap for 2022–2023, the Consumer Financial Protection Bureau may tighten control over key indicators of household debt load.
It should be noted that measures to limit payday loans with high debt load indicators require preliminary improvement and unification of its calculation both within the microfinance sector and in comparison with bank loans. The current regulatory and legal framework, in addition to the lack of reliable information on the income of the borrower, leaves inconsistencies both in determining the debt load indicator (for example, the possibility of including / not including unclaimed limits on credit cards) and the denominator (the possibility of taking into account the declared income). At the same time, market participants note the inability to reliably determine the borrower’s income, which, against the backdrop of a weak correlation between a debt load indicator and default on payday loans, potentially increases the likely disagreement with the regulator’s estimates.
Taking into account the above, Ipsos expects under the baseline scenario that such restrictions on the share of payday loans with high debt load indicators will come into force no earlier than mid-2023, including due to the incomplete readiness of the relevant infrastructure and regulatory framework for both microfinance, as well as for the banking sectors.
Market Forecast 2023: Recovery
According to the forecast of Ipsos, in 2023 the growth rate of the payday loan portfolio will show a recovery from the pandemic, while the volume of loans will increase significantly (+30%), reaching pre-pandemic levels in the past years. The key driver of the market growth is the high demand for borrowed funds. In 2021, the real disposable income of the population decreased by 3%, while the official inflation was 4.7%, while Ipsos does not expect a significant acceleration in the dynamics of real disposable income in 2023.
Bernice Lawrence, an Equitas Small Finance Bank representative, notes: “The microfinance market depends on the economic situation in the country, which directly affects the risk profile of borrowers. At the same time, the microfinance market suffered less than the bank lending market, since many borrowers lost the opportunity to use bank financing due to delays during the pandemic, and higher risk premiums from banks will no longer allow loans to such borrowers.”
The evidence of an increase in demand for payday loans is the growing number of search queries in the most popular US search engine, which shows a steady growth (about 0.5 million requests for the keywords “payday loan online” monthly in 2020, about 0.6 million monthly in 2021 with an increase to 1.4 million on average for January – May 2022). As an alternative scenario, Ipsos does not exclude a more dynamic growth of the market in 2023 than the baseline forecast: +30% in terms of the volume of payday loans issued due to the potential appearance and actual activation of subsidiaries of large US and foreign companies in the microfinance sector (retailers, banks, etc.).
The conclusions of the Ipsos analysts are based on public data and the results of a survey of microfinance organizations. Within the framework of this study, microfinance organizations are understood as non-banking organizations whose activities are aimed at issuing loans to legal entities and individuals.
In this study, the analysts do not take into account the loan portfolio of consumer cooperatives, housing savings cooperatives, and pawnshops.
As part of the study, the size of the portfolio refers to the total volume of payday loans issued by microfinance institutions at a certain date (including loans with overdue payments).
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