Nano-Finance Business, 2021: Recovery Inhibited by Risk and Economic Uncertainty (Current Issue No.3200)

​Nano-finance under the supervision is referred to as retail loans for business purposes, which target individuals with no regular income, account statements with banks and assets prescribed as collateral. The nano-finance business contracted during 2019-2020 due to a number of factors. These include the fact that large operators stopped extending new loans because of high operating costs that may be adequate to cover potential risks. Moreover, income of their grassroots clients became increasingly fragile due to the sluggish economy as a result of the COVID-19 pandemic. Given this, outstanding loans fell by roughly half from the record high in 2018 to THB17,441 million as of the 2020 year-end, which was in contrast to a surge in non-performing loans (NPLs) to 6.1 percent, against the 2.3 percent reported for 2018.

      Meanwhile, as the extension of automobile and motorcycle title loans is less risky and offers credit service providers secure income, competition in this credit market has intensified, especially motorcycle title loans because potential borrowers have income at almost the same level as those in the nano-finance business. Moreover, their transactions can be verified and monitored.                                                

      Since the interest rate under nano-finance is as high as 33 percent, this offers credit service providers more incentive to make adjustments to ensure that their credit extension processes are more efficient, as follows:

·  Offering loans via digital channels so that they have greater opportunities to tap potential retail customers and reduce business costs

· Offering information-based lending via cooperation with business partners on various online platforms that have large supplier and customer bases.

· Scaling down credit limits to THB5,000-50,000, which are lower than the credit ceiling, so as to diversify risk.

KResearch expects that the nano-finance business will grow within a range of only 1-5 percent in 2021 after posting steady contractions during 2019-2020 because some large credit service providers have gradually reentered the market to tap the nano-digital loan segment. Meanwhile, NPLs in the nano-finance business are projected to decline from last year to roughly 5.0-5.5 percent as credit service providers have become increasingly cautious in their credit underwriting process over the past two years. Because the nano-digital business model is at an initial stage, close monitoring must be made to risks that may arise from the extension of such loans. KResearch expects that NPLs in the nano-digital loan business will not have a significant impact on the overall NPLs during the early phase of its introduction because the extension of such loans is broad-based and the amount extended is small.

If the COVID-19 pandemic can be controlled and economic activity at home and abroad returns to normalcy, KResearch expects that competition in the nano-finance business will intensify because its return rate is higher than those of other retail loans and a leading bank's subsidiary is set to enter this market. Meanwhile, the traditional loan underwriting process, based primarily on financial transaction data of borrowers, has created a gap that prevents borrowers with debt servicing ability from gaining access to funding sources because financial institutions do not have other data that reflect opportunities and risks of this customer segment. However, the advancement in digital technology for collecting behavioral data beyond that is in the financial system will offer greater opportunities for customers to gain access to credit in the financial system without hurting the economic system because the credit underwriting process equally recognizes both opportunities and risks, as well as a responsibility to society, and sustainable development of the Thai economy over the long term. The nano-finance business is under close supervision of the relevant authorities.