Southeast Asia may allow microlenders a relatively free run for longer as recovering from the COVID-19 pandemic remains at the top of the agenda, though it may become a breeding ground for risks in the coming years, analysts say.
Unofficial lenders in emerging Southeast Asia, as earlier in China and India, have been allowed to skirt around the more stringent rules that apply to other financial institutions such as banks. The governments, aware of their importance in providing small loans to the unbanked populations, keep regulation easy as long as they do not risk destabilizing the financial system.
Amid the pandemic, most governments are aware that microlenders play an essential part in providing capital to the unbanked segments of the population, said Johnson Chng, a partner at Oliver Wyman. "Times like this require the government to step in to kind of be fair to both sides. But whether and how much the government can step in depends on how much of a war chest they have in their treasury departments," Chng said.
Southeast Asia may still be behind the likes of China and India in terms of available data and technology to regulate such lenders, "and obviously COVID makes it doubly complex," he said.
India is seeking to tighten the rules for nonbank financial companies, or NBFCs, after the failure of several companies — including the high-profile collapse of Infrastructure Leasing & Financial Services Ltd. — in recent years threatened to destabilize the financial system. The Reserve Bank of India published a discussion paper on Jan. 22 on a regulatory framework for NBFCs based on their size and has invited comments on its proposed new rules. The central bank is also mulling to allow the bigger NBFCs to convert into banks, which would give them access to relatively cheaper sources of funds.
China, too, has proposed new rules that require microlenders to have at least 1 billion yuan in registered capital when operating in one province, or 5 billion yuan when operating in more than one province, making it difficult for less capitalized players to operate in the market.
Guillaume de Gantes, the leader of financial services practice for Southeast Asia at McKinsey, said China's attempt to regulate peer-to-peer lending has highlighted the challenges for the industry. It would be even more onerous in Southeast Asia, as the priorities and strategies may differ in each country.
The relative importance of microfinance may be the highest in Cambodia among Southeast Asian countries, de Gantes said. "There, the priority is to manage systemic risk, ensure profitability and growth of these institutions," he said.
The Philippines stands out in terms of the number of institutions and "the challenge is around conduct and ensuring they can build scale." At the other extreme, Thailand has a limited private institution ecosystem with the government itself largely shouldering the role of microfinance.
As they grow, microfinance companies will also face some of the same problems that their bank rivals face. Low interest rates and worsening asset quality were the major concerns in 2020, with smaller banks struggling as borrowers failed to repay loans on time.
"The stress from the pandemic will play out in the next two to three years as small businesses and households find themselves unable to repay loans," said Vidhu Shekhar, senior country head India at CFA Institute. "This will put pressure on micro-lending institutions as well, and could result in calls for bailouts. But I don't expect governments to change their approach to micro lending because of the pandemic," he said.
Most governments have been focused on pumping liquidity to keep their economies afloat as the pandemic roiled the region's economies.
"The pandemic has spawned a borrower-friendly credit climate with government measures specifically promulgated in many cases to reduce enforcement measures upon borrower defaults, and freeze default interest rates," said David Harrison, a partner in law firm Mayer Brown's Vietnam office.
Vietnam, for example, has banned third-party debt collection, which may favor more regulated credit institutions. It also has plans to regulate fintech in the context of payment intermediary services.
However, once countries recover from the pandemic, analysts expect governments will look into regulating the microlending industry to ensure economic stability.
"Regulation would need to be calibrated depending on the circumstances in each market, so as to balance meeting the demand for credit and protecting borrowers from sharp practice," said Wong Nai Seng, regulatory risk leader at Deloitte Southeast Asia.
Even with the light-touch regulation, authorities in Southeast Asia will likely keep a close watch on fintech companies that are seeking to tap the recent economic growth and rising incomes in the region.
Chinese tech giants such as Ant Group Co. Ltd., an Alibaba Group Holding Ltd. affiliate, and Tencent Holdings Ltd. also provide small loans to their customers and are set to joust with regional players such as Grab Holdings Inc. and Go-Jek that have ventured into lending via mobile apps. China's rapidly evolving rules for microfinance companies were cited as a major reason behind the sudden halt to Ant's 2020 listing plans.
"For 2021, the regulators in the Southeast Asian markets will focus on the humongous tech firms that are providing financial services to make sure that they don't have a major risk underneath their noses," Oliver Wyman's Chng said.
Technology and app-based ride handling firms in Southeast Asia have disrupted banks in the payments business, thanks to the popularity of their reloadable wallets that can even be used by the large unbanked population. However as these fintech firms tend to operate in multiple countries, regulating them becomes complex.
As of Jan. 22, US$1 was equivalent to 6.48 Chinese yuan.