Digitizing Instant Credit; Low Risk, Low Hassle, High Potential
Credit access is limited in Nepal. There are 44 million bank accounts in a country with a banked population of 18 million, equating to a ratio of 2.5 bank accounts per banked person. However, barely 2 million of these accounts are credit accounts, which is less than 5% of total bank accounts. This is because obtaining credit is a long and tedious process, with multiple bank visits, paperwork, pledging of collaterals, and other obstacles present.
The harsh reality is that people enjoying credit facilities are the ones with connections with banks through relatives or friends. People without referrals face difficulties in obtaining credit from financial institutions. Banks are, at their core, a risk management business, and hesitation to provide credit without large collaterals or referrals is understandable.
Conventional credit products offered by financial institutions rely on a traditional approach to lending, which means that the cost of underwriting small short-term loans is not economically viable for the banks, and hence, highly creditworthy individuals with small credit needs would always remain unserved.
Foneloan: The First Step Towards Digitizing Credit Access
Foneloan is a digital financing product that provides short-term loans to the bank’s customers through their mobile banking apps. It is an add-on to the mobile banking app of banks powered by F1Soft and allows banks to disburse loans of up to Rs. 200,000 instantly, without requiring collateral, bank visits, or even paperwork.
Foneloan was conceptualized to cater to the people who are creditworthy, yet the traditional process of obtaining credit discouraged them from applying for credit facilities in a country that is seeing increasing decentralization, industrialization, and entrepreneurship.
“Foneloan was initially implemented to the salaried employees maintaining payroll account with Nabil Bank which helped the customer to meet the immediate cash requirement without any hassle. Recently, Foneloan has been extended to QR Merchants also, which will help those small businesses and enterprises to fulfill their short-term credit requirements”, said Niraj Basnet Danil, Head SME and Microfinance at NABIL Bank. “Based on the experience of Foneloan to QR Merchants, we plan to scale it up to other models and businesses, especially to the Agri sector.”
“Banking in Nepal is still in process of evolution but is currently focused on collateral-based lending primarily due to legal and regulatory regime and in view of ease in NPA management.”, added Mr. Basnet. “Though our risk-taking appetite is increasing in recent days, we need to shift from collateral-based loans to behavioral and cash flow-based credit. Foneloan’s approach to automated credit underwriting and loan management is the first step towards achieving the same. It seems that psychometric evaluation of borrowers is necessary for the coming days for larger ticket sized loans. NABIL Bank is also exploring the right model to expand the horizon of the digital services through specialized nbank.”
NABIL Bank is the first institution to offer Foneloan, starting from September 2020. They have also recently expanded Foneloan access to QR merchants of the bank.
How Does It Work?
With Foneloan, applying for a loan takes just a few taps, and it is disbursed immediately into their bank accounts. Additionally, customers don’t have to worry about paying back the loan either; maintaining the required balance on the date of the payment is enough. The system automatically debits the loan amount along with interest.
Eligibility or creditworthiness is decided by an automated backend system called “Decision Analytics” that weighs different aspects of the account, such as type of account (salary or savings), deposit patterns, withdrawal patterns, existing loans, and other factors to decide whether it is eligible to get the loan or not.
Loans can be paid back on a 1, 3, 6, 9, or 12-month period, and Foneloan has also included a Buy Now, Pay Later feature that allows users to make QR payments instantly and pay back the amount at a set time.
Currently, Foneloan is available on the mobile banking apps of 8 major commercial banks of Nepal and is planning to expand to cover more banks within this year.
“Nepal for long had very conservative credit policies”, mentioned Mr. Bishnu Gwayali, Head Retail & SME Credit at Everest Bank. “But we are seeing a progressive shift from reactive to proactive policies, especially in the digital credit space. The latest directive from NRB where the digital lending cap has been increased from Rs. 200,000 to Rs. 500,000, clearly is an example.”
“We are convinced with the effectiveness of the underwriting standards of personal credits and Foneloan as a whole. Managing risk is our business, hence we should not shy away from taking calculative risk especially when it comes to new products and services aimed at making our and customer’s life easier”, elaborated Mr. Gyawali. “We believe that in the next 5-7 years, banking will witness a complete shift towards digital transformation and digital credit among many other services will be the front runner”.
Everest Bank is the latest bank to offer Foneloan, starting from September 2022.
The Journey So Far
Foneloan was conceptualized in 2019, and the first bank was onboarded in late 2020. In under 2 years, Foneloan has disbursed about 50,000 loans worth Rs. 1 billion. The average loan amount is Rs. 30,000, and NPL rates are only about 1%.
Foneloan has been largely embraced by the public for various reasons. The Buy Now, Pay Later feature that was most recently released has already seen a jump in usage, with people using it for everything from purchasing TVs to paying hospital bills with this feature. It isn’t an exaggeration to say that Foneloan has helped people during their times of most dire need.
Foneloan has also become a source of revenue for the banks that offer it. Since the process of applying for loans and paying them back is automated, banks are able to generate income from interest without dedicating manpower to underwriting, loan tracking, collateral verification, or numerous other steps required for conventional credit.
People living and working in remote areas of the nation might not have access to credit cards, but they can be eligible for Foneloan. It is slowly becoming a go-to service for credit for users of all ages, and users who register and use Foneloan use the service again and again, showing the highly retentive nature of the service.
“Digital lending is efficient, and the logic-based approach to underwriting makes the system fast and effective for the bank, and convenient for the customers”, said Ms. Bharti Pande, Head Strategy and Marketing at Laxmi Bank. “We’ve made our policies more expansive and inclusive to offer this service to a larger customer base, and the number of repeat customers show us that we are doing something right.”
“Customers are appreciating the product, and it is quite well-received. Now, we want to move away from urban centers and expand to rural areas too.”, Ms. Pande mentioned when asked about what customers think regarding Foneloan. “We are regularly reaching out to eligible customers through various channels, and have a dedicated CX team to deal with customer issues with Foneloan. However, behavior-based analytics must be mixed with logic-based analysis to incentivize good borrowers and penalize risky ones.”
Laxmi Bank has the largest portfolio for Foneloan and offers Foneloan not just to salary accounts but regular accounts as well.
So What’s Next?
Foneloan is the first and only instant credit facility available nationally, and one that does not require any paperwork, bank visits, or collateral. While the eligible pool might not consist of all bank account holders, the banks have the ability to decide the risk level they want to entertain for the service and configure their Decision Analytics systems accordingly. In 2022, Foneloan is seeing drastic growth, since B2C marketing for the service has recently started, and people are starting to realize and use the service extensively.
The Decision Analytics system is also unique and revolutionary in the market. Creating an objective parameter for disbursement of loans not just reduces loan processing manpower, but also enables banks to give small short-term loans that are economically viable to underwrite. It also promotes healthy credit behavior from customers, since keeping oneself eligible for Foneloan requires customers to pay back loans on time, be smart with their deposits and withdrawals, and practice healthy credit habits.
The Decision Analytics system is also a great precursor for creating an individual credit-score system for the country. Credit scoring is a great concept that allows financial institutions to objectively assess risks for individuals and set interest rates accordingly.
Foneloan has also taken its first steps to extend the service to small businesses, giving them access to instant loans in an attempt to transform a market teeming with potential but with no economic backing. This is the roadmap for Foneloan; first becoming the widest credit option for individuals, then servicing small businesses with loans required for operations and scaling.
F1Soft International has always been a problem-solving organization. Ever since its inception in 2004, it has looked for ways to make Nepali lives easier through digital intervention. It started with various digital banking solutions, but it has also started branching out to other avenues that address large gaps in our economy. Foneloan is the latest endeavor in its long list of solutions for various problems that Nepalis face.