Private credit fuels a ‘buy now, pay later' lending boom in Asia
The computer cost 37,999 Philippine pesos (S$854), almost as much as Regalado earns in a month. Still, Billease approved her application within minutes. She agreed to make 12 monthly payments of 4,493 pesos each, including principal and interest. The effective annual rate: 42 per cent. 'At first I was hesitant, but I didn't have much choice,' said Regalado, who lives in southern Manila and had four instalments left as at mid-July. 'I really needed that laptop.'
Lenders worldwide last year made US$334 billion in BNPL loans, five times their value from five years before, according to technology analysis and consulting firm Juniper Research. In the US, merchants typically pay any fees, so customers get no-interest loans as long as they keep current. But the developing world has a different model: charging eye-popping interest rates to cash-strapped borrowers.
While Indonesia, Malaysia and Thailand have been tightening regulation and warning consumers about the cost and risk of BNPL loans, companies such as Manila-based First Digital Finance, which operates as Billease, say they are opening up consumer finance in underserved markets. They are attracting investors with a socially responsible tilt, such as private equity giant TPG's The Rise Fund, one of Billease's owners.
Traditional lenders did not want to take on the risks of extending this kind of credit, said Georg Steiger, Billease's chief executive officer and co-founder. 'Early on, banks were not very comfortable with the type of collateral that we can offer, which is basically secured against a loan book,' he said.
So the booming US$1.7 trillion private credit industry filled the gap. These lenders, which make loans outside both traditional banking and the world of publicly traded bonds, initially catered primarily to small and medium-sized companies but have been expanding into consumer finance.
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Billease has tapped private debt investors, including UK-based Lendable, which has raised money from Shell's charitable foundation, development banks and investment firms catering to wealthy families. So have two of its biggest competitors, both based in Singapore: Kredivo Group has borrowed from money manager Janus Henderson Group's Victory Park Capital Advisors, and Apaylater Financials, which does business as Atome, has looked to the growing private credit operations of BlackRock, the world's largest money manager. The private credit companies typically lend out money to South-east Asian BNPL outfits at annual rates of 10 per cent to 15 per cent, making the deals attractive to the companies' investors.
In Jakarta, Indonesia's capital, ads for the BNPL companies are almost inescapable both online and on billboards, city buses and commuter trains. One for Kredivo encourages customers to use BNPL loans for smaller daily purchases, even for train fares and items at convenience stores. 'It's that flexible!' the tagline reads.
Huy Pham, a senior finance lecturer at the Royal Melbourne Institute of Technology Vietnam who specialises in financial technology, said that BNPL loans can lead to splurges from consumers with unstable incomes, exposing both them and their lenders to growing risks. 'At the end of the day, if customers are not able to pay back the loans, then the platforms will be in trouble,' Pham said.
Indonesia's BNPL-related debt in May reached almost US$1.9 billion, up 40 per cent from a year earlier. According to the country's Financial Services Authority, 3.74 per cent was nonperforming-meaning borrowers were more than 90 days behind on their payments-up from 3.22 per cent a year earlier. 'Consumers should assess their ability to repay the debt before using 'pay later' services,' said Agusman, the agency official who supervises financing, venture capital, microfinance and other financial institutions. (Like many Indonesians, he goes by only one name.)
The authority has been conducting financial literacy campaigns, aimed particularly at younger borrowers. It recently announced rules that will require individuals to be at least age 18 or married and have a minimum monthly income of three million rupiah (S$237), just under Indonesia's average, before they can take out BNPL loans. Last year, the regulator capped maximum daily interest rates for online personal loans at 0.3 per cent per day, which translates into an annualised rate of 109.5 per cent.
BNPL loans can be controversial in Indonesia, a nation of 284 million that has the world's largest population of Muslims, whose religion forbids the charging or paying of interest. The Indonesian Ulema Council, the nation's top body of Islamic clerics, issued a legal opinion on online lending in 2021, saying the practice is 'problematic.' It cited 'usury practices with extremely high interest rates, borrowers failing to repay on time as agreed, and lenders threatening or even physically assaulting those who default.' Last year, the government started requiring debt collectors to stick to certain scripts and visit debtors only during specified times.
A 2023 paper by business school professors in Indonesia and Malaysia concluded that consumers generally had positive views of the online short-term loans despite what the academics called unethical interest rates and aggressive debt collection practices. 'People are borrowing beyond their means and buying things they cannot afford, because it's so easy to get loans,' said co-author Sri Rahayu Hijrah Hati, a professor of marketing at the University of Indonesia.
BNPL lenders say they obey debt collection rule,s and the rates they charge reflect the risks of the population they are serving. They say they do not purport to be compliant with Muslim law, and most banks in the country also collect interest on loans. Andy Tan, Atome's chief commercial officer, said his company must contend with customers who disappear and erase their online presence, among other kinds of fraud. 'Credit risk is something we monitor day in and day out,' he said.
Billease's Steiger said that his company's borrowing cost is close to 20 per cent after factoring in the mid-teens rates it pays on private debt, foreign currency hedges, withholding taxes and other expenses. At the same time, he said, Billease is flexible with clients who need more time to repay their debt. He adds that the company keeps collections in-house, recording conversations between borrowers and the company to prevent rude behaviour, and refrains from charging more in late fees than the loan's original principal.
Kredivo CEO Akshay Garg said that his company approves less than a quarter of its loan applications and primarily targets middle- and upper-class borrowers who are likely to repay. 'We are just lending to people who should be getting credit cards,' he said. Kredivo sends payment reminders to borrowers through its app and in e-mails, Garg said, and individuals get to keep the items they bought even if they default because the debt is unsecured.
BNPL lenders are betting on customers such as Alexandra Santos, a 31-year-old tech professional in Manila. In 2023, she wanted to tour the province of Albay, in the southeast of the Philippines' Luzon island and famous for its cone-shaped Mayon volcano. She funded the holiday with a Billease loan of 8,200 pesos, payable in six instalments of 1,552 pesos each over three months. That included a total interest of about 1,112 pesos, an effective interest rate of 13 per cent over the period, or 52 per cent on an annualised basis.
Santos fully repaid the loan before its final due date and continues to borrow from Billease and other lenders. 'In our culture, being in debt carries a stigma,' she said. 'But in my view, it's not really bad to have debt as long as you know your financial responsibilities.'
If she and most other customers can keep paying back their loans, the profit for Billease will be enormous. The company typically charges 3.5 per cent a month on its loans, but it also turns the money it lends over many times a year. Steiger has estimated the expected annual return on this cash: 90 per cent. BLOOMBERG
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