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The coronavirus pandemic has made it tough for digital banks in Asia to thrive, says Fitch

Fitch Ratings in New York, United States.

Cem Ozdel | Anadolu Agency | Getty Images

For those looking to get into digital banking in Asia, it may be more difficult as some opportunities have been lost in the coronavirus pandemic, according to Fitch Ratings.

The pandemic has hit the global economy hard, disproportionately affecting people and companies with a "weaker" borrower profile – the customer segment that many emerging digital banks are targeting, said Tamma Febrian, deputy director of financial institutions at the rating agency.

"Many of them cite the unbanked and underserved segment as their main target and we believe the crisis will hit them disproportionately at the moment," Febrian told CNBC's Squawk Box Asia on Friday.

"This means that technically you are talking about … potentially reduced opportunities for profitable credit," he added.

In addition, social distancing measures and lockdowns around the world to slow the spread of the virus have forced many established banks to improve their digital offerings, Febrian said. This could potentially close in new entrants, he explained.

"The jury is still not there"

In a report earlier this week, Fitch said such challenges would be more felt in developed markets of Asia, where "competition from established banks was already fierce". These markets include Australia, Hong Kong, Japan and Singapore, where there are "dominant" established companies.

But emerging markets like India, Indonesia and the Philippines still offer the "greatest" opportunities for digital banking, the agency said. These countries have low banking services penetration, which gives emerging digital lenders "an easier path to critical mass," he added.

"However, these countries are among the worst hit by the pandemic in the region and, even in the longer term, the delay in digital infrastructure may hurt their potential," the report said.

Meanwhile, Febrian told CNBC that many emerging digital banks designed their business models in a "favorable" economic environment. It is therefore uncertain whether these models can survive this business cycle despite their potentially more advanced technological capabilities, he said.

He added that the current crisis is a time for digital banks to evaluate their business models. That includes researching whether the risks they are taking are within their risk appetite and making sure that the margins they are receiving can cover potential future losses, he explained.

"The jury is still not there. We haven't gotten to the point where digital banks … cannot benefit from some of these trends, but we say this is a tougher market for them to navigate, and so they need to refine their strategy further. "

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