Digital lending fintechs have made necessary changes to comply with the Reserve Bank of India’s (RBI) new norms ahead of the November 30 deadline, and are gearing up for the next phase of consolidation. The industry is also preparing to maintain its growth rate in a tougher macro environment of higher interest rates and inflation.
“All the work has been done in terms of technical changes, process changes, etc., in areas where further clarifications are required, people have taken a more conservative approach, rather than being on the wrong side of the regulations. So nothing is left to do. All set and ready to go live,” said Sugandh Saxena, the CEO of the Fintech Association for Consumer Empowerment (FACE), which counts fintechs like Yubi, Uni and Kreditbee as members.
RBI announced the norms in August this year forcing a few fintechs to change their core business models. The norms barred the presence of third-party accounts in the flow of lending, including prepaid cards and wallets. Loan disbursal and repayments should be executed only between the bank accounts of the lending partner bank or non-banking financial company (NBFC) and customers, the norms said.
Players like Slice and Uni whose models included disbursing loans into prepaid cards changed their models to disburse loans directly into the bank accounts of customers. Uni also introduced a co-branded credit card, replacing its prepaid card bet.
Other fintechs that were pooling repayments from customers before crediting the amount to lending partners have also updated their agreements and changed processes, industry leaders said.
Anuj Kacker, co-founder of Freo and Vice President of the Digital Lenders Association of India (DLAI) said, “The few who weren’t aligned to the norms have changed their business models. As an industry overall we have not been massively impacted. Maybe 5 percent of the companies have been impacted. Yes, there is a higher cost of compliance now. But it is only a one-time cost to comply.”
Demand intact?
According to FACE’s report for the July to September quarter (Q2 FY23) when the norms came into effect, the value of loans disbursed grew 216 percent to Rs 14,016 crore from Rs 4,435 crore in the same quarter last year. The number of loans disbursed saw a 149 percent increase from 65.56 lakh in Q2 FY22 to 1.62 crore this year.
The data is based on FACE’s 21 members lending directly through their own balance sheet and/ or as a platform working with lending partners.
During the festive season in October, fintech lending platforms said they saw up to 8x growth as compared to last year. However, the jump was also on the back of a low base as the country was still recovering from the after-effects of a strong second wave of the COVID-19 pandemic last year. Many fintechs also benefitted from Slice, Uni and others pausing onboarding of new customers as they transitioned to new models, according to industry sources.
However, all this comes at a time when interest rates and inflation are expected to rise further, with growing concerns of a global recession.
Irfan Mohammed, Chief Business Officer at Yubi said, “The cost of funds for fintechs has gone up, so the call is to pass it on to the customers or not. But when it comes to the impact of passing on prices — most of these customers are not significantly price sensitive, they are here for convenience. So there may not be a significant impact of rising interest rates.”
Mohammed added that many of these customers would have fallen prey to loan sharks and ended up paying a higher rate of interest. Comparatively, interest rates offered by fintechs may seem smaller.
“The real question to be asked is whether these customers are in a better or worse situation with these digital lending apps. If these apps have helped these customers cut down from the usurious interest rates from unregulated entities, then they may have more money in hands to service loans from regulated digital lenders,” he said.
For customers who are choosing fintech platforms over banks to borrow from, there may be a realisation that the cost of borrowing is higher in these cases. In such a scenario, customers may move away from fintech apps.
“Credit demand is only going up. The question is whether the demand is going to come to fintechs or is going to go to traditional banks and NBFCs and are they going to meet it. With digital transactions flourishing, there is a much larger appetite by banks and NBFCs in giving smaller loans at a lower cost,” said Jaikrishnan G, Partner and head of financial services consulting at Grant Thornton Bharat.
Consolidation theme gathers steam
The impact of a global slowdown was visible in falling valuations especially that of global Buy Now Pay Later (BNPL) players like Klarna, Affirm and Zip Co. Back home, the digital lending norms have put the onus on the lending bank or NBFC, making them the more important entity in their partnerships with fintechs.
“There is not much room (for fintechs) to be innovative in those areas. Consolidation is on the cards for some of these smaller players. We are seeing some traction around potential transactions in the lending and tech space,” said Jaikrishnan.
ZestMoney is one of the first prominent players to sell to digital payments leader PhonePe. According to sources, the deal is valued at $200 million to $300 million, lower than its valuation of $470 million last year. Companies that can cross-sell more products after procuring a customer for a loan will be able to have stronger business models, while others may have to scout for buyers, analysts say.
An analyst said on the condition of anonymity, “People will pay for customers and not the asset book because they cannot be sure of what’s hidden there. Buyers will see it as — I have better tech and multiple products to offer to these customers. So the value moves back to the customers from the product and tech.”
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