Fintech companies are looking at entering the lending business by acquiring small non-banking financial companies or getting NBFC licences as they seek to deploy their expertise and experience in a growing credit market.
Experts said the trend gained momentum after the Reserve Bank of India tightened digital lending rules in September 2022 and banned the First Loss Default Guarantee (FLDG) model, which allowed fintech companies to compensate for a certain percentage of defaults in the loan portfolios of partner banks or NBFCs.
“Fintechs now have the market share, geographical and network reach across the country and different customer segments under their current business,” said Varun Sharma, managing partner at FinGuru, a consultancy company. “These companies want to foray into lending to different sectors as they see the demand is high and they have the means to do so.”
In the past few months, fintech companies have either acquired small NBFCs or sought an NBFC licence from the RBI.
BharatPe acquired a 51 percent stake in Trillion Loans, a Mumbai-based NBFC. in May. The NBFC advances secured and unsecured loans to small businesses and auto, gold and education loans to retail customers.
Neobanking platform Jupiter secured a NBFC licence from the RBI in April to enter the lending business. Alternative financing fintech Getvantage secured an NBFC licence in May.
PhonePe’s plans
Among those that plan to get an NBFC licence is PhonePe, the Walmart-backed fintech company. A top PhonePe executive told Moneycontrol in an interview earlier that it started its digital lending pilot in April, targeting merchants.
“Somewhere we may apply for an NBFC, just to test out new cohorts. But we don’t want to build the balance sheet, we want to take the lenders, which are banks and NBFCs, to the borrower,” said Sameer Nigam, cofounder of PhonePe.
Experts said fintech companies are developing new lending models mainly to scale up their financing operations and get into lending through NBFCs.
“To encash their technical capabilities and effectively utilise their industry experience, rather than just being a service provider for other banks and NBFCs, fintechs are now wanting to enter direct lending,” said Jyoti Prakash Gadia, managing director of Resurgent India.
Praveen Khanna, vice president of ScoreMe Solutions, said that by obtaining an NBFC licence, fintechs gain more credibility and can offer a wider range of financial services.
“Acquiring stakes in small NBFCs will allow fintechs to tap into the established infrastructure, customer base, and expertise of the NBFC,” Khanna said.
RBI regulations
Experts said that with the ban on the FLDG model, more fintechs are exploring partnerships and other means to lend. The FLDG model was a win-win for banks and fintechs because banks had a lower burden of loan defaults and fintechs were able to venture into indirect, if not direct, lending.
“The regulator has kept a watch on fintechs and it is a growing sector. Regulations do not allow fintech to lend directly, and hence, fintechs are working on NBFC partnerships,” said a fintech analyst who did not wish to be identified.
Ram Rastogi, chairman of the Fintech Association for Consumer Empowerment, said the strict regulation of fintechs was mainly due to malpractices by some entities, primarily during the pandemic.
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“During the peak of Covid-19 in India, people borrowed money from fintechs and digital lenders wherein they had to pay very high interest rates. Some failed to repay and committed suicide. After this, the RBI and the government stepped in and banned many apps. Most of them were of Chinese origin,” he said.
Sharma of FinGuru said by granting NBFC licences to fintechs, the RBI can bring them under its purview.
“When fintechs work on lending with or through NBFCs, the transparency level is higher than just working on lending with partnerships,” said Sharma.
“Fintechs directly are not allowed to lend. Hence, now they will aggressively work on the lending business through their associated NBFCs, on which they will have larger control,” said the fintech analyst cited earlier.
Jindal Haria, Director, India Ratings and Research, said that the action by fintechs to lend through NBFCs via acquisition or seeking a NBFC license is a welcome move as it will bring lending related activities under the purview of RBI.
"In addition, there could be a more methodical approach to credit and governance in a regulated environment," said Haria.
What next?
Gadia of Resurgent India said the RBI is working on a framework that will help fintechs to meet the demand of credit-hungry sectors.
“A lot of opportunities are going to arise for fintechs through setting up of new NBFCs and investing in the existing NBFCs and going into large-scale partnerships,” said Gadia.
On the regulatory end, Rastogi said that after banning digital lenders and fintechs involved in malpractices and ruthless recovery activities, the focus of the RBI is on data protection of fintech company customers.
“After the data protection bill is finalised, it will be equivalent to the General Data Protection Regulation which is used in Europe for data protection and regulation. With this, the RBI may look to regulate fintechs,” said Rastogi.
