Non-securitisation for short-term loans not a worry, say fintech lenders

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Fintech lenders, especially those offering short-term loans, are optimistic about their lending numbers and growth despite the Reserve Bank of India (RBI) on December 7 saying that loans with a residual maturity of less than 365 days are ineligible for securitisation, saying the move will have limited impact. However, experts and various ratings agencies are not as sanguine.

Fintechs largely unaffected

“Most of the lending happening by fintechs is under the 365 days’ tenure. Other than this, the majority of the loans disbursed by them are unsecured. So largely, the RBI ban would not affect them much,” said Ajay Chaurasia, vice president, business, marketing and product, RupeeRedee, a digital lending fintech.

But Chaurasia highlighted that fintechs have been gravitating towards a secured model, a move that has received a setback from the new norm. He said, “With time, fintechs were exploring secured loan options as they could use these as assets to procure more capital. This will get delayed now.”

In October 2022, the RBI issued rules on digital lending for fintechs and other digital lenders but fintechs have been seeking clearer outlook guidelines to fine-tune their lending operations.

“Fintechs have been waiting for clarity on the RBI guidelines concerning digital lending as most of these companies are into unsecured lending and are wishing to explore secured lending like a few big fintechs,” said Mahesh Shukla, chief executive officer at Noida-based fintech PayMe.

Speaking about the December 7 announcement, Shukla echoed what most fintech lenders are saying and explained that the majority of fintechs would not suffer as they are exploring co-lending and other models with major banks.

Priyanka Wadhera, chief financial officer at Indifi Technologies, a digital lending platform, said fintechs are experiencing a funding winter due to which they are taking a fresh look at their operations.

“Macro factors like a liquidity crunch that has resulted in less borrowing and paying the same interest rate to their customers are also affecting fintechs and digital lenders as they have to rebalance their financial operations,” Wadera said.

Experts’ take

The RBI’s ban on short-term loan securitisation will hit the lending industry, especially fintechs, several rating agencies said.

“RBI’s measure on the loan securitisation will impact the securitisation of shorter-tenure assets and more particularly fintech lenders who are into short-term lending,” ratings agency CareEdge said in a report.

CareEdge analysts said they expect the securitisation by fintech companies, and to a lesser extent gold and microfinance loan companies, to be hit by the amendment in residual maturity.

India Ratings said assets that have short tenor loans such as microfinance, gold loans, short-term personal and consumer durable loans will be affected by the regulatory change. It also said that as the number of securitised assets will reduce, issuances could also go down in the near term, which will reduce the weighted average seasoning of securitisation pools.

“The ban will limit the issuance of pass-through certificates (PTCs) backed by shorter tenure loans which will affect 5 percent of such deals,” Crisil Ratings said in a note.

Growing numbers

Indian fintechs and non-banking financial institutions are expected to be worth over $350 billion by 2023, various reports said.

Financial lending companies doubled their disbursements in 2021-22, giving 2.66 crore loans worth Rs 18,000 crore, a Fintech Association for Consumer Empowerment report said. Out of these loans, around 80 percent were short-term loans (less than six months’ tenure) amounting around Rs 14,000 crore.

Economics Law Practice, a Mumbai-based firm, in a report titled India’s Road Map for Digital Lending – Action Points for Lenders, said that total global alternative credit (credit through fintechs and bigtechs) in 2019 stood at $795 billion in which the share of fintechs was around 28 percent or $223 billion.

Mukesh Chand, the author of the report and senior counsel at Economics Law Practice, said: “The growth shown in the lending industry was expected as post-pandemic, industries have seen major activity. Ratings agencies expect bank credit to expand by 13 percent in 2022-23 up from 11.5 percent in 2021-22, with increased demand for retail and working-capital loans.”