Paytm's loan disbursal growth to be impacted until it adheres to new RBI norms, says Macquarie

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The new norms on digital lending approved by the Reserve Bank of India (RBI) could operationally impact Paytm's Buy Now Pay Later (BNPL) offering Paytm Postpaid, which accounts for 60 percent of loans disbursed through the platform, Macquarie said on August 12.

In a call with investors and analysts on August 11, the company's CEO Vijay Shekar Sharma had said that the company will be changing its internal systems to ensure that loan disbursals and repayments are routed directly to and from the bank accounts of the borrowers and Paytm's lending partners.

Macquarie believes, this will impact the growth of the company's loan disbursals in the interim.

While Paytm said it is compliant with merchant and personal loans
business norms, Paytm Postpaid loans are currently not disbursed directly to the customer’s bank account. Instead, they go to a nodal account and then subsequently Paytm, being a payment aggregator, routes the payment amount to the merchant.

"RBI’s norms, in their current form, do not seem to allow this mechanism and the company seeks clarifications from the regulator here. In the interim, we believe Paytm’s lending business disbursement growth may be affected," Macquarie said.

On the call, Paytm highlighted that even if these new norms are implemented in their current form – Paytm will be able to implement it by adding an extra hop where the loan is disbursed to the customer first and then the payment is made to the merchant.

"We will be watchful of the operational impact here, especially on customer convenience. The RBI’s recent regulation also disallows disbursement of credit to a prepaid payment instrument (PPI)/wallet account and that could potentially constrain the company further, in our view," Macquarie added.

Macquarie maintained its underperform rating on Paytm with a target price of Rs 450.

In the recommendations by the Working Group on Digital Lending that the RBI accepted for implementation on August 10, the regulator said that all loan disbursals and repayments are required to be executed only between the bank accounts of borrower and the registered lender without any pass-through/pool account of the loan service provider (LSP) or any third party.

Besides this rule, Paytm said that it is in compliance with all other norms accepted by RBI.

The key point of contention was the RBI’s views on first loss default guarantee (FLDG), a lending model between digital lending fintechs and their partner banks and NBFCs. Under these agreements, the fintech promises to compensate the partners up to a predetermined percentage in case a customer fails to repay the loan.

The RBI has said that these recommendations are under consideration. Meanwhile, regulated fintechs have been asked to adhere to the master directions on securitisation of standard assets.

"I believe that RBI is of the opinion that FLDG is not that bad that it should be removed. This is how regulated NBFCs work. As of now, the idea is that FLDG is not permitted for unregulated entities," Sharma said, although Paytm does not engage in any FLDG arrangements with its lending partners.

On August 11, advisory firm Institutional Investor Advisory Services India Limited (IiAS) flagged the proposal to reappoint Sharma as the CEO of Paytm for another five years and also opposed the remuneration decided for the position -- an amount higher than any of the Sensex 30 executives. They have advised the shareholders of the company to vote against the move.