Fintechs may feel the heat as RBI moves to curb unsecured consumer loans

The Reserve Bank of India’s (RBI’s) move to tighten norms for personal loans and credit cards by raising the capital that banks and non-banking financial companies (NBFCs) need to set aside for such borrowings will likely hit fintechs as well.

Over the past year, big fintech players have reported tremendous growth on the back of robust credit disbursal by top-tier NBFCs and banks, but the RBI directive is likely to impose a credit-squeeze on these startups.

Consumer lending startup Kreditbee founder Madhusudan E told Moneycontrol that in the short term only those who have over-leveraged lending partners will be impacted. "We had raised equity recently and hence will not be affected immediately. But if this is a long-term policy, this will have an impact on the loan book growth of all the fintechs. But lending is cyclical and RBI is known to be cautious and rightly so," he said.

Loan origination will slow down unless small banks and NBFCs raise capital, which is unlikely to happen soon, fintech industry executives said. This will impact several fintechs, including large players such as payments major Paytm, which has been on an upswing thanks to the growth in unsecured lending backed by banks and NBFCs.

“This will increase their cost of capital. The cost of borrowing from banks may be higher, which may need more equity for the same level of lending to the unsecured segment. More than anything else, it may slow down the loan-book growth,” said Vijay Mani, partner for banking and capital markets at Deloitte, South Asia.

Other large lending platforms such as Navi Finserv, OnEMi Technologies (which runs Kissht and RING), and Cred may also face a credit squeeze, experts said.

Even if the origination is not affected, demand will fall as interest rates go up. “They won’t be able to pass on all of the increase and still see growth, unless they relax their underwriting standards, which they may not. Because the signs are pointing to over-borrowing (in the unsecured segment). After considering provisions, a bank’s / NBFC’s returns may not rise. So it’s not a positive development,” he said.

Delinquencies going up

Over the past few months, the central bank has raised concerns about overheating in the unsecured consumer lending portfolio even as the banks and NBFCs maintained that their loan book quality is good.

In their September quarterly results, Cholamandalam Investment and Finance Company and Bajaj Finance saw delinquencies rising in the segment. Per latest data released by credit rating agency Transunion CIBIL, personal loan (PL) delinquencies are inching up.

“While overall PL delinquencies (defined as 90 days past due) are still low at 0.84 percent, for PLs less than Rs 50,000, the non-performing loan (NPL) levels are six times that, indicating heightened stress in this segment,” Suresh Ganapathy, managing director at Macquarie, a research firm, wrote in a note to investors.

"NPLs on loans originated through their fintech partnerships on a 12-month lagged assets under management (AUM) basis was in double digits, at 10 percent-plus. While the overall contribution of the new business loans is around 10 percent of Chola’s AUM, it's more than 20 percent of (the number of) disbursements,” Ganapathy wrote.

He added that when loans originated through fintechs are running at double-digit NPL levels (at least on a lagged AUM basis) for loans 90 days past due, there should be higher concern for loans 30 days past due.

“While large private sector banks are still fine, it is time to be careful and exercise discretion considering overleveraging seen in some consumer cohorts, and such high NPL levels for certain financial institutions catering to sub-prime segments,” Ganapathy said.

Fintechs like Paytm, which depend on their lending partners, will also get affected as the general financial system will now get a bit more cautious about disbursing unsecured loans, the note added.

Ignoring RBI's warnings

“The last risk change (change in the risk weight on consumer credit) was probably done several years ago. This is the strongest signal yet from the RBI that the regulator believes that there is stress and overheating in the unsecured consumer loan segment. This will take a toll on fintechs,” said Shishir Mankad, head of financial services at consultancy firm Praxis Global Alliance.

According to him, the fintechs will have to price the loans higher, which will cause a demand reduction, which was the intent of the increase in capital requirements announced yesterday. He added that the big increase in capital adequacy will not be easy for all lenders to take in their stride.

“Most fintech partnerships are with mid-level private sector banks and NBFCS, and they will be forced to slow down their disbursal growth,” Mankad said.

There is no room to increase the rates, which are already elevated. Even the fintech players targeting the premium customers will get affected, as they will get much better rates from large private sector banks, he added.

According to CIBIL data, among those who took personal loans of less than Rs 50,000 in the first quarter of the current fiscal, half of them had more than four existing loans. For the same category, only 17 percent had more than four loans before Covid, indicating a level of over-leveraging not seen in the recent past.

Some fintechs have their own NBFC arms through which they lend to customers. However, these NBFCs will also have to take loans from banks at a much higher rate because of the RBI’s latest move.

Banking on lending for monetisation

Most large fintechs have been looking at consumer lending to drive their monetisation initiative. PhonePe, the country’s largest mobile payments company, recently appointed a new CEO for its lending business as it looks to enter the segment.

“If Bajaj Finance and Cholamandalam are seeing their NPLs rise, why will the NPLs not rise for the credit disbursed through Paytm?” said a fintech executive, adding that the company will see the impact during the ongoing third quarter itself.

The executive, who didn’t wish to be identified, added that the impact would depend on the business model. “You could increase rates and keep your margins intact, or absorb some of the hit to the margin. If you are only getting distribution margins, then you should be fine, more or less.”

For banks, the priority would be to get the best loan book with the limited exposure they are allowed by the regulator.

“The RBI kept saying it’s not good, but no one was listening, so they hit them where it hurts most. It’s a timely move from an ecosystem perspective,” the executive said, and added, "Financial services is a very tough cyclical business, and fintechs are getting a taste of it for the first time," the person added.