Paytm to exit postpaid loans, focus on distribution-only credit model

Paytm Board goes for reduced compensation

In a major shift in lending strategy, Paytm has decided to completely phase out postpaid loans in the near future, besides stopping collection services for lenders on personal loans, a company spokesperson confirmed to Moneycontrol. The company now plans to focus solely on a distribution-only credit model.

Currently, the fintech firm works in partnerships with banks and non-banks for both distributing and collecting of loans for them while earning a (distribution) commission and a (collection) bonus, respectively.

However, the terms of the partnership vary with each lender, where Paytm may be responsible for both services or just one. While the credit assessment and risks are managed by the lending partners, Paytm's collection commission varies based on how much customers repay.

Treading cautions on collection service, Paytm plans to be the distribution partner for banks and non-banks to keep the asset quality under check.

"Given industry asset quality deterioration for small ticket personal loans, accordingly we will not receive a collection bonus on existing books of personal loans and Postpaid loans and have decided to pause these products till credit cycle plays out," the company said in its earning release.

"Since we do not expect to do personal loans with collections or Postpaid loans in the near future, and we do not expect any collections bonuses on the existing Postpaid loans or such personal loans," it added.

While the dramatic slowdown in lending happened after the Paytm Payments Bank Ltd (PPBL) fiasco, the cracks first started showing in the second quarter of the last fiscal year.

In December last year, the company management had announced to "slow down" its small ticket Postpaid loans (less than ₹50,000) post RBI's concerns on unsecured lending across the industry. While this was intended to be a smaller part of the business model, the latest statement confirms a complete phase out of the Postpaid loan product.

Change in Strategy, treading caution on collections 

Paytm is treading caution on collection services while focusing on distribution-only model for credit growth.

"For the loans where we do distribution as well as collections, we are going to remain cautious even on merchant loans, to avoid any asset quality deterioration beyond our partners’ thresholds," Paytm said.

Paytm said the "distribution-only" loans have continued to scaled well and more lending partners, including pilots with banks, have been added during the quarter.

"This type of loan contributed the vast majority of consumer loans this quarter, and is our key focus as it has bigger TAM, wider interest from
large banks and non-banks, easier tech integration and more regulatory clarity," the company informed.

Moneycontrol had previously reported on the rising non-performing assets (NPAs) at Paytm, which entered double-digit territory for certain partners of Paytm and they stopped lending through the platform.

While Paytm never had any first loss default guarantee (FLDG) agreements with its partners, the company’s commissions were based on collection efficiency, or rather how much Paytm was able to collect from the borrowers.

Paytm earns around 3.5 percent margin as a commission for facilitating lending on its platform. Apart from making money on providing collection services for financial institutions, which is often in the range of 0.5 percent to 2 percent, based on collection efficiency, higher repayment netted better commissions for Paytm.

The company had independent partnerships with each of the lenders and often depended on the negotiations.

Paytm also plans to target "prime and super prime' category customers, and offering them a competitive interest rates.

“Going forward, we are also expanding by offering larger ticket business loans through distribution only model where the lender is responsible for collections," the company said.