The recent clampdown by the Reserve Bank of India (RBI) on unsecured loans is expected to have a significant impact on fintech companies in India. This move comes as part of the RBI’s efforts to manage risks in the banking sector. Here’s a detailed analysis based on information from various sources:
RBI’s New Guidelines
- Increased Risk Weightage: The RBI’s directive requires banks and non-banking financial companies (NBFCs) to increase the risk weightage on unsecured loans to 125%, up from the existing 100%. This includes personal loans, consumer durable loans, credit cards, and gold loans.
- Focus on Secured Credit: The directive emphasizes the need for regulated entities to focus on secured credit, especially against assets that are inherently depreciating, like vehicles.
- Impact on Retail Credit: As retail credit, which constitutes 30% of total bank credit, comes under heightened scrutiny, fintech lending, known for its unsecured loan nature, faces challenges.
Impact on Fintechs
- Diversification into Secured Products: Fintech companies are expected to diversify and strengthen their secured portfolio in response to these changes. Fintechs that source funds through banks or NBFCs are considering building their secured portfolio options to at least 40% of their total portfolio.
- Shift in Lending Strategy: Some fintechs may explore options like gold loans as part of their diversification strategy. There’s an anticipated shift towards secured and priority secured loans (PSLs).
- Regulatory Preparedness: Fintechs acknowledge the RBI’s steps as a means to reduce risk and are implementing stricter underwriting criteria to ensure loan quality.
- Concerns Over Consumer Indebtedness: Amidst inflation and fluctuating interest rates, there’s concern about the broader impact of rising consumer indebtedness.
FLDG Framework Revival
- First Loss Default Guarantee (FLDG): RBI has revived the bank-fintech partnership model for digital lending, known as FLDG, with new rules and stringent dos and don’ts.
- FLDG Arrangement: Fintechs can provide banks with clients, perform services like loan sourcing, monitoring, and pricing, and guarantee a part of the loan loss.
- Limits on Guarantees: The default guarantee by fintechs has been capped at 5% of the portfolio amount, and they must secure their exposure through cash deposits or bank guarantees.
- Disclosure and Due Diligence Requirements: Fintechs must publish details of their FLDG portfolios and comply with robust credit underwriting standards.
- Impact on Borrowers: This arrangement allows fintech lenders to serve borrowers with lower credit scores or limited credit histories, with enhanced customer protection measures and transparency.
- Market Opportunities: The new guidelines offer opportunities for early-stage fintechs to partner with banks and NBFCs, potentially increasing funding in digital lending fintechs.
- Increased Scrutiny: The involvement of REs in underwriting arrangements is expected to increase the scrutiny of fintech business models.
Projections and Expectations
- Consumer Lending: Fintech firms have been actively involved in consumer lending, sanctioning almost Rs 30,000 crore for consumption loans between 2015 and 2022.
- Growth Projections: Despite regulatory changes, the Fintech Association for Consumer Empowerment reported robust growth in fintech lending, with an 81.41% YoY increase in loans disbursed in Q1 FY24.
- Future Outlook: It is projected that fintech lending will surpass traditional bank lending by 2030, capturing a significant share of the consumer and retail market.
These regulatory changes and the evolving landscape of fintech lending highlight the dynamic nature of the financial sector in India, balancing growth and risk management.