The Reserve Bank of India’s (RBI) recent crackdown on unsecured loans could impact fintech players as lending institutions now have to increase the risk of such loans. This move affects fintech platforms that specialize in generating leads and providing unsecured personal loans, consumer term loans, credit cards and gold loans.
Under the new guidelines, banks and NBFCs have to raise their risk weights against such loans to 125%, up from the existing 100%. While the industry has generally viewed this decision positively as a measure to reduce risk, there are concerns about its potential impact on loan growth.
The directive underlines the need for regulated entities to review their exposure to unsecured credit, with a specific focus on additional loans against assets such as vehicles, considered to be “essentially depreciating in nature”. Compliance with these regulations is mandatory until the end of February 2024.
As retail credit, making up 30% of total bank credit, undergoes further scrutiny, the fintech lending sector faces challenges associated with the unsecured nature of its loans. The RBI’s proactive stance in emphasizing an expected credit loss based interim approach signals a departure from the current “loss” methodology.
Unbridled growth
Fintech companies focused on consumers, including Freo, Fibe, Kreditbee, Paytm and Cred, among others, play an important role in terms of the number of loans disbursed. Indian banks are witnessing aggressive growth in their personal loans, with credit to the segment increasing by 30.8% year-on-year, outpacing overall sector credit growth.
Fintech companies have been actively engaged in consumer lending, sanctioning nearly ₹ 30,000 crore in consumer loans, including personal loans, consumer term loans, and vehicle loans, between 2015 and 2022. This exceeds the ₹ 5,000 crore disbursed by fintechs during the business loans. same period, according to data from the RBI-backed Center for Advanced Financial Research and Learning (CAFRAL).
The Fintech Association for Consumer Empowerment reported robust growth in fintech loans, with its members disbursing Rs 29,875 crore in loans in Q1 FY24, reflecting an 81.41% increase YoY. This contradicts the notion that fintech firms have been adversely affected by recent regulatory measures aimed at reducing regulatory arbitrage and establishing best practices.
2030 projections
Cafral has projected that fintech lending is poised to surpass traditional bank lending by 2030. This comes amid an increase in fintech companies capturing a considerable part of the consumer and retail market, particularly focusing on new credit customers with limited credit histories.
Industry players acknowledge that tightening standards for consumer loans is a positive step to reduce risk. Many fintech partners have already implemented stricter underwriting criteria in the past month to ensure loan quality. However, there is an expectation that this move could lead to a decline in loan growth, affecting the consumption of retail loans and, consequently, profitability.
While fintech industry participants emphasize their cautious approach to lending, concerns persist about the broader impact of rising consumer debt, especially in an environment characterized by inflation, variable interest rates and general debt.