RBI Scrutiny Slows Fintech Growth as Bad Loans Rise
The fintech lending sector in India is experiencing a notable slowdown in growth along with a troubling increase in bad loans. This decline is happening amidst heightened regulatory scrutiny from the Reserve Bank of India (RBI) concerning the burgeoning unsecured credit business. Insights from multiple startup founders and industry experts reveal the profound challenges and strategic shifts occurring within the sector as it navigates through this rigorous regulatory landscape. The RBI’s implicit directive has forced fintech lenders to limit their growth to a maximum of 20% annually and to maintain borrowing costs at reasonable levels. Although there isn’t a formal cap on credit rates, industry practices have gradually aligned to ensure borrowing rates do not exceed 45%, reflecting the maximum interest rate on overdue credit card payments. This measure aims at fostering responsible lending practices and mitigating risks associated with rapid expansion and high-interest loans, enforcing a broader regulatory intent to maintain financial stability within the sector.
Regulatory Directives and Industry Response
A key theme prevailing in India’s current fintech lending landscape is the significant influence exerted by the RBI’s implicit directives, guiding fintech lenders to curb their annual growth and ensure borrowing costs remain within reasonable limits. As the fintech lending market aims to align with the regulatory framework, it’s essential to note that there is no formalized ceiling on credit rates. However, industry norms have emerged that keep borrowing rates under 45%, aligning closely with the most elevated interest rate on overdue credit card payments. This regulatory directive displays the RBI’s broader intent to promote responsible lending practices, prevent the rapid imposition of high-interest loans, and safeguard against potential financial instability, which rapid, unchecked growth might entail.
The sentiment shared among fintech founders is that the RBI’s overarching goal is to prevent unsecured lenders from dangerously extending their reach into high-risk segments, particularly to customers with low incomes, who often rely on microfinance institutions. The RBI has defined the annual household income threshold for microfinance loans at Rs 3 lakh. In response, fintech companies have adjusted their customer base, excluding individuals earning below Rs 20,000 monthly or Rs 2.5 lakh annually. This exclusionary tactic aims to avoid potential regulatory backlash while staying aligned with the RBI’s cautious approach toward financial inclusivity and risk assessment within the lending landscape.
Shift in Customer Focus and Loan Offerings
Rising regulatory pressures have prompted fintech lending startups to undergo a considerable shift in their customer focus. The response to the RBI’s directives has seen fintech companies abandoning their traditional base of new-to-credit (NTC) customers, blue-collar workers, and consumers from lower-income brackets. Instead, the target audience has shifted towards offering higher-value loans with extended tenures, catering to a more stable and higher-income clientele. Consequently, many startups have increased their average loan amount from a modest Rs 45,000 to a more substantial Rs 1 lakh. Additionally, the period of loans has stretched from the brief three to six-month window to longer tenures spanning from 12 up to 36 months or more.
This strategic pivot is reflected in the industry’s data metrics. TransUnion CIBIL’s Credit Market Indicator report for September 2024 underscores this trend, showing a notable decline in the origination of NTC loans. The share of NTC loans within the total unsecured originations declined from 16% in June 2023 to 12% in June 2024. These numbers confirm that fintech companies are restructuring their strategies, seeking to balance risk by extending loan periods and focusing on customers with higher repayment capabilities, consequently veering away from the more volatile lower end of the income spectrum. This shift is seen as a critical move to comply with the evolving regulatory framework while mitigating associated lending risks.
Rising Asset Quality Stress and Borrowing Costs
Another significant aspect affecting the fintech sector is the rising asset quality stress paired with increased borrowing costs, which can be attributed to tighter underwriting standards. The sector has been witnessing raised levels of bad loans and elevated credit costs, primarily due to these stringent credit assessment criteria. As an example, Pune-based fintech firm Fibe reported an increase in gross bad loans, rising from 2.6% in the previous fiscal year to 2.8% in September. Similarly, Mumbai-based Kissht experienced a marked surge in loans overdue by more than 90 days, escalating from 1.9% to 3.6% within just three months. These increases are symptomatic of a constrained lending environment, where fintech firms cater to higher-risk customer segments and face increasing delinquency rates.
Experts indicate that these developments can be traced to a lending atmosphere that is becoming increasingly restrictive. Fintech firms, inherently serving higher-risk clients, are now operating under tighter underwriting protocols. Axis Bank’s Deputy Managing Director, Rajiv Anand, pointed out that the more stringent underwriting standards adopted across banking and NBFC sectors, in response to rising risks, have naturally also extended to the fintech segment. This scenario has exacerbated delinquency issues, placing further stress on asset quality within the sector and increasing operational risks.
Funding Challenges and Investor Sentiment
The cost of capital has emerged as a pressing concern for fintech lenders. Moneyview, a Bengaluru-based company, has reported a noticeable rise in credit costs, fluctuating between 12.5% and 14.5% for an average borrowing period of 22 months. Additionally, the sector is contending with severe funding challenges. The RBI’s cancellation of Zavron Finance’s registration serves as a critical example, affecting platforms such as Cashmama and Rupeemax, which were dependent on its support for their operations. These developments have heightened uncertainties and posed significant operational challenges for fintech firms, impacting their ability to secure funds and maintain customer confidence.
This slowdown and the increased regulatory scrutiny have inevitably caught the attention of venture funds—a substantial support pillar for many fintech platforms. Investors, once buoyant about the prospects of fintech lending, are now adopting a circumspect approach. There’s a discernible shift towards focusing on use-case-specific loans rather than the broader category of general personal loans. Investors are eyeing opportunities that blend credit with transaction data to unlock potential markets, especially within the domain of supply chain financing for small businesses. This evolution in investor sentiment underscores the changing landscape, where fintech companies must demonstrate resilient and adaptable strategies in a more caution-driven funding environment.
Strategic Realignments and Future Outlook
The fintech lending sector in India is seeing a significant slowdown in growth and an increase in bad loans. This decline is occurring under the watchful eye of the Reserve Bank of India (RBI), which is scrutinizing the rapidly expanding unsecured credit market. Multiple startup founders and industry experts have outlined the major challenges and strategic adjustments within the industry as it navigates through this stringent regulatory environment. The RBI has implicitly directed fintech lenders to cap their growth at 20% annually and keep borrowing costs at manageable levels. While no official ceiling exists on credit rates, industry norms have settled to ensure borrowing rates don’t surpass 45%, paralleling the highest interest rate on overdue credit card payments. This policy encourages responsible lending and aims to mitigate risks tied to rapid expansion and high-interest loans. The overarching regulatory goal is to maintain stability in the financial sector by promoting sustainable and responsible lending practices.