The rise of fintech has been a game changer, especially in the realm of finance. By carving a distinctive niche in the financial landscape, fintech companies have opened new avenues for seamless consumer lending, challenging the traditional lending models.
With the unparalleled advantage of delivering more efficient, cost-effective and personalised financial services, fintechs are actively dominating the consumer lending area.
While fintechs have enabled consumers from individuals to small businesses to access credit and investors to earn higher returns, recent developments in the industry have significantly impacted the growth of consumer lending.
RBI’s decision to tighten norms for personal loans and credit cards in the form of higher capital requirements for banks and NBFCs will take a disruptive toll on fintech platforms, hindering their loan disbursal capabilities.
Analysing The New Norms
RBI’s directive to banks and NBFCs to increase the risk weight on unsecured personal loans to 125% from the previous 100%, whilst excluding education, vehicle, housing loans etc is hard-hitting.
However, it is a significant move to stimulate lenders to tighten their internal surveillance mechanisms. The norm to tighten the nozzle is not a fast-forward decision but a meticulous thorough directive that aims to curb the exponential rise in unsecured lending, specifically small-ticket personal loans.
Specifically targeted towards first-time borrowers, which increases fraud and risk probability, such unsecured retail loans that do not need any collateral have grown at a CAGR of 47% from the quarter ending March 2021 to March 2023.
Since, many NBFCs and banks have partnered with fintech lenders which has proved to be a fruitful endeavour for both parties, but in the light of recent events with the surge in risk weights for bank credit to NBFCs, the cost of funds for the latter will go up, thereby hampering fintech lender’s ability to disburse loans due to scarcity of lending capital.
Understanding The Impact
The most pivotal concern among digital lenders is the cost of loans which is expected to rise at a surging rate, because of the 25% increase in risk weight, higher demand on capital, and stricter standards by which NBFCs will operate.
Despite the new stringent standards, fintechs will be benefitted, given the fixed First Loss Default Guarantee (FLDG) rate at 5% by RBI, which will continue to help fintech partners in securing digital loans.
NBFCs offer fintechs a fixed rate of interest for unsecured retail loans, but with the banks’ accelerated rate on loans to NBFCs, the same higher cost will be passed down to consumers, further translating to an escalated cost of acquisition.
Additionally, as fintechs rely on a blend of equity and debt financing to fund their lending activities, the rise in weightage on credit card and personal loans will increase the cost of debt financing, significantly impacting the profit margin as they will have to pay higher rates on the funds borrowed from banks and NBFCs.
Redefined Consumer Lending Model
Moving forward, fintech lenders and platforms must make ‘Wise Lending’ their mantra, taking proactive measures to curb unsecured lending. With the strengthening of risk control, fintechs will be unable to deliver loans to the lower credit score consumers as well as underserved segments, which would critically affect inclusive and equitable access to financial services.
Thus, fintechs need to adopt and implement a well-balanced holistic approach that takes into account both the new norms and the effect on the underserved sectors.
There is no doubt that this is a great transformative opportunity for fintech platforms, to reshape their business model to integrate and implement new directives. By incorporating advanced risk assessment systems or a diversification approach into myriad financial services, lenders can reduce reliance on credit card and personal loan revenue.
Given the technological advancements, fintech needs to invest in cutting-edge tech innovations embedding ML and AI algorithms that can help assess borrower risk paving the way for enhanced efficiency, low operational cost, informed decisions and improved risk management.
Bottomline
Given the sheer number of citizens attracted to easy credit for non-productive purposes being gigantic, RBI intervention is a critical step in the long-term lending space.
By curbing lenders that may have followed lenient practices in loan appraisal in the past, this measure has opened up the space for fintechs to introspect and re-evaluate frivolous lending habits, making it possible to make a pronounced shift towards a more secure lending ecosystem.
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