Year ahead- Loan partnerships with fintechs to rise in 2024

Year ahead: Loan partnerships with fintechs to rise in 2024

Partnerships between fintechs and traditional lenders will increase in 2024 as the former struggle to garner sufficient funds to build their own balance sheets.

Simultaneously, fintechs must contend with a rise in compliance costs with Reserve Bank of India (RBI) tightening scrutiny in recent years, say experts.

In recent months, various banks and non-banking financial companies (NBFC) have asked fintech partners to curtail issuing small-ticket personal loan disbursements. Subsequently, fintech major Paytm announced that is recalibrating the portfolio origination of less than Rs 50,000, which is largely a post-paid loan product. Paytm said that it will be focussing on business loans and high-value personal loans going ahead.

This shift in strategy from Paytm comes on the heels of RBI’s mandate asking banks and non-bank lenders to increase risk-weights on unsecured retail loans by 25 percentage points.

Many personal loan-focussed fintechs are recalibrating their business models following RBI’s norms. “Firstly, a likely redistribution of asset classes may occur, as lenders seek to smoothen growth across unsecured and secured products,” says Aditya Kumar, chief executive officer, Niro.

“Secondly, a flight to quality is expected, with lenders seeking to build unsecured portfolios in segments perceived as more resilient and less leveraged,” he added.

Separately, MobiKwik Founder and Chief Executive Officer Bipin Preet Singh noted that the emergence of account aggregators will also foster collaboration in the industry.

While fintechs largely operated outside the RBI’s radar earlier, the central bank has tightened its watch on the segment in recent years. With many incidents of borrower harassment coming to light, RBI’s scrutiny on these fintechs has intensified in 2023. In the coming year, these entities will continue to adjust to the changing regulatory environment, say experts.

“With the increase regulations, there are a lot of compliance requirements, customer protection etc. Managing those compliances along with innovation and scale, would be a challenge,” says Sugandh Saxena, chief executive officer, Fintech Association for Consumer Empowerment.

Similarly, Credit Wise Capital Director and Founder Aalesh Avlani feels that rapidly changing regulations and lack of clarity in certain areas make it difficult for fintechs to keep up and comply, resulting in compliance costs and hindering innovation.

RBI has encouraged fintechs to attain NBFC license and offer loans from their own books. But, the prevailing tough environment to attain equity and debt capital will make it difficult for these entities to make the transition. Additionally, RBI’s strict norms for issuing NBFC licenses has made it intensified challenges for these entities.

As a result of this, many entities would prefer to remain lending service providers, who source loans for bank and NBFC partners, say experts.

“The core LSP model is appealing to people. Similarly, the co-lending model is becoming more available,” says Alok Mittal, Co-founder, Indifi Technologies.

Mittal added that even if some fintechs manage to become NBFCs, they may opt to go into co-lending arrangements in order to attain access to larger scale of capital.