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Tag: Fintech NBFCs

  • Fintechs in 2024: Navigating Toward a Brighter Future

    2023 is a year that loan app companies and fintech companies may want to erase from their memory. Fraudulent loan app companies, extortion cases, and a rigorous crackdown by policymakers have meant that the whole cart is being painted black.

    However, some loan app companies and fintech companies continue to pin their hopes on a better 2024 with consumer awareness programs, smarter risk-priced products, and collaborations to clean up the much-tarnished image of the sector. 

    Clean Business
    Risk-based Pricing
    End of a Tunnel

    Clean Business

    Digitization has hit nearly every aspect of life, and credit availability is not very far behind. A report released by banking regulator Reserve Bank of India showed that loans disbursed by banks and non-banking finance companies through the digital mode multiplied 12 times between 2017 and 2020. With the rise in several disbursements, the grim underbelly of several loan app companies has also been exposed.

    Earlier this month, Finance Minister Nirmala Seetharaman intimated the Lok Sabha, saying that between April 2021 and July 2022, Google Play had reviewed up to 4000 loan app companies and had removed more than 2500 loan apps from its Play store. Several debtors have been driven to death by extortion calls and threats, some even being sent morphed pictures of theirs, highlighting the dark side of loan app recovery agents.

    However, some of the more reputed companies are trying their best to clean off this image of loan app companies.

    “We continuously explain to our end consumers through online as well as offline mediums to not fall into offers that look very attractive or that are available through WhatsApp, SMS, and SMS calls,” said Rajesh Shet, founder of gold loan platform company Sahi Bandhu.

    The regulators, too, are putting in all efforts to curb unsolicited apps. Recently, the Ministry of Information and Technology has asked the Reserve Bank of India to have more exhaustive Know-Your-Digital-Finance-App norms.

    “This will ensure that only legitimate and scrutinized financial apps can access and use the Indian banking system, and further, if there is any violation of law, the KYDFA process will help in establishing the traceability and origin of the app for action under the law,” Minister for State for Electronics and Information Technology Rajeev Chandrasekhar told the news website Moneycontrol.com.

    Risk-based Pricing

    The issue of defaults within the loan app universe unravels a chicken-and-egg situation wherein companies are going overboard with selling products, thereby ending up sitting with bad loans on their books.

    “Within the fintech industry, to increase the top line, some companies are trying to sell everything possible, even if customers are not looking for a loan or a credit card. They are trying to cross-sell and try to bring in lucrative deals or offers,” said Brijesh Chokhra, co-founder of the instant loan app company Wecredit.

    Instant student loan app company Kuhoo Founder and Chief Executive Officer Prashant Bhonsle feels lending needs to be dealt with in a nuanced fashion to make it work for both the company and the customer.

    “There are interpretations that a lender will have to do to fully understand, such as the income documents of the customer, the P&L, and the ITR. Some businesses you are evaluating are cash-flow businesses, and some are asset-heavy businesses. How do you interpret that information? And that interpretation is the secret sauce, which varies from lender to lender,” said Bhonsle.

    Talking about Kuhoo’s focus area of student loans, the skill was to evaluate the potential of every student to get a job, Bhonsle said.

    The regulators are, however, not taking any chances. 

    Recently, the RBI asked banks and non-banking finance companies to increase the risk weights on commercial loan exposure and credit card exposures to 125% from 100% earlier. Interestingly, several digital lending apps borrow from NBFCs too.

    Rating agency ICRA recently observed in its press release that co-lending transactions by medium and small non-banking finance companies were “on the rise, largely seen in the unsecured loan segment, with the counterparty mostly being other NBFCs.”

    Attributing to RBI data, Minister of State for Finance Bhagwat Karad said in the Lok Sabha earlier this month that NBFC’s share of credit to the industry was the highest at 12.83 lakh crore INR, registering a 12% rise year on year. This was followed by retail loans at 10.55 lakh crore INR, recording a near 26% rise on the year.

    According to Bhonsle, appropriate “risk-based pricing” holds the key to a successful lending business.

    End of a Tunnel

    Given India’s sustained growth trajectory coupled with the promise held in artificial intelligence and machine learning, 2024 could hold promise for fintech companies.

    “The Indian economy is growing rapidly, and with it, the demand for financial services. The coming years hold immense promise, and innovators across the world should explore these opportunities,” RBI’s Governor Shaktikanta Das said in a speech in September. 

    “Technological innovation has unprecedented potential to make finance more inclusive, competitive, and robust. It is crucial that technological advancements in the world of Fintech evolve in a responsible manner and are truly beneficial to the people at large. It is, therefore, vital for these innovations to be scalable and interoperable,” he added.

    One of the ways to scale up operations for fintech companies would be through mergers, such as the one between the digital lending app Slice and North East Small Finance Bank in October. Touted as a breakthrough strategy to scale up, players are hoping for more such collaborations within the industry.

    “I strongly believe that this industry will have to work closely and collaboratively, keeping common interests in mind. There will be competition, but there are common industry concerns and matters that require collaboration. And then, at some stage, there will not be enough room for many players. That’s when one will have to join hands and see who is good at what. Someone may be very good in tech, and someone may be very good in customer onboarding,” said Shet of Sahibandhu.

    India’s growth prospects also hold promise as far as credit demand is concerned.  Rating agency S&P revised its growth projection for India in 2023–24 to 6.4% from 6% earlier. For the next fiscal, however, it lowered its projection marginally to 6.4% from 6.9% earlier.

    “India as an economy is doing so well, and this asset class (real estate) has shown returns year after year. I do see a lot of innovation on the FinTech side, particularly on the home loan side, because it seems like the norm of the regulators to allow the account aggregator framework to become more popular, which means that digital information will be a lot more freely available to many players who are part of the account aggregator framework,” said Pramod Kathuria, founder and CEO of AI-enabled fintech platform for home loans, Easiloans.

    Conclusion

    Fintech companies and digital lenders are hoping for a more responsible and cheerful 2024. While technological innovations unlock their potential further, the only thing that could put a spanner in their tracks would be unscrupulous lending by themselves.

    Fintech NBFCs and Market Shifts: How Fintech NBFCs Should Adapt to Market Trends
    NBFCs need to embrace technologically driven solutions for the best customer experience. Here are the key market trends affecting fintech NBFCs.
    StartupTalkyAshwini

  • How RBI’s Risk Weight Adjustment Affects Banks, NBFCs, and Fintechs

    In an effort to control the unchecked expansion of unsecured consumer lending, the Reserve Bank of India (RBI) recently issued a notification. The directive increases the risk weight for consumer credit exposure of banks and non-banking financial companies (NBFCs), potentially impacting fintech players. Industry experts suggest that these lending institutions will now need to allocate more capital to be set aside against the unsecured loans they disburse.

    The RBI’s measure involves a 25-percentage-point increase in the risk weightage for both existing and new unsecured consumer credit exposure of commercial banks and NBFCs, elevating it from 100% to 125%. While the industry players appreciate the move for its risk mitigation aspects, concerns have been raised about the potential decline in loan growth. In essence, this adjustment is expected to drive up the lending costs for unsecured consumer loans.

    The RBI has expressed concerns about the escalating trend in unsecured consumer loans, specifically personal and credit card loans. With the latest circular instructing banks and NBFCs to heighten risk weights on such loans and restrict exposure, the RBI aims to curb the rapid growth in this segment.

    According to RBI data, personal loans witnessed a 23% growth in August 2023, and credit card outstanding increased by 30%, compared to the figures from August 2022.

    The higher risk weights entail that banks and NBFCs must allocate more capital for each loan they extend. In simple terms, this measure safeguards against potential issues if borrowers fail to repay their loans, preventing banks from encountering financial trouble. Lenders are now required to adhere to set limits on exposure to various segments of consumer credit as approved by their boards. Additionally, top-up loans backed by depreciating assets, such as car loans, will now be categorized as unsecured loans.

    “RBI’s recent move to strengthen regulations on consumer lending, particularly in personal loans, is a positive step towards risk reduction. In response, our partners have already implemented more stringent underwriting criteria over the last 30 days to ensure loan quality. It’s anticipated that this RBI initiative will contribute to a decline in loan growth, aligning to curb excesses in the NBFC space,” commented Manish Shara, Co-founder & CEO of Zet.

    Following global standards, a 100% risk weightage implies that INR 92 out of every INR 100 loan originates from depositors’ money, while INR 8 comes from shareholders’ investment. With the recent 25-percentage-point increase, banks and NBFCs will now need to source INR 10 from shareholders’ investments. This adjustment is expected to impact companies like Paytm, CRED, Navi Finserv, OnEMi Technologies (which operates Kissht and RING), along with several consumer-focused fintechs such as Freo, Fibe, Kreditbee, Paytm, and CRED, considering their substantial share in the number of loans disbursed.

    Offering insight into the central bank’s move, Rishabh Goel, Co-founder and CEO of Credgenics, stated, The current rise in risk weight assessment is likely to result in a marginal increase in loan pricing by banks. This serves as a signal urging lenders to exercise caution, especially in the small-ticket loans segment.

    Priyanka Chopra, COO, and managing partner for seed investing at IIMA-CIIE, predicted that this move would lead to a moderation of unsecured credit for digital lending startups. However, she noted that established players with a robust capital base and calibrated underwriting are expected to experience minimal impact.

    The RBI’s decision was driven by the necessity to control the growth in unsecured loans. Last month, RBI governor Shaktikanta Das emphasized the high growth in certain components of consumer credit, advising banks and NBFCs to enhance internal surveillance mechanisms, address risk build-up, and institute suitable safeguards. The notification also introduced changes to the risk weight of credit card receivables of scheduled commercial banks and bank credit to NBFCs to address potential risk build-up. Furthermore, the RBI stated that all top-up loans against movable assets with inherent depreciation, such as vehicles, must be treated as unsecured loans for credit appraisal, prudential limits, and exposure purposes.

    Jaya Vaidhyanathan, CEO of BCT Digital, expressed her support for the RBI’s decision, affirming, “The move to increase risk weights for personal loans is a constructive step, aligning with the central bank’s concerns regarding aggressive lending in the unsecured consumer loans sector. While the overall financial impact of defaults in this category may not be considerable, the sheer volume of individuals drawn to effortless credit for non-essential purposes like electronic gadgets is substantial. This initiative will deter lenders who may have previously adopted lax practices in loan assessment, reminiscent of historical incidents in 2008 involving credit card and personal loan mismanagement.”

    The latest sectoral credit growth data from the Reserve Bank of India (RBI) reveals that Indian banks are aggressively expanding their personal loan portfolio, with credit to the segment growing by 30.8%, compared to 19.4% on a year-on-year basis. Fintech firms have sanctioned almost ₹30,000 crore for consumption loans—personal loans, consumer durable loans, vehicle loans between 2015 and 2022—compared to less than ₹5,000 crore disbursed for business loans during the same period, as reported by the RBI-backed Centre for Advanced Financial Research and Learning (CAFRAL).

    There Is Currently No Imminent Effect on Interest Rates
    Is the Era of Easily Accessible Credit Coming to an End?
    Impact on Credit Cards

    There Is Currently No Imminent Effect on Interest Rates

    There is no immediate anticipation of an impact on interest rates, according to Shibani Kurian, Senior Executive Vice-President & Head of Equity Research at Kotak Mutual Fund. While the augmented risk weights are likely to influence growth in specific segments, large banks and NBFCs are currently well-capitalized, surpassing regulatory requirements. Therefore, raising capital immediately may not be necessary due to the increased risk weights. Banks are expected to assess the impact and decide whether any cost increases need to be passed on to customers. Corporate trainer (Financial Markets) Joydeep Sen concurs, emphasizing that while there might not be an immediate effect on banks’ costs, they are likely to adopt a more cautious approach in the long run.

    Naresh Malhotra, a former SBI executive and current Director at JCRC LLP, an accounting firm, emphasizes that NBFCs are more likely to bear the brunt of the impact, facing increased funding costs. As NBFCs borrow from banks to lend to customers, the rise in risk weights will elevate their borrowing costs from banks or through bond issuance. The final impact will be contingent on the resource mix and the proportion of unsecured consumer loans in an NBFC’s overall portfolio. Regarding commercial banks, Malhotra notes that although their unsecured loan portfolio has grown at a rate exceeding the general credit growth rate, their exposure to this segment is more effectively hedged than that of NBFCs. However, he acknowledges that higher capital outlay will also affect commercial banks.

    The RBI’s decision to elevate risk weights on unsecured consumer credit, including personal loans, from 100 percent to 125 percent for both banks and NBFCs, has implications for the lending landscape. Additionally, the risk weights for credit card receivables have been revised from 125 percent to 150 percent for banks and from 100 percent to 125 percent for NBFCs.

    Is the Era of Easily Accessible Credit Coming to an End?

    The era of easily accessible credit might be coming to an end from the borrower’s standpoint. Ritesh Srivastava, Founder and CEO of FREED, a debt relief platform, notes a noticeable shift among lenders, who have become more cautious and stringent in approving new loan applications. The approval rates for new loans currently hover around 4 to 5 percent, a significant drop from the peak of the cycle when they ranged from 8 to 12 percent.

    Malhotra emphasizes that the RBI is concerned about the rapid expansion of unsecured credit, prompting the central bank to raise the cost of lending for both banks and NBFCs. The intention is clear—to decelerate the pace of this growth. Kurian echoes this sentiment, pointing out that the heightened capital requirements will gradually ease the competitive fervor in the consumer credit sector, where banks, NBFCs, and fintechs in collaboration with regulated entities have been striving to attract more customers.

    Sen provides an additional perspective, stating that in unsecured loans, banks can compensate for delinquencies due to the higher interest rates. However, the consequence of elevated rates is that those diligently repaying their credit card dues end up covering for those who do not—a concept known as “good money for bad money.” This underscores the need for more thorough due diligence, and the increased risk weights will contribute to achieving this.

    This shift could be advantageous for individuals with a steady income and strong credit scores. On the flip side, those with irregular incomes and lower credit scores may encounter greater difficulty in securing loans. Adhil Shetty, CEO of BankBazaar.com, explains that for ideal borrowers—those with stable income, a credit score above 750, and a history of timely payments—there should be no impact on existing or new credit lines. Lenders are likely to favor such borrowers, while individuals outside these criteria may find it more challenging to secure loans, a trend that has historically held true.

    Impact on Credit Cards

    Industry experts we consulted do not foresee any immediate consequences, such as a reduction in credit card limits or higher interest rates, affecting credit cards.

    Malhotra emphasizes that the larger source of risk lies in outstanding credit card balances that remain unpaid even after the due date, warranting more attention. Kurian provides additional insight into this matter. Despite the rapid growth in credit card spending, she notes that there has been no deterioration in delinquency. “Revolve rates” (indicating the amount of outstanding credit card balance that remains unpaid) are currently lower than pre-Covid levels. Consequently, banks face no immediate asset quality concerns, making an immediate reduction in credit card limits unlikely. However, in the future, financial institutions may shift their focus to customers with better credit profiles, potentially slowing down the previously rapid growth. Srivastava suggests that existing credit card customers who only make minimum payments may encounter tighter credit limits and possibly a downward revision in limits upon renewals.

    On a positive note, Naveen Kukreja, Co-Founder and CEO of Paisabazaar, believes that for lenders with sufficient capital and effective risk management, credit cards and unsecured loans will remain highly profitable segments and continue to be focal points.

    Fintech firms anticipate that the effects of the Reserve Bank of India’s directive will become evident within six to twelve months, compelling them to broaden and fortify their secured portfolio. Fintech companies that acquire funds from banks or non-banking financial companies (NBFCs) are swiftly working on expanding their secured portfolio to constitute a minimum of 40 percent of their overall portfolio.

    Fintech NBFCs and Market Shifts: How Fintech NBFCs Should Adapt to Market Trends
    NBFCs need to embrace technologically driven solutions for the best customer experience. Here are the key market trends affecting fintech NBFCs.
    StartupTalkyAshwini

  • Fintech NBFCs and Market Shifts: How Fintech NBFCs Should Adapt to Market Trends

    This article has been contributed by Kunal Mehta, Founder and Director, Arthan Finance.

    The fintech industry has been growing and developing rapidly with the introduction of digitization in various aspects of the system. The traditional format of banking has evolved at a great speed, especially since the pandemic. NBFCs operating in the fintech sector have seen significant growth in recent years. With technology driving growth in almost all sectors, there is a greater need for a smoother financial system interface. Fintech NBFCs, or non-banking financial companies, have enhanced the financial experience of customers by offering innovative, technology-driven solutions. There has been a major shift towards digital and cashless transactions, creating greater and better opportunities for NBFCs to expand their businesses and portfolios.

    However, with technology constantly upgrading and shifts in consumer behavior and demands on the market, the NBFCs must continuously adapt to stay ahead of the curve. Along with digital solutions, NBFCs also need to embrace technologically-driven solutions for the best customer experience.

    Since the pandemic, market shifts and wavering demands have put some pressure on the fintech companies to thoroughly analyze the futuristic demand. In order to stay relevant, NBFCs should be able to understand the nature of the demands of their customers and their futuristic needs. Some of the changing market trends that will shape the fintech industry in the coming years are:

    Constant Integration of Digitalization
    Amplifying Security
    Expansion into New Geographic Markets and Product Lines
    Blockchain Technology
    AI-driven Data Solutions
    Leveraging IoT Technology
    Hyper Automation
    MetaVerse Fintech

    Constant Integration of Digitalization

    Although fintech companies have been established through technology, NBFCs must continue to invest in building and adopting new technology and digital infrastructure that will help streamline internal processes, enhance customer experience and collect data that will help them understand the future needs of their customers.

    Amplifying Security

    In recent years, there have been a lot of fraudulent cases relating to online and digital payments. This has made people wary of using technology for their day-to-day transactions. There is a dire need within the fintech sector to strengthen their security and protect the trust of their customers. With digital payments becoming the new norm, designing a high-security transaction system will help NBFCs boost growth and expand their customer base.

    Expansion into New Geographic Markets and Product Lines

    One of the biggest assets of the fintech sector is easy accessibility. The consumer can conduct all financial transactions at the tip of their fingers. However, in order to make their services available and known, NBFCs need to venture into new geographical markets and market their products locally. This expansion will help to increase the reach of NBFCs and create new business opportunities. Additionally, expanding their product portfolio will help NBFCs reach out to a bigger market and create more opportunities for business.

    Blockchain Technology

    Blockchain technology is increasingly being adopted by the fintech sector for its potential to improve transparency, security, and efficiency in financial transactions. It enables the creation of secure and decentralized ledger systems that can facilitate a range of applications including digital payments, smart contracts, and decentralized finance (DeFi). Blockchain technology can help improve financial inclusion by enabling faster, cheaper, and more secure transactions for individuals and businesses, and can also reduce fraud and errors in financial transactions. Additionally, it has the potential to streamline various financial processes, from remittances to insurance claims, by eliminating intermediaries and increasing transparency. NBFCs need to gradually experiment with integrating this technology to understand its pros and cons on the user experience and business.

    AI-driven Data Solutions

    One of the biggest boons within technology has been AI-driven data collection, segregation, and solution. NBFCs should look into amalgamating AI in their systems and allowing AI to understand customer behavior. This will help fintech companies to provide customized products and services to their customers, benefitting both, the company and the consumers and driving major value creation.

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    Leveraging IoT Technology

    IoT Technology has been effectively changing the dynamics of the financial landscape. IoT has excellent data analytics capabilities that can help segregate millions of data points in seconds. Additionally, it can swiftly detect hackers, attacks on the system, and malware being uploaded. This can help NBFCs detect fraudulent activities and increase the security of their system and protect the data of their customers. IoT can also help mitigate risks for secured and unsecured loans while improving consumer engagement.

    Hyper Automation

    With new technology within AI and deep learning being designed and introduced, process automation would be the next fintech market trend to be adopted. From deploying chatbots and introducing deep learning to understand customer behavior, Hyper Automation will reduce paperwork, increase efficiency, enhance decision-making, and make the entire experience seamless for the customer.

    MetaVerse Fintech

    The biggest revolutionary technology, the MetaVerse, is one of the most innovative and crucial technological development. With proper development, MetaVerse will become a universe of its own, drawing customer engagement and driving value creation through various services. Fintech companies must look out for MetaVerse Technology as it is fast evolving and still new in its phases. With fintech MetaVerse, customers will be able to conduct their banking and financial activities and transactions in a virtual reality format. This, in a way, will be building a full circle.

    With technology making it easier for customers to conduct transactions on their phones introducing MetaVerse where customers can enter virtual reality and experience traditional banking services. This will be revolutionary for NBFCs as it will allow them to provide a personal touch and experience to their customers and help retain them. It will also open up new opportunities and avenues for customer engagement and build loyalty and trust.

    Conclusion

    Fintech companies and NBFCs have been leveraging technology to improve the customer experience, making it faster and more convenient for users. By adopting new technology, expanding their reach, and building avenues to retain customers, NBFCs have a huge opportunity for growth and development in the coming years. Fintech companies need to stay focused on creating business strategies that will help them integrate new technology in a seamless manner, which will enhance the consumer experience.