In FY23, Indian banks witnessed a loan growth of over 15 per cent, the highest rate since FY12. This was driven by robust GDP growth and pent-up demand after the COVID-19 pandemic. Credit card lending and exposure to unsecured personal loans rose to 10.2 per cent in FY23, marking a significant increase from 7.5 per cent in FY18. This elevation suggests an increase in risk appetite among banks and financial institutions.
The year also saw an increase in exposure to Non-Banking Financial Companies (NBFC), with their loans constituting 10.5 per cent of total lending. Major NBFCs are targeting a 25 per cent loan growth in the medium term. Notably, unsecured loans, particularly non-bank microfinance loans, experienced a 43 per cent YoY growth, raising concerns about risk controls and asset quality.
Regulatory Measures To Curb Risk
The Reserve Bank of India (RBI) implemented measures to address the escalating risk within the sector. It increased the risk weights for unsecured personal loans and credit card loans from 100 per cent to 125 per cent; for credit card loans in banks, the weight was raised to 150 per cent. While this move is considered credit-positive and aimed at mitigating systemic risks, it may result in elevated lending rates, reduced credit growth, and an increased need for capital among vulnerable lenders.
Impact on Lenders and Borrowers
The anticipated impact of increased risk weights on banks' loans to Non-Banking Financial Institutions (NBFIs) could be substantial, contrasting with the likely lower impact of heightened credit-card risk weights. Private banks, which have a relatively better CET1 capitalisation compared to the state-run banks, are expected to maintain reasonable capitalisation after the alterations. Additionally, they are better positioned to source fresh capital, if needed, given their higher price-to-book valuations.
Challenges and Opportunities for Fintech Firms
The recent increase in risk weights for unsecured loans poses challenges for the fintech sector. As banks and NBFCs might lend at higher rates, fintech lenders face pricing pressures. To offset increased costs, these lenders may need to raise interest rates for customers, potentially leading to elevated interest expenses and monthly payments and/ or increased tenure for existing borrowers.
The shift in digital lending interest rates could prompt consumers to revert to traditional finance sources like banks. As a response to these measures, fintech firms must take steps to retain their market share and deliver consistent margins. Efforts should be taken to absorb the additional cost and diversify offerings so that these companies can continue to attract borrowers and grow their portfolios. Fintech lenders should reassess their business models and expand them more sustainably through improved technology for a more inclusive financial system and product portfolio expansion.
Utilising Technology
Advancements in blockchain, AI, and machine learning empower fintech firms to enhance financial services across all operational areas. Decentralized Finance (DeFi) is gaining traction in India, offering financial access to unbanked and underbanked populations, thereby narrowing socio-economic disparities. Fintech firms should cautiously navigate regulations in areas like cryptocurrency and blockchain.
Additionally, fintech firms are instrumental in promoting sustainable finance through branchless, paperless models, positively impacting the environment. Extending this approach across lending and collection processes can amplify social impact, facilitate growth, and cut costs.
These technologies also enable an inclusive financial system, providing small businesses and individuals, typically underserved by traditional banks, with more accessible and affordable credit options.
Product Diversification
Fintech lenders can diversify their services by offering personal banking, digital money, investment management, and insurance. Innovative models like peer-to-peer lending, alternative credit scoring, small ticket loans, and alternative insurance underwriting cater to diverse customer needs. Customising these services for mass-scale adoption can address specific customer requirements, aiding in long-term financial goals and moving companies towards a zero NPA (Non-Performing Assets) objective.
Proactive diversification, improved asset quality, and cost-cutting strategies position fintech firms to navigate and thrive amid stringent regulations, seizing the immense potential. The projected growth of the fintech market to USD 2.1tn by 2030 is driven by AI and machine learning-driven business models. This growth is amplified by the increasing usage of mobile and smartphones, especially among the 68 per cent youthful demographic. Despite regulatory challenges, fintech firms are poised for extraordinary growth and expansion by leveraging tech innovations and favourable market dynamics to propel expansion.
Disclaimer:The views, thoughts and opinions expressed in the article are solely the author’s and are not representative of the author's employer/organisation.
- Maulik Sanghavi, partner, Corporate Finance and Investment Banking, BDO India
