Now, the Reserve Bank of India (RBI) has stepped in to rein in what it probably views as an unchecked and unwise lending spree. Striking a note of caution, the sector regulator has asked banks and NBFCs, the main source of funds for fintech lenders, to go slow on unsecured lending. This move could have a deep impact on fintechs which are fast-growing startups mostly focused on unsecured consumer lending.
RBI says: Back on October 6, the RBI Governor Shaktikanta Das spoke about the need for banks to tighten lending norms. “Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, and address the build-up of risks,” Das had said.
Now, the RBI has increased the risk weightage of these loans for banks and NBFCs by 25% across unsecured loan categories.
Jargon Buster: Risk weightage is a method of calculation which implies that for every loan extended, an adequate amount of capital should be held by banks. So now banks will have to keep aside more for provisions and to maintain their capital adequacy. This protects banks from going bankrupt in case they face large-scale defaults in their portfolios.
Main Impact: With restricted lines of credit available, fintechs might need to slow down. While this step will obviously help lenders protect their capital base and focus on recoveries, it will put a check on the march of fintechs who depend on traditional lenders for business. Co-lending could be affected as well.
Early-stage fintech lenders need to grow quickly. First, to push up their valuations, and second, to create a meaningful impact in the ecosystem. A tightening of the credit pipeline may halt them in their tracks.
The timing of the central bank’s move is significant, coming as it does after two or three years of struggles, just when fintechs were seeing profits, scaling up their loan books, and attracting investor attention.
Decoding RBI’s move: But why is the central bank so alarmed now?
This data set between September 2023 and 2021 has the answer:
Consumer durable loans: Grew 57.5% to Rs 20,956 crore from Rs 13,304 crore.
Credit card outstanding: Grew 64% to Rs 2.17 lakh crore from Rs 1.32 lakh crore.
Other personal loans: Grew 57% to Rs 12.4 lakh crore from Rs 7.9 lakh crore.
Medium small and micro business loans: Grew 21% to Rs 34.7 lakh crore from Rs 28.7 lakh crore. (the average ticket size of these loans is typically larger)
This massive, if somewhat alarming, loan growth has caught the attention of the central bank, which now wants banks and NBFCs to slow down and focus on more secured assets.
And the fallout? For a start, consumer sentiment is bound to be impacted. Loans will undoubtedly be a little more expensive than in earlier times. The hoopla around credit cards might die down a little bit as well. And banks, naturally, will get more selective while lending.
This, overall, should be all to the good. It will put the industry back on firmer ground, in turn strengthening the financial stability of our economy. Needless to say, it is essential to avoid a catastrophe like the subprime mortgage crisis of 2008 in the US which pushed most of the developed world into a deep recession back then.
Erring on the side of caution, as suggested by the RBI, may well be justified after all.
Fintech lenders may face the brunt of RBI’s tightening of capital norms for unsecured lending: The RBI’s recent directive requiring lending institutions to increase their risk weightage or the amount of capital to be set aside against unsecured loans disbursed by them could weigh down the country’s nascent fintech lending sector.
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