After asking banks and non-banking financial companies to adopt a calibrated approach to growth, the Reserve Bank of India has asked fintechs to slow down.
In a recently held meeting with fintech executives, the regulator reportedly asked many companies, particularly those involved in lending products and/or operating as lending service providers, to reduce their growth.
The RBI’s concern, sources said, is that despite reduction in risk weights in unsecured loans, there is little or no moderation in growth. “It’s not good from a systemic point of view,” said a senior source familiar with the matter. Even though some fintech leaders have told the regulator that strong growth comes from a weak base, the reasoning has not found support.
“The target of around 15 to 20 percent growth is the message to all of us,” said the CEO of a lending fintech who wished to remain anonymous. Currently, fintech lenders are among the fastest growing entities and almost all fintechs across the board could have closed FY24 with 35-50% growth. “This warning has put us in a difficult situation,” the CEO said.
It’s in the DNA
Fintech executives and investors are coming together to try to find alternatives. The sector is once again coming back with fundraising projects with clarifications on operational aspects such as loss-defect guarantees. However, the DNA of fintech lenders is rapid growth, and valuation multiples are often tied to how quickly the loan portfolio can grow.
“On the one hand, we do not want to take the risk of not heeding the RBI’s warnings, because we have seen how non-compliance can backfire. But on the other hand, how can we satisfy our investors? If growth slows to 15-20 percent, generating returns above 30 percent is almost impossible,” said another fintech CEO. Additionally, while most players are looking to become profitable or break even before their IPO plans, slowing growth could turn back the clock. “Volumes and scale are important to becoming profitable and that can’t happen if growth slows,” said another CEO.
After that
Although venture debt is no substitute for equity, many fintechs are considering adding debt to their balance sheet to improve the return profile and thus slightly increase valuations. Since many operate in the unsecured lending segment (whether for personal loans or small business needs) where cost of funds pass-through is not an issue, fintechs are also exploring alternative business models.
“Of late, there has been increased interest in gold loans and loans against property. This type of lending will ensure productive use of debt,” said a senior executive at a fintech company, adding that as many companies are still in the early stages of exploring these options, loan rates growth will be automatically reset. “But it could also increase our cost structures, and it will all depend on how we manage that,” she added.
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