Fintechs may shift to secure products after RBI order on consumer loans

Fintech companies believe that the impact of Reserve Bank of India's order last week on unsecured loans will be visible in six to 12 months and prompt them to diversify and strengthen their secured portfolio.

Fintechs which source funds through banks or non-banking finance companies (NBFCs) are looking at quickly building their secured portfolio options to at least 40 per cent of their total portfolio.

“Over the medium to long term, as part of our product strategy, we are evaluating secured products which can be enabled over a digital platform” said Yogi Sadana, the founder of Zype, a lending-focussed fintech.

The Reserve Bank of India (RBI) tightened norms for personal loans and credit cards by raising the capital requirements that banks and NBFCs must set aside for such borrowings.

It raised the risk weight on retail loans – personal loans and credit card loans fall in this category – from 100 per cent to 125 per cent.

It excluded education, vehicle, housing, and gold loans.

Keeping in line with the central bank’s directive, fintechs may consider other forms of secured products such as a gold loan as part of their diversification strategy.

Time to diversify

“One could see that there will be some diversification.

"One can do a gold loan also because it is a secured product,” said Madhusudan Ekambaram, co-founder and chief executive officer (CEO) of KreditBee.

Sadana said: “What we have seen is that the banks have gotten a lot of interest in secured lending and gold loans.

"There has been interest in products like this where there is an underlying security present with the RBI becoming cautious of growing an unsecured portfolio of banks.”

Ekambaram said fintech firms may consider expanding into secured and priority secured loans (PSLs) as they diversify.

“It (strategy) will differ from fintech to fintech.

"One may do products like education loans or an extension towards loan against property.

"One can also do an SME/micro-SME loan for enterprises with a Udyam certificate. If one is extending an unsecured loan over it, it can be categorised as a priority sector loan,” said Ekambaram.

His company, KreditBee, had ventured into a loan against property product (LAP) for retail customers before the RBI’s orders.

“This was not based on the current scenario but we wanted to offer multiple different loan products to our customers.

"Traditionally, we had been doing unsecured personal loans.

"Later, we started with SME business loans.

"This way, we had started both the forms of both secured and unsecured loans.

"Later, we started with the loan against property even for the retail segment,” he said.

Fintech companies said the RBI directive is not a surprise.

“The RBI governor had spoken about the increase in the unsecured personal loan segment during the monetary policy committee meeting in October.

"As a consequence, RBI has raised the risk weights for banks and NBFCs on unsecured loans by 25%.

"We need to appreciate and respect the RBI’s view as this shows their commitment for long term financial stability,” said Sadana.

Consumer awareness

Higher delinquency among certain customers has been a concern for some time.

The TransUnion Cibil report for Q2 FY23 said that consumers having at least one small-ticket personal loan saw balance level delinquency of 4 per cent, marking a rise of 120 basis points since Q2 FY22, Business Standard reported earlier this week.

“There needs to be cyber and financial literacy and awareness among customers that they should neither fall prey to unauthorised lending apps, nor fall into over-indebtedness,” said Jatinder Handoo, CEO of Digital Lenders Association of India (DLAI), an industry association.

“We are organising a capacity-building programme for independent directors and CXOs regarding corporate governance, because that is something RBI has time and again expressed its views on governance. Multiple initiatives, right from the board to the end customer, there are multiple interventions planned in the next one or two weeks’ time,” he said.

Fintechs believe the RBI orders won’t have an immediate impact and they would evaluate the situation for the next six months.

“Within the next six months we will be able to see the impact panning out.

"That said, if we compare the growth of unsecured loans in the last six months to six months from here, we will find a dent,” said Ekambaram.

Sadana said companies will have to reconsider their credit policies.

“With increase in the risk weights, lenders will have to relook at their risk, credit policies and products.

"In the short term it will create pricing pressure since leverage will become more expensive.

"Having said that, as a good practice a review of the risk and credit policies should be a periodic process to assess portfolio risk.” he said.