Fintechs may pose a challenge to banking sector over the next few years

The formal and informal fintechs will pose a significant challenge to the mainstream banking sector over the next few years

At an inter-block cricket match in Purnea district early this year, all sorts of loans were on offer around the ground, with banners bearing cell numbers. None of these banners bore the names of banks but apps that could process instant loans with few questions asked.

This is just the kind of activity that Reserve Bank of India Governor Shaktikanta Das warned in a December 23 press release would result in individuals and small businesses “falling prey to growing number of unauthorised digital lending platforms (or) mobile apps on promises of getting loans in quick and hassle-free manner”.

But this explosion of app-based lending, a digitised extension of the informal, below-the-radar channels that flourish in India, underlines the growing importance of fintech companies of all hues. Even before banks can reach credit to the “unbanked” through such measures like Jan Dhan, these companies have moved in and are creating what Nobel laureate George Akerlof would describe as a lemons market — where it is difficult to distinguish between a good and a bad product. There are no industry-wide estimates of how large India’s digital lending segment has grown. In 2018, Boston Consulting Group estimated that it could be a $100-billion market for India by 2023 across all segments.

The Reserve Bank of India (RBI) has realised the pace of change and has opened regulatory sandboxes for digital companies to test out retail payment solutions. In one of those, Nucleus Software of Noida is testing an offline digital cash product, “PaySe”, to connect with rural areas for e-payments. The product is aimed at “digitisation of payments in rural areas, starting with Self Help Groups (SHG)”. Another one, Ubona Technologies from Bengaluru is testing a voice-based payment solution that will work on mobile phones, including feature phones. The product also offers the convenience of preferred Indian language to the customer, the RBI release noted. These companies hope to contest with the big daddies that are already there in the same space, Paytm, GooglePe, PhonePe and the newly minted AmazonPe. No surprise, the payments sector had the highest number of startups with over 400 across India as of 2020. Of over 2,000 fintech startups, lending and wealth tech accounted for the top three rankings in the country.

The RBI is worried about the fintechs crowding the credit space in the financial spectrum. It is here where the big bosses of banks such as the State Bank of India (SBI) and HDFC Bank to the smallest, Punjab and Sindh Bank, have ruled. This is also where the competition is getting intense. Banks make their earnings by giving out credit, not arranging payments that has small fees per transactions — from less than Rs 1 to Rs 125. Yet as the price of money threatens to stay low for the next few years, the lure of offering cheap credit is becoming attractive for the fintech companies. They have the technology to beat the banks hollow.

The only thing holding them up is the RBI’s refusal to allow them to lend but merely act as loan facilitators. The fintech companies are finding ways around this too. PhonePe CEO Sameer Nigam has just announced he will provide loans and working capital for the 15 million merchant customers who are already on the app. Millions of such apps are available in rural areas. Others are encouraging their clients to hold larger balances on their books, mimicking deposits made in the savings account and offering cash-back discounts.

Such simplified structures, which involve less rigorous KYC norms, are expected to rise in the post-pandemic era. This could pose real risks for conventional Indian banks. Mandar Kagade, principal, Black Dot Public Policy Advisors, said it will take time but fintech companies will use the period to tie up with the established players.

Meanwhile, players such as government-owned SBI, India’s largest lender, are tightening the covers around themselves. A recent media report said SBI has recast loans of just 4,000 retail borrowers in financial year 2020. Yet this year SBI Cards and Payments has reported a trebling of its bad loan percentage in just one quarter — April to June, 2020. Essentially the banks are trying to save themselves and thus pricing themselves out of the market for small loans.

Retail loans account for 60 per cent of the loan book of Bank of Maharashtra, one of the four state-owned banks from which the government is reported to be planning to exit. The limited reach of such a bank based on the reach of its branches makes its future prospects difficult.  What are the advantages it can offer to a borrower if it does not remain a government-run entity? In any case, such safety does not help the small borrowers. The potential for reaching them is the reason WhatsApp was willing to wait over two years to clear all the regulatory road blocks to launch its financial service. And this could mean in 2021, there might be just no buyers for the banks the government wants to sell.