Fintechs' lending biz is growing but industry must mind the warning signals

FY24 sees record loan surge and customer growth

You would have thought fintech (digital) lenders are being put through the wringer, hamstrung as they are by an equity-raising winter and stiffer terms when seeking bank credit lines. Think again. Data from the Fintech Association for Consumer Empowerment (FACE) has it that in FY24 loans given out by these firms topped a whopping Rs 1,46,517 crore, up by 49 per cent year-on-year and spread over 101.9 million accounts (up 35 per cent).
 

While no sizing study has been done on this segment (it falls under what the trade classifies as those who avail of loans under ticket sizes less than Rs 50,000), Sugandh Saxena, chief executive offer (CEO) of FACE, puts it down to “strong customer demand and preference undeniably being the driving forces behind the growth… this, coupled with the market's still modest scale, provides a long runway for healthy growth, and the market is maturing to those levels”. FACE, an aspirant for the status of a self-regulatory organisation, would like you to believe that “digital lending is responsibly driving ahead with a sharp focus on customer-centricity, compliance, risk management and sustainable business models.”
 

It’s an indirect way of rejecting misgivings that firms in this business have a carpet-bombing approach while vending loans, play off weak underwriting scaffoldings, or risk delinquencies. While the average loan ticket-size in FY24 stood at Rs 12,648, compared to Rs 11,094 in FY23, there are whispers that given that customers have three loans running at a time it could be that evergreening is on.
 

The ‘Financial Stability Report’ (FSR: June 2024) of the Reserve Bank of India (RBI) specifically calls attention “to a few concerns that require close monitoring”. Personal loans below Rs 50,000 remain high. In particular, non-banking financial company (NBFC)-fintechs, which have the highest share in sanctioned and outstanding amounts, reflect the second-highest delinquency levels, only below that of small finance banks (see chart).

 

Lending growth
 

But Ranvir Singh, co-founder and CEO of RING (a consumer-first credit app entity), seeks to correct the imagery. He is of the view that other than the innate demand for fintechs’ offerings, “the fact that there is heightened confidence on the quality of customers and awareness of risk-predictability has added to the growth trajectory.” What Singh says has to be read along with the larger setting.
 

The plot on unsecured lending changed after Mint Road upped the risk weights in November last year: To 125 per cent from 100 per cent (and on credit cards to 150 per cent from 125 per cent). Bank loans to these segments and downstream NBFC-fintech lenders also fall in this last genre. But at another level this has – counter intuitively – worked in the favour of NBFC-fintech lenders.
 

“The upping of risk weights has made competing banks and the traditional NBFCs a tad more cautious,” points out Singh even as he brushes aside concerns that the targeted audience is largely  made up of the new-to-credit or those with thin credit files. His stance is that customers from leading banks “also come to us for a host of reasons, say quicker processing plus, nothing by way of prepayment or far lower charges.”
 

And this despite “the fact that capital adequacy of banks is such that they can absorb the higher risk weights when they offer credit lines to fintechs (lenders). As for the better among the latter, capital (be it equity or debt) will not be an issue,” notes Saurabh Tripathi, global head (financial institutions practice), Boston Consulting Group.
 

Yet, there’s something to be said when you go through another aspect.
 

According to FACE, data reported for capital (15 companies shared on equity and 19 on debt) in FY24 show that Rs 1,913 crore was raised in equity and Rs 16,259 crore in debt (this compares to Rs 3,171 crore and Rs 9,836 crore in the preceding fiscal). It raises a question: How can more debt be riding on the back of lower equity? Senior executives of fintechs explained it as thus: Many of the larger players had raised comfortable equity buffers, and had not stepped up their game. They did in FY24 and, therefore, debt spiked. 
 

That said, few will counter that if the funding winter were to hold, and delinquencies were to rise (more so, if pricing on debt sourced by these firms were to move up and loans mirror this reality leading to customers’ inability to repay), we could see another twist in the tale. Bank lines are getting tougher to source after the RBI’s guidelines on unsecured lending. “We have deleveraged a lot from our peak. Going forward, unless equity raising conditions improve, it will be tough to grow the book. I do see consolidation happening in this space,” says V Raman Kumar, chairman and founder, CASHe.

 

Loan price

Loans are now priced at 30 per cent levels per annum and tenures range between three-six months (where the bulk of the exposures reside) to 24 months. According to Saxena, the overall portfolio-at-risk for 90-days past-due, improved since FY22; and in FY24 fell to 3.5 per cent from 3.6 per cent in September 2023).

It brings us back to the FSR: June 2024 which says vintage delinquency – a measure of slippage – remains relatively high in personal loans at 8.2 per cent; a little more than a half of the borrowers have three live loans at the time of origination; and more than a third of had availed of more than three loans in the last six months. The observation was for the business segment, not on a class of players. Whichever way you may look at it, you cannot ignore the red lights.