Collateral anchor: Fintech companies steer towards secured lending

This comes after RBI raised risk weights on unsecured personal loans

Nearly a year after the Reserve Bank of India (RBI) raised risk weights on unsecured personal loans, the country’s leading fintech companies are shifting focus, expanding their portfolios to include collateral-backed credit in collaboration with lending partners. The strategy allows these firms to diversify revenue streams and offset risks from rising loan delinquencies.

Leading the charge, Bengaluru-based PhonePe has launched a broad range of secured credit products, including mutual fund loans, gold loans, vehicle loans, loans against property, and education loans, significantly enhancing its credit distribution portfolio since May.

BharatPe introduced two-wheeler loans and loans against mutual funds in August, working with non-banking financial companies (NBFCs). Google Pay followed in October, offering gold loans.

“Secured credit is a large market,” said Hemant Gala, chief executive officer (CEO) of PhonePe Lending. “While not digitally savvy a few years ago, it’s catching up very fast. Everyone wants to try and figure out a model for it.” 

The pivot comes as growth in unsecured personal loans moderates. Data from the Fintech Association for Consumer Empowerment (FACE), a self-regulatory organisation for fintech companies, reveals a slight decline in fintech disbursement volumes in Q1FY25 to 26.4 million, down from 26.6 million in Q4FY24. Despite this trend, fintechs remain optimistic about secured loans, supported by a large market and lender enthusiasm to partner on risk-mitigated, collateral-based credit.

“There’re users who want secured loans because of the lower cost of borrowing. Second, there’re users who may never get a loan, and there is no way to underwrite them,” said Sharath Bulusu, Google Pay’s director of product management, told Business Standard in an earlier interaction. These offerings bring more customers into the formal credit fold, he underscored.

Exploring models

Since May, PhonePe has expanded its roster of lending partners from 15 to 35 institutions, while Google Pay now collaborates with five lenders to extend both personal and gold loans.

According to Gala, secured loan conversions tend to outperform unsecured options due to the targeted nature of collateral-based credit and higher customer intent. He noted that PhonePe is also refining its revenue model to decide between lead-based and disbursal-based structures.

Solving early bottlenecks

In typical arrangements, fintech firms focus on customer acquisition, while lenders handle underwriting and, in most cases, collections. Commissions or take rates per loan drive fintech revenue in these partnerships.

“Very small loans don’t always work for lenders because of high origination costs,” said Bulusu of Google Pay, adding that digitisation can cut these expenses.

Unlike extending unsecured loans for which fintech firms and lenders rely on credit history, the process of underwriting the value of collateral-based loans is different, involving moving parts that require significant offline presence. 

“We have to see how there could be processes that can evolve and that we can leverage to replicate assets digitally,” said Gala from PhonePe Lending. “The end-to-end digitisation may play out well in the next 12-24 months,” Gala from PhonePe Lending said. 

However, onboarding and paperwork can deter customers from completing the secured loan process.

“We see high interest initially, but as customers move deeper into the funnel with lenders, drop-off rates increase. The drop-offs are also primarily in the phase when customers on the platform are trying to explore different products,” added Gala.

Diversification drive 
 

Growth in unsecured loan disbursements slows, pushing fintechs to diversify

PhonePe, Google Pay, and BharatPe offer secured loan options

New secured products include mutual fund loans, gold loans, vehicle loans, etc.

Secured loans see better conversions than unsecured loans

Fintechs partner with lenders for sourcing and disbursal

End-to-end digitisation could streamline secured loan processes

Secured loans offer lower borrowing costs for eligible users