Why RBI's disproportionate action against fintechs may be bad for business and investor sentiment?
Something analogous is happening in the world of non-banking financial services. In less than five weeks, RBI shut down Paytm Payments Bank, served Visa a cease-and-desist order with regard to card-based vendor payments and P2P transactions, prohibited IIFL Finance from sanctioning new gold loans, and debarred JM Financial from providing finance against shares and debentures, and for new IPOs.
Had this been all, one could have excused this as a specific set of actions against a small number of significant players. But the central bank has subsequently also carried out a plethora of audits targeting fintechs that disburse small-ticket personal loans. The stated reason: exuberant unsecured loan growth.
Now, while it is true that unsecured loans present great risk when things go sour, they also present more profitable opportunities than regular loans when default is controlled. Credit card loans have grown fastest in this space (34% y-o-y), accounting for some ₹2.4 lakh cr in outstanding value as of November 2023, with just four large banks controlling more than two-thirds of this volume. Other unsecured personal loans disbursed by banks and NBFCs grew at 23% y-o-y. And fintech loans — historically provided through digital lending apps to those with no, or poor, credit history — also grew exponentially during this time.
According to two recent reports — 'Fintech Personal Loans, Apr 2018-Sep 2023' by FACE, and 'Charting New Horizons for Fintech Lending' by Experian — fintech loans have doubled their sanctioned
