The new norms on unsecured lending, elucidated by RBI Governor Shaktikanta Das, underscore a strategic move towards sustainability. Despite exemptions for certain sectors like housing, vehicle loans, and small business credits due to their positive economic impact, the crux lies in the recalibration these guidelines demand. Fintechs, known for their agility in unsecured lending, are prompted to diversify into secured models, particularly small business loans, aligning with their operational ethos.
The Unsecured Landscape:
In the world of finance, fintechs have excelled in hassle-free lending, offering quick funds with minimal paperwork. However, recent regulatory changes suggest a need for adjustment in their operations. Notably, larger banks are expected to weather this shift well, as unsecured loans form a smaller share of their portfolios (usually less than half). On the other hand, for Non-Banking Financial Companies (NBFCs) and fintechs, known for their reliance on unsecured lending, the adaptation is more nuanced. It’s not about challenges; it’s about finding the right fit in this evolving regulatory landscape.
Challenges and Opportunities:
For fintechs, a pivotal challenge lies in adjusting pricing models and underwriting norms. The shift towards higher capital requirements and increased cost of funds, sourced from NBFCs or banks, is poised to reshape the fintech lending landscape in the short to medium term. The call for a diversified product portfolio is becoming more apparent, urging fintechs to explore alternatives beyond unsecured personal finance.
In response to these challenges, industry observers suggest that small business loans could become a focal point for fintech innovation, offering a streamlined process that aligns seamlessly with fintechs’ operational models.Technology as a Beacon:
Moreover, technology is emerging as a key player in fintech’s response to the changing regulatory landscape. Fintechs are expected to delve into the realm of non-traditional data for underwriting, leveraging Artificial Intelligence (AI) and Machine Learning (ML). This shift not only represents a technological leap but also a fundamental change in approach, as fintech’s seek to identify patterns in customer behaviour and creditworthiness beyond conventional data.
Despite the potential benefits of innovation and diversification, a word of caution is sounded. FinTech’s may experience short-term challenges, including an increase in lending rates that could impact customers. The risk of a rise in Non-Performing Assets (NPAs) looms large, especially if fintech’s compromise on credit quality in an attempt to offset business pressures.
Industry Outlook:
To place this transformation in context, recent industry data highlights a rapid growth in consumer credit over the last two years, particularly in unsecured loans. The regulatory adjustments are seen as a necessary step to mitigate the risk of NPAs in this sector, emphasising the short-term challenges as a means to achieve long-term stability.
As regulatory changes take root, the financial services industry in India stands at the crossroads of challenge and opportunity. The imperative to innovate, diversify, and balance short-term pressures against long-term gains is reshaping the narrative. The coming years will witness a dynamic interplay between regulatory requirements, technological advancement, and the evolving needs of consumers, as fintech’s redefine their roles in this new financial landscape.
The writer is Vice President, Nucleus Software.
