After RBI tightens lending norms, will fintech see a slowdown? Experts explain
The Reserve Bank of India (RBI) recently released new guidelines requiring lending institutions to increase their risk weightage to cover unsecured loans disbursed by them. Industry experts predict that the fintech and NBFC segments in India will be severely affected by this directive.
Higher Risk Weightage
As per the new guidelines, fintech platforms offering unsecured personal loans, consumer durable loans, and credit cards will have to increase their risk weightage for such loans from 100 per cent to 125 per cent. This means they will need to set aside more capital to cover these loans.
Impact on Borrowers
Due to the increase in risk weights for unsecured personal loans, lenders from banks and NBFCs to lending apps are expected to be more expensive. This could put pressure on the lending apps to increase their rates, which would shift the burden of the increased cost to the borrowers. However, the industry is assessing how to absorb these costs partly to avoid a significant increase in unsecured credit costs.
Effects on the Fintech Sector
Industry professionals predict that the availability of capital lines for lending apps will decrease, and interest rates will increase, resulting in lower demand for consumer credit. Additionally, the fintech sector will experience a reduction in RoE on consumer loans and may require additional equity raises to maintain consumer lending book growth. This impact is expected to sustain in the medium term as well.
Clarification on the New Norms
The new norms affect unsecured personal loans, credit cards and loans provided by Banks and NBFCs to other NBFCs for unsecured lending. It does not affect home loans, education loans, vehicle loans, and other secured products.
What Falls under Personal Loans?
Personal loans are typically considered loans taken by individuals without collateral. These loans are taken for purposes such as consumption (credit cards, and other shopping spends), top-up loans, including those that are issued on secured loans like a top-up on an existing two-wheeler loan, personal loans taken for working capital needs, etc.
Intervention Design
According to industry professionals, the intervention is designed to reduce risk and increase prudence in consumer lending. This could lead to a reduction in the indebtedness levels of consumers, and consequently, become more stringent on lenders. This aims to ensure risk is contained for sustained growth.
Impact on NBFC Growth
Chief Technology Officer at AGTB Bank, UAE, Vinod Yadav, predicts that the new regulatory measures could slow down the volume of unsecured loan issuances, affecting the rapid growth trajectory of the NBFCs. However, the emphasis on a more stable and cautious lending approach could benefit the sector in the long term. By reinforcing borrower stability, NBFCs would be better positioned for sustainable growth even if the pace is slower than previously anticipated.
Encouragement for Prudent Lending Practices
According to Rohit Arora, CEO and Co-founder at Biz2X & Biz2Credit, this change could encourage more prudent lending practices, leading to a healthier, more sustainable growth trajectory for NBFCs.
In conclusion, with the new RBI guidelines, the fintech and NBFC segments in India are expected to face some challenges in the short term. Still, the intervention design aims to ensure risk is contained for sustained growth, benefiting borrowers and lending institutions in the long term.
Disclaimer:
Estabizz Fintech compiled the material in this article using the most recent Acts, Rules, Circulars, Notifications, Provisions, Press Releases, and material applicable at the time. They ensured the completeness and correctness of the material through due diligence. When using this material, users must consult the relevant, applicable legislation. The given data may change without prior notice and does not constitute professional advice. Estabizz Fintech disclaims all liability for any results from the use of this material.
