Digital lenders are increasingly focusing on improving their portfolio quality and underwriting processes amid tightened lending norms, lack of equity capital and a “funding winter”.
In the current environment, more financial technology companies are likely to engage in co-lending arrangements with traditional lenders while well-capitalised entities may seek to acquire smaller peers.
“With tightening equity capital, flavour is frugal. Focus on core products and market segments, cost optimisation, efficiencies, portfolio quality, risk management, governance, compliances, customer value/protection lays a strong foundation for sustainable and scalable business models. We see these trends as maturing of the industry,” said Sugandh Saxena, chief executive officer of Fintech Association for Consumer Empowerment (FACE).
In recent months, financial technology companies have implemented cost-cutting measures, including staff reductions due to difficulties in raising equity capital. According to a report by Inc42, total funding for Indian fintech companies declined by 40% year-on-year in 2022, reflecting a “funding winter.”
Valuations of entities across the valuation ecosystem have also been marked down, funding deals have been delayed and concerns over global uncertainties and geopolitical tensions have deterred investors, as stated by a senior official at a Bengaluru-based digital lender.
“Funding winter is a reality,” acknowledges Vaibhav Joshi, CEO of EasyPay. Fintechs seeking funding will face challenges until the market improves and profitability is demonstrated. Joshi also highlights the favorable acquisition opportunities for well-capitalised fintechs during this period.
Experts note that entities that prioritised rapid growth at any cost have encountered difficulties.
The failed deal between PhonePe and ZestMoney exemplifies the challenging funding environment.
“Earlier, most of the companies were chasing growth at any cost. Today, the key value proposition is how optimised the customer acquisition cost is, how revenue is shaping up; and whether revenue is EBITDA positive,” says Madhusudan Ekambaram, co-founder and chief executive officer, KreditBee.
Digital lenders have increasingly pursued non-banking financial company (NBFC) licences from the Reserve Bank of India (RBI), which has tightened regulations for these entities. This regulatory shift has prompted lenders to focus on improving loan collection processes, governance standards and product pricing.
Compared to traditional lenders, digital lenders often face higher defaults across collection buckets as collections require a personal touch rather than relying solely on digital channels. Many digital lenders operate in the stress-prone unsecured personal loan segment and the asset quality of these entities weakened during the Covid-19 pandemic.
While co-lending partnerships between digital lenders and traditional lenders have thrived, smaller lenders face uncertainty regarding the legality of the first-loss default guarantee model. This has impacted them negatively.
“Now, there is a focus on book quality and underwriting, which is much needed. More players are focussed on the right thing. I think the industry is currently going through a maturity phase,” says Anil Pinapala, founder and chief executive officer, Vivifi India Finance.
While co-lending partnerships between digital lenders and traditional lenders have blossomed in recent times, there is a lack of clarity over the legality of the first-loss default guarantee model and this has impacted smaller lenders, say experts.
While some consolidation is expected in the financial technology industry in the short-term, the long-term outlook is positive.
Experts anticipate some consolidation in the financial technology industry in the short term but maintain a positive long-term outlook. Lenders with a proven track record in managing risk will continue to attract significant capital, according to Aditya Kumar, CEO of Niro.
Kumar added that the outlook on the industry is extremely positive. There is a lot of talent that is moving from historically great banks and NBFCs to manage risk and collections better.