Fintech lenders may see their customers shifting to banks and non-banking financial companies (NBFCs) with an impending rise in their interest rates.
Rates are set to go up because of higher cost of funds after the Reserve Bank of India (RBIs) has decided to raise weights on unsecured loans. The central bank’s move will also prompt fintech lenders to diversify their product portfolios.
As a rise in cost of funds becomes imminent, some financially-strong fintechs will try to absorb the higher cost, but several lenders will have to raise interest rates for retail customers.
“The premium customers in our industry are sensitive to any movement in interest rates. They are dealing with fintechs because of convenience, but may go back to apps of banks and NBFCs in case of a significant hike in interest rates by some fintechs,” Madhusudan Ekambaram, CEO and co-founder of KreditBee, told FE. “It will be an opportunity for banks to grab those customers.”
A hike in interest rate is unlikely to be an industry-wide phenomenon and only some firms with a high exposure to unsecured loans may opt for it, Ekambaram clarified.
Premium customers are individuals who reside in metro cities and have better salaries and high credit scores. Though smaller in number, they have an average loan ticket size of Rs 3-4 lakh, making them attractive for fintech firms.
“Within premium customers, there are individuals who change their borrowing patterns as per the movement in interest rates. In case of a rate hike, some of them might go back to banks to get lower rate,” Anil Pinapala, CEO and founder of Vivifi India Finance, told FE.
The central bank’s decision is also expected to push fintech lenders to add more products to their portfolios. “Currently, there are companies which are focused on unsecured loans. The RBI’s decision will force companies to diversify product line-up and customer base,” said Pinapala. “They may add products which do not require increased risk weights.”
Explaining the impact of cost of funds, he said firms that lack diversity in their debt capital structure will be more affected by the rise in the cost of funds.
Fintech lenders are also bracing for moderation in the loan growth. “Given that lending institutions will have to set aside more capital while extending loans as stated by the RBI, we might see a moderated growth across the industry in the short term,” Ashish Goyal, co-founder and CFO of Fibe, told FE. “This is for two reasons. Firstly, lending institutions will cautiously assess the risk prior to providing loans to customers and lend responsibly to creditworthy individuals to minimize risk. Secondly, the industry will witness tightening of underwriting models for sustainable growth while safeguarding consumer interest.”