Fintechs are expected to recalibrate their business models in order to mitigate the impact of the latest Reserve Bank of India (RBI) circular on unsecured personal loans, say experts.
Here, lenders are seen adopting a wide range of measures like changing their pricing model, tighten underwriting standards, and diversifying their product lines.
“While most fintechs are focused on unsecured loans, I can see some of them logically change and modify their business models to get into other products like small business loans,” says Vivifi India Finance Founder and Chief Executive Officer Anil Pinapala.
In its latest circular, RBI asked non-bank lenders to increase risk weight on unsecured retail loans to 125% from 100%.
RBI’s measures will hurt new-age fintechs the most as these companies been aggressively growing their balance sheet through co-lending with NBFCs and direct lending, say experts. Lenders in the unsecured consumer segment face a higher risk on their capital and growth prospects as they will face higher funding costs in the medium term.
Also, traditional large non-bank lenders could curtail their loan aggregation from these fintechs in the medium term, as their costs of funds and capital requirement for loans originated from these partnerships go up.
In such a scenario, experts feel that underleveraged fintechs may opt to secured loans in order to become more appealing to traditional NBFCs.
Such a move will also enable these companies to mitigate risks associated with concentration in a single product line, while simultaneously offering the opportunity to upsell to customers.
For instance, KreditBee recently secured and unsecured business loans. It has also started a loan against property around six months ago with an aim to diversify its portfolio.
Nevertheless, experts acknowledge foraying into the secured loan segment would be a challenge.
“One requires a larger understanding on underwriting such loans, you need to have a branch presence to visit the property and verify the documents. The shift is not easy,” says KreditBee Chief Executive Officer Madhusudan Ekambaram, adding that it requires a good amount of preparation, mindset, and change in focus.
Similarly, Pinapala feels that it would be very difficult for fintechs to get into products like loan against property as these require physical verification and others. Also, they would find it difficult to compete with traditional lenders in this segment.
As an alternative, some fintechs will further tighten their underwriting standards and choose borrowers with a higher credit score, and this would help them keep their return on assets intact. Here, these lenders will use traditional and non-traditional data to choose prospective customers.
Indifi Co-founder and Chief Operating Officer Siddharth Mahanot feels that lenders might make adjustments to their customer pricing models to ensure compliance and sustainable operations.
“When personal loans in this market are 15%, it is possible to absorb a 0.2-0.4% increase as long as risk management strategies are playing well,” a senior official at a Chennai-based fintech said.