With the Reserve Bank of India (RBI) pushing fintech firms towards calibrated growth, investors in them companies are turning cautious. In a recent meeting, the banking regulator asked lending-focussed fintechs to cut down growth. Entities growing at over 30% have been asked to keep growth at 15-20%, say industry sources.
“This directive is a double-edged sword for fintech start-ups. While it is vital to have robust systems and practices in place; investors also seek high growth rates in a promising sector like fintech,” Anisha Patnaik, Founder, LexStart Partners said, adding that it remains to be seen how this “plays out”.
According to data from financial consultancy platform The Digital Fifth, investments in the fintech segment fell to $203 million the first four months of 2024 from $1572 million a year ago, indicating a more selective approach towards the segment.
“We are trying to understand what RBI is driving at here and how they think of growth for fintechs. Some institutions can drive very high-quality growth, in which case you would want them to grow faster,” Sandeep Patil, partner and head of Asia, QED Investors said.
He added that while it is easy to grow fast in lending, the real value comes from collections. Till you know the quality of book that you are building, you should only grow in a measured way. This might be where RBI is coming from. QED Investors has invested around $150 million into Indian fintechs. The company’s investments include digital banking platform Jupiter, OneCard credit card issuer FPL Technologies, and digital credit score platform OneScore.
In the last 12 months, the fintech industry has grappled with enhanced regulatory oversight. The RBI’s recent directive asking bellwether Paytm Payments Bank to shut down a majority of its operations is indicative of its tough stance.
In November, the central bank had asked banks and traditional non-banking financial companies(NBFC) to increase risk weights on their exposure to unsecured personal loans. This measure has impacted co-lending partnerships between consumer facing fintechs and traditional lenders, and led to a slowdown in fintech loan disbursals.
Amid this challenging environment, fintechs are looking to re-evaluate their business models and growth strategies. Many entities are attempting to diversify their product offerings, particularly in the micro, small and medium-sized enterprises(MSME) segment and secured loan segment.
“Given that many major players are currently focused on the retail segment, this shift will require them to redesign their products, technology, and distribution channels to cater to these new segments,” Sameer Singh Jaini, founder and chief executive officer, The Digital Fifth said.
He added that this transition will likely lead to an increase in costs and have a temporary negative impact on fintech companies.
On the other hand, experts feel that the enhanced regulatory oversight will help promote more sustainable business models, thereby leading to greater long-term stability and resilience in the fintech lending market.
“Slower growth, stemming from increased regulatory compliance, can indeed contribute to fintechs maintaining adequate capital buffers, crucial for absorbing potential loan losses and ensuring financial stability,” Sagar Agarvwal, co-founder and managing partner, Beams Fintech Fund said, adding that in the long-run, these regulatory changes will make the fintech lending market more appealing to investors and stakeholders. The portfolio of Beams Fintech’s over $100 million fund includes Niyo, Credgenics, and InsuranceDekho.
(With inputs from Ayanti Bera)