The FE Fintech Summit 2023 that just concluded in Mumbai saw the coming together of some of finest minds swapping ideas and brainstorming on the various elements shaping the fintech arena. In a fireside chat with this writer at the summit looking at the changing investment landscape, Siddharth Parekh, co-founder and senior partner, Paragon Partners, shared luminous insights on what he saw as the factors that were attracting investors to the sector, what may lie ahead and what to guard against.
He began by describing these as exciting times for fintech businesses as well as investors. There was lot that he saw going on across lending, credit, asset and wealth management and insurance that was continuing to see significant investor interest – both domestic and offshore – pour capital into the companies in this space. “I think this is largely driven by the macro factors that we all know – improved regulatory environment and current reforms in the fintech space. Obviously, rising mobile penetration and favourable demographics in the country as well as a very strong engineering talent pool and off course the India stack that is very unique and collaborative and that has really driven lot of disruption in the fintech space.” The India stack and lending reforms, he says, are steps in the right direction aimed at “protecting borrowers and also the interests of the investors.”
Seeing opportunities, as a fund, across all these sectors – MSME, consumer lending, wealth tech, digital insurance product sales, he referred to some new products including UPI-enabled credit, BNPL, wealth tech that continued to see rising investor interest.
Democratisation of data Stating that he remained “very bullish,” he said, “the India stack had really enabled stakeholders to leverage the open digital infrastructure through the democratisation of data.” Through the India stack, he said, “we have got UPI, which is digitised payments, we have got GST, which is digitised trading, we have also got digitisation of identity through Aadhaar. Then, the democratisation of data has happened through initiatives like the account aggregators, the open credit enablement network etc.” It had levelled the playing field by removing the asymmetry of information leading to increasing penetration of credit and also affordable and better pricing for the consumer. All these, along with the regulatory initiatives had proved to be hugely beneficial for the fintech space and investors.
He saw the regulator as having done “a great job at weeding out operators that are just there playing on the regulatory arbitrage” and felt the reforms and constraints that were put in place were positive in the long term and only those that remained fully compliant would be the ones who would win in the end.
Data versus collateral
On whether data will eventually get to substitute collateral, he felt that would be risk albeit data would continue to be a crucial enabler.
“Everyone,” he said, “was using data to improve their credit models and improve their offerings and customer proposition.” While data, to him, would continue to remain important, investors will still always value collaterals and asset-backed lending as these were more secure.
However, when it came to a credit DNA, he felt fintechs were perhaps falling behind the legacy banks and NBFCs “who had mastered the art of lending over many cycles. The risk for us as investors, he said, was clearly to identify those fintechs that had the credit DNA.” He described it as “a very different mindset and skillset and one needed to retool business processes and management teams to really succeed in the credit game.”
Luckily, he said, “we haven’t seen any large blow ups in the consumer lending cycle though over the last five years we have seen tremendous growth in lending something like 12X growth over five years in the consumer lending space and largely driven by NBFCs and fintechs.”
Evolving regulations
On investing in a space where regulations are constantly evolving, he said, as investors, they had to be very cognisant of where the regulations were headed, keeping track of the regulations and mindful of what the market experts were seeing.
“It is part of our due diligence process but then it is changing so rapidly and evolving that tomorrow there could be regulations that take us all by surprise but then the safest bet, at least in the lending space, is to back a regulated entity and the RBI
In these uncertain times when regulations are evolving Siddharth Parekh’s mantra, as it were, was to “back businesses in sectors where there is a strong government push or initiative for higher penetration and on businesses with strong corporate governance and sustainable business models.”
In the regulatory landscape for the fintechs, it is hard to miss the recent measures, the digital lending guidelines announced by the Reserve Bank of India
Future growth On factors that could fuel future growth, his take is that there were lot of tailwinds primarily driven by positive reforms and technology initiatives like the India stack where data was getting more streamlined and consumers finding it easier to transact though apps or through seamless processes and businesses finding it easier to acquire customers where for credit or insurance or wealth advisory. He therefore saw “lot of opportunities within multiple sectors within the industry.” Taking the MSMEs as an example, he explained: “This is a huge space and opportunity where fintech have continued to achieve a lot of success. There are 60 million MSMEs in the country and many fintech startups have tried to penetrate this and serve those MSMEs. I think the vertical market places have done really well.”