Fintech firms feel heat of IL&FS default with lower funds for disbursals

The Infrastructure Leasing & Financial Services (IL&FS) crisis is likely to impact fresh disbursements by financial technology (fintech) companies heavily dependent on non-banking financial companies (NBFCs) for sourcing of funds.

In the aftermath of the IL&FS crisis, NBFCs and banks are tightening the underwriting norms for sanction of advances to fintech companies.

“It is now evident that the ripples of the NBFC crisis are hitting India’s lending ecosystem. Many NBFCs have re-evaluated or are in the process of re-evaluating their lending course of action. It is reflecting through slower pace of disbursal across segments such as retail lending, car loans, and home loans. Fintech lenders who directly lend from their books or have higher dependency on NBFC-led funds will see a slower disbursement pipeline. Further, banks have tightened their funding funnel to NBFCs. Therefore, NBFCs are now focusing on capital conservation, so that a liquidity buffer is created. NBFCs may face higher cost of borrowing that will further impact their growth projections and net interest margins,” said Manav Jeet, managing director and chief executive officer, Rubique, a Mumbai-based online financial matchmaking platform.

The silver lining is that the government has been extremely cognisant of the situation. It aims to revive the situation and wants to come up with a recapitalisation plan very soon, Jeet added.

New Delhi-based IndiaLends also expressed concerns as large NBFCs and banks are tightening their underwriting clauses, which are creating issues for some fintechs.

 “After the IL&FS crisis, there is a liquidity crunch for fintech companies heavily reliant on NBFCs. We are not affected, as we have a good blend of banks and NBFCs for funds. The Supreme Court’s (SC’s) order restraining entities from using Aadhaar data by striking down Section 57 of the Aadhaar Act has only added to the woes,” said Gaurav Chopra, co-founder of IndiaLends 

According to a report by India Ratings and Research (Ind-Ra), the SC order is likely to hamper balance sheet growth of consumer finance companies in the short term.

On a long-term basis, especially for retail lenders who have credit verification processes built around technology, the order would increase operating cost, turnaround time in loan disbursement as well as risk of fraud, the report added.

Replacing Aadhaar with the traditional methods of verification will slow down customer acquisition in existing geographies and reduce the pace of geographical expansion, thereby impacting fresh disbursements which would affect portfolio growth and credit penetration.

The inability to use Aadhaar for authentication will impact the new-age NBFCs and fintech companies disproportionately, as one of their core competencies was a quick turnaround. An increase in volumes is a necessity to drive operating leverage benefits for small-ticket consumer loan companies, which may see slowdown in portfolio expansion. The turnaround time for disbursing loans is likely to increase for a few quarters until the lenders realign their verification processes, Ind-Ra said.