Fintech may be the worst hit as RBI comes down hard on unsecured credit

Fintech may be the worst hit as Mint Road comes down hard on unsecured credit in the system, reports Raghu Mohan

Last week, Mint Road slammed the brakes on the runaway growth in consumer credit. Regulated entities (REs) will now have to review their exposure to the segment, “in particular” to unsecured credit. Top-up loans against assets, “inherently depreciating in nature” (such as vehicles), shall be treated as such. REs need to comply with the diktat no later than the end of February 2024. But what’s gone relatively below the radar is lending by fintech, a good portion of which also falls in the unsecured category. The Centre for Advanced Financial Research and Learning (Cafral) has it that fintech firms have captured a substantial share of the consumer and retail market. Their lending is projected “to exceed traditional bank lending by 2030”, says the Reserve Bank of India (RBI)-promoted body in its first ‘India Finance Report (IFR)’.
 

Now, segmented lending data by fintech is hard to come by, unlike in the case of banks and non-banking financial companies (NBFCs). These new-age firms mostly tap the new-to-credit customers with little by way of credit histories. They are in a sweet spot: According to the Fintech Association for Consumer Empowerment, its members gave out Rs 29,875 crore in loans in Q1 FY24, up year-on-year by 81.41 per cent. This is contrary to the widely held view that these firms were caught flat-footed after Mint Road came out with a raft of regulations to cut regulatory arbitrage; and put in place a best practices framework.

Bubbling beneath
 

“In the last fourteen months, delinquent credit volumes enrolled on our monthly platform have moved up almost three times to Rs 55 crore,” says Ritesh Srivastava, founder and chief executive officer (CEO) of FREED, a consumer debt relief platform. Almost 80 per cent of those folk who have signed up are in the age group of 21-35 with an annual salary of around Rs 5 lakh. Indebtedness is on the rise, much of it to fuel impulsive buys, and hawked by fintech. “We need to look at debt-to-income models differently. You may be leveraged only up to 20 per cent of your income, but this does not mean your expense is also capped at that level.” He gives the example of credit-card outstanding in excess of Rs 2 trillion, a 30 per cent increase since last year. “This definitely bodes well for consumerism, but there’s a huge cause for concern due to the surge in indebtedness, higher inflation and the obno­xiously high interest rate on credit cards in India.”

Ranvir Singh, co-founder of Ring (an instant line of credit platform catering to the lower-mass market), feels there’s no cause for alarm. “Though the growth in personal loans has been unprecedented, many lenders have followed a very balanced approach as against any spontaneous flowering of enthusiasm.” He’s seconded by Madhusudan Ekambaram, co-founder and CEO of KreditBee (which gives out loans of up to Rs 4 lakh): “While I cannot speak on behalf of the industry, I can affirm that, at KreditBee, we adopt a highly cautious approach to lending. We maintain confidence in our underwriting systems.” And in any case, the festive season is a time of joy and gift-giving. “Enticing incentives prompt consumers to make substantial purchases, ranging from electronics to vehicles. Consequently, there is also an increase in borrowing across all consumer segments.”
 

The latest TransUnion Cibil report for Q2 FY23 points out that consumers having at least one small-ticket personal loan saw balance-level delinquency of 4 per cent, a 120-basis points uptick since Q2 FY22. Stress of this magnitude only has a marginal impact on the retail loan portfolio; and those below the ticket size of Rs 50,000 make up for mere 0.3 per cent at the systemic level. But TransUnion Cibil is for caution “… because consumers may prioritise other payment obligations ahead of personal-loan payments, which in turn may be a wider indicator of financial stress”. The reason is that since January 2022 such loans made up for approximately 25 per cent of the origination volumes. As a result, the proportion of credit active consumers availing of small-ticket personal loans has increased to 8 per cent in Q2 FY23 from 3 per cent in Q2 FY19. More alarmingly, during this period, approximately half of the consumers already had more than four credit products, compared to just 17 per cent in that category in Q2 FY19.
 

The RBI’s September bulletin has it that net financial savings were down at 5.1 per cent of gross domestic product (GDP) in FY23 from 7.2 per cent in the previous financial year. Financial liabilities of households were up 5.8 per cent last financial year compared with 3.8 per cent in FY22, suggesting a larger-than-usual recourse to debt-driven consumption. A report by Motilal Oswal ('How sustainable is India’s household debt?') notes that while household debt in India is low compared to other major countries, non-mortgage household debt at 26 per cent of GDP is comparable to that in the US, Canada, Japan and China.

 

Really hunky-dory?
 

“Much of it (unsecured credit) is for funding consumption – buying mobile phones or life-style expenses. But look at the uncertain times we are living in. A small pivot in the external environment can change the earning potential of these people who are availing of it,” says Vivek Iyer, partner (Financial Services - Risk), Grant Thornton Bharat. Retail makes up for 30 per cent of total bank credit from around 23 per cent five years ago. Of the total retail credit of Rs 44 trillion, only 25 per cent is 

unsecured, but as Ajit Velonie, senior director, CRISIL Ratings, puts it: “We are living in a 3i environment: Inflation, interest rates and indebtedness.”

The tricky part is as follows: Fintech firms source funds via bank credit lines, so, when the RBI says banks are to be careful in lending to retail (unsecured in particular), it’s not only on what they do directly. It’s not surprising that RBI has raised the risk weights on exposures of banks to NBFCs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weights is below 100 per cent. Currently, these are at 25 per cent, 30 per cent and 50 per cent for NBFCs rated “AAA,” “AA,” and “A”. The RBI’s circular is silent on lower-rated NBFCs (fintechs fall in this lot), but it’s unlikely banks will indulge them. Another matter of detail: Loans are priced to risk; many banks are said to be close to their exposure limits even to some of the better-run NBFCs. So, where does that leave fintech in what is anyway a funding winter?

Red flag up
 

The RBI red-flagging retail credit in general, according to senior bankers, is that another variable is at play in the background: 

The expected credit loss based approach to provisioning.
 

This will mark a move away from the ‘incurred loss’ approach to a more proactive ‘expected loss' approach. And the central bank is being proactive, lest a bubble builds up in retail, and pulls down the entire consumption story with it.
 

For the ‘Report on Trend and Progress of Banking in India’ (2021-22) made a reference to banks “herding behavior” in diverting lending away from the industrial sector towards retail loans. If legacy REs are to relook the plot here on, where does it leave fintechs? And the RBI may not be done yet with its moves.