Time for fintech NBFCs to revisit business models, says India Ratings

Tight liquidity, signs of stress weighs on business

Fintech NBFCs may need to revisit business model and temper loan disbursements in the light of tighter funding and regulatory warning on growth strategies, India Ratings (Ind-Ra) has cautioned.

They need to be watchful in growing their unsecured consumer lending exposure in FY25 in the backdrop of increase in funding cost along with pressure on funds mobilisation and pressure on asset quality with slowing growth.

Ind-Ra, in a statement on Wednesday, said it expected fintech NBFCs to tighten their lending parameters, tweak risk management frameworks, revisit their business models and provision coverage levels during the current financial year (FY25). This could impact the time required by a few fintech NBFCs to achieve operational breakeven, as internal accruals would continue to lag assets under management (AUM) growth in the medium term.

Given that the effective tenor of the loans is less than two years in most cases, the slowdown in incremental disbursements would also have a direct impact on the reported asset quality ratios as well, it added.

After growth phase, now time for consolidation

During FY23 and large part of FY24, large NBFCs entered into partnerships with fintech players and started offering unsecured loans to a new set of customers. These NBFCs traditionally operated in different segments but have ventured into this territory since it offers better yields and improves granularity of the book, ratings agency said.

The NBFCs have been mindful of capping the proportion of this portfolio at a certain level, given the unsecured nature of the portfolio. The credit cost behaviour would be different from that for the secured loan book that they carry on their balance sheets.

The fintechs for which 100 per cent of assets are in the unsecured space could become more selective in on boarding customers and fine-tuning their business model, it added.