 "fintech rbi")
“The days of fintech vanity business models are over; and the focus is now on governance and the road to profitability,” says Rohan Lakhaiyar, partner (financial services-risk) at Grant Thornton Bharat. A lot is at stake.
The Centre for Advanced Financial Research and Learning (Cafral), in its first ‘India Finance Report (IFR)’ released last November, said of the 14,000 startups born between 2016 and 2021, close to half were fintech. It projected lending by these entities to exceed banks’ by 2030. This may have to be looked afresh.
Tracxn – a data intelligence platform for private market research – has it that fintech funding stood at $2 billion in 2023, a fall of 63 per cent and 76 per cent compared to the preceding years: $5.4 billion in 2022 and $8.4 billion in 2021. As for debt, the higher risk weightings placed by Reserve Bank of India (RBI) on bank lending to non-banking financial companies (NBFCs) means many may not be able to source credit lines (fintech is an NBFC variant).
There is also a hint of a change in bank-fintech partnerships. Mint Road, in its ‘Report on the Trend and Progress of Banking in India’ (FY24), is for caution when relying solely on pre-set algorithms on which the models operate.
Governance warning
All manner of data and observations – from the bad-loan mountain, the huge unbanked hinterland, lack of understanding of new-age customers, and the inability to leverage technology or data-mine — were bandied about to press home the case that legacy entities will have to cede space to finetch. But the writing on the wall was clear on November 18, 2021, when Mint Road put out its Working Group (WG) Report on Digital Lending through Online Platforms and Mobile Apps. Its executive summary was blunt: “The pandemic-led growth of digital lending had led to the unbridled extension of financial services to retail individuals is susceptible to a host of conduct and governance issues”. On a larger canvas, digital innovations along with the possible entry of Big Tech companies may alter the institutional role played by existing financial and regulated entities (REs). And specifically, the fallout of this may get reflected in blurring of regulated and unregulated financial institutions and activities. “Such developments spurred by mere commercial considerations would pose regulatory challenges in ensuring monetary and financial stability and in protecting the interests of the customers,” the WG noted.
Is the worst over?
“Fintech funding has fared better compared to the wider startup ecosystem. The financial sector is highly regulated and the recent regulatory changes had an impact with late-stage funding taking a hit,” says Neha Singh, co-founder of Tracxn.
Is fintech to be being viewed through the prism of its ability to traverse the regulatory landscape?
“It depends upon who is viewing and what is the vantage point,” says Jatinder Handoo, chief executive officer (CEO) of the Digital Lenders Association of India (DLAI). He explains that a regulator is entrusted with a role of ensuring market stability, client protection and minimising risks. The regulator – by virtue of its design, functionality and mandate – will probably follow that approach which is expected in a highly dynamic fintech ecosystem. “But I don’t believe the same approach and angle of prism is followed by all stakeholders.” The last 18 months have been transformational for fintech. Mint Road has come out with guidelines and policy on client protection, data management and an omnibus framework for self-regulatory organisations.
Alok Mittal, co-founder and CEO of Indifi Technologies, feels fintech has the ability to traverse regulatory issues. "They have shown it when the revised FLDG (first-loss default guarantee) norms came in”. In June 2023, RBI cracked down on FLDGs – financial buffers offered by unregulated fintechs to REs against defaults on loans originated by the former – by capping them at five per cent of such exposures. This was to arrest the tendency of REs going soft when underwriting credit, taking comfort from the FLDGs. But what Mittal says next is to be read carefully: “What I see is the new set of regulations on the funding of NBFCs and risk weights on unsecured lending prolonging the funding winter”. Or a double whammy: A squeeze on both equity and debt.
There is also something to be said on the inability of fintech to read the big picture. The events leading to the 2021 fintech funding cycle were unprecedented, according to Lakhaiyar. Significant funds were raised by companies at high valuations, even as revenues and positive unit economics remained largely elusive during this period. The reversion to a normalised state of funding was due to happen sooner or later, and it did in the second half of 2022. Co-incidentally by then, even the share price of PayPal, Square and Tencent had crashed to their five-year lows. “My sense is that the better fintech can expect to get funded, but we are in no way going to get back to the levels (of funding) seen a few years ago”.
It would also be interesting to look out how private equities view the winners of RBI’s hackathon HARBINGER; its second edition was held last year. It’s an event organised to bring together people and entities for developing innovative solutions to challenges in specified areas through problem statements. These statements are worked upon by participants who include – but are not limited to – individuals, teams, entities from the hardware, software and coding community.
But it is certain there will be follow through on what T Rabi Sankar, RBI deputy governor, said at the Business Standard BFSI Summit in Mumbai on December 21, 2022. “The rise of fintech… is a major source of disruption to the banking industry...Regulators need to ensure that non-bank entities lying outside the regulatory perimeter for banks do not undermine the role of banks, raising financial stability concerns”.
Spring is sometime away.
