Fintech funding may fall this year as RBI circulars take wind out of growth sails, BFSI News, ET BFSI

Indian fintech firms are likely to be hit by the two recent Reserve Bank of India (RBI) circulars on credit loading on prepaid instruments and on digital lending.

As fintech companies look to find ways to circumvent the RBI circulars, their funding is likely to be hit further.

Fintech funding is likely to be lower than in 2021, which generated a whopping $10 billion in funding across more than 580 deals in FY21. That was three times the $3.5 billion received in 2020. The first half of 2022 has seen conservative funding of $4.2 billion, which is lower than H1 FY21 but double the funding received in H1 FY20, according to a Bain report .

At the pace and global route of startup funding, Indian fintechs are unlikely to reach 2021 numbers.

While payments and lending continue to attract the bulk of funding (60 percent), other segments, including financial infrastructure, wealth technology and neobanks, are now catching up.

The prepaid instruments

In July, the Reserve Bank of India (RBI) through a circular banned credit limit loading on non-bank prepaid payment instruments (PPIs), ending the booming business of extending credit limits with mobile wallets and buy-now-pay-later (BNPL) platforms via instruments that mimic credit cards.

Fintechs have cumulatively issued around 5 million cards in India and have more than Rs 5,000 crore of assets under management. On an average, they disburse under Rs 3,500 crore every month. These firms have combined to issue about 2 million cards on a monthly basis this year, which is much higher than the 1.3 million-1.5 million credit cards issued monthly by traditional lenders during the first quarter of calendar 2022.

Around 80 different card products were launched, reflecting the rapid growth in this segment.

Following the central bank’s directive, neobanking firm Jupiter stopped issuing its Edge ‘credit card’ challenger while KreditBee, LazyPay and Kissht also stopped issuing prepaid cards with lines of credit.

Ever since Bengaluru-based fintech startup Slice began issuing ‘credit card’ contenders in 2019, the segment has seen rapid growth with the entry of players such as Uni Cards, Jupiter Edge and BharatPe’s PostPe which launched their own prepaid cards with lines of credit or a revolving credit mechanism similar to a credit card.

RBI has not stopped fintechs from providing loans. A line of credit only becomes a loan when a customer withdraws money from it. The customer can use part or all of the amount of the approved credit limit.

These “personalized credit cards” act like real credit cards, but are actually prepaid cards. Standard credit cards use a credit BIN (bank identification number). Although the Norwegian Banking Authority does not have a problem with prepaid cards being loaded with money through a debit card or credit card, it is the rotation of credit through a just-in-time loan at the time of payment that is a problem. It then becomes a credit card.

Slice has now stopped card operations as it transitions to a new system following the RBI’s new guidelines for digital lending.

Slice has asked users to open a prepaid account that will be linked to cards.

“To ensure a smooth transition, we will temporarily block your card during November. We will notify you in advance in the Slice app when we upgrade you to the brand new experience before the end of November,” it wrote in an email to its customers.

It said customers would be able to open a Slice mini prepaid account, where they could add and withdraw money.

Digital lending guidelines

Earlier this year, the central bank issued digital lending norms, under which disbursement of loans and collection of repayments must only be carried out between borrowers and entities it regulates, with no third parties involved in this process.

In its digital lending circular, the central bank also sent a list of recommendations to the government, including passing a law banning unregulated lending. The RBI had said that the cost of digital loans must be disclosed in advance to the borrower and there should be no adjustment to increase credit limits automatically.

All fees and charges of the loan provider must be paid by the lender and not by the borrower.

To allow a smooth transition to the new digital lending guidelines, the Reserve Bank of India said on Friday that all entities under it had until November 30 to ensure that all existing digital loans comply with the new rules.

These changes can lead to changes in commercial structures, product design and relationships with lenders, increase costs and hamper the growth of fintech.