India stack and lending reforms enable the evolving fintech story: Siddharth Parekh

The FE Fintech Summit 2023, which just concluded in Mumbai, saw the gathering of some of the best minds exchanging ideas and brainstorming on the various elements shaping the fintech arena. In a fireside chat with this writer at the summit looking at the changing investment landscape, Siddharth Parekh, co-founder and senior partner, Paragon Partners, shared illuminating insights on what he saw as the factors that drew investors to the sector, what might lie ahead and what to must guard against.

He began by describing these as exciting times for fintech companies as well as investors. There was a lot he saw across lending, credit, capital and asset management and insurance that continued to see significant investor interest – both domestic and offshore – pouring capital into the companies in this area. “I think this is largely driven by the macro factors that we all know – improved regulatory environment and current reforms in the fintech space. Obviously increasing mobile penetration and favorable demographics in the country as well as a very strong engineering talent and of course the India stack which is very unique and collaborative and has really led to a lot of disruption in the fintech space.” The India stack and lending reforms, he says, are steps in the right direction aimed at “protecting borrowers and also the interests of investors.”

He saw opportunities, as a fund, across all these sectors – MSME, consumer loans, wealth technology, selling digital insurance products, and pointed to some new products including UPI-enabled credit, BNPL, wealth technology which continued to see increasing investor interest.

Democratization of data He said he remained “very bullish,” “The India stack had really enabled stakeholders to leverage the open digital infrastructure through democratization of data.” Through the India stack, he said, “we’ve got UPI, which is digitized payments, we’ve got GST, which is digitized commerce, we’ve also got digitization of identity through Aadhaar. Then, the democratization of data has happened through initiatives like account aggregators, the open credit enablement network etc. It had leveled the playing field by removing the asymmetry in information leading to increased penetration of credit and also affordability and better prices for the consumer.All these, along with the regulatory initiatives, had proved to be hugely beneficial to fintech- the area and investors.

He saw the regulator as having done “a good job of weeding out operators who are just there playing the regulatory arbitrage” and felt that the reforms and restrictions put in place were positive in the long term and that only those who remained fully compatible would be the ones who would win in the end.

Data vs. Security

If data will eventually replace security, he believed that would be a risk, although data will continue to be a crucial enabler.

“Everyone,” he said, “was using data to improve their credit models and improve their offers and customer propositions.” Although data, for him, would still be important, investors would still value collateral and asset-backed lending as these were safer.

But when it came to a credit DNA, he felt fintech may have fallen behind the legacy banks and NBFCs “that had mastered the art of lending over many cycles. The risk for us as investors, he said, was clearly identifying those fintechs that had credit DNA. He described it as “a completely different mindset and skillset, and one needed to restructure business processes and management teams to really succeed in the credit game.”

Fortunately, he said, “we haven’t seen any big explosions in the consumer lending cycle, but over the last five years we have seen tremendous growth in lending something like 12X growth over five years in the consumer lending space and largely driven by NBFCs and fintech.”

Regulations in development

When it comes to investing in an area where regulations are constantly evolving, he said, as investors, they had to be very aware of where the regulations were going, stay on top of the regulations and pay attention to what the market experts were seeing.

“It’s part of our due diligence process, but then it changes so quickly and evolves that tomorrow there could be regulations that surprise us all, but then the safest option, at least in the lending space, is to support a regulated entity and the RBI and others are increasingly getting rid of the regulatory arbitrage that some of the players benefited from in the past.”

In these uncertain times as regulations evolve, Siddharth Parekh’s mantra was, so to speak, to “support businesses in sectors where there is strong government pressure or initiatives for higher penetration and on businesses with strong corporate governance and sustainable business models.”

In the regulatory landscape for fintechs, it is hard to miss the latest measures, the digital lending guidelines announced by the Reserve Bank of India (RBI) last year, which he felt was a move in the right direction and good for the industry. But then, “it surprised many even though it was a move to clean up the system and make it more transparent and affordable for consumers, while improving lending and collection practices, and reporting information to agencies.”

Future growth In terms of factors that could contribute to future growth, his view is that there was a lot of tailwind primarily driven by positive reforms and technology initiatives like the India stack where data became more streamlined and consumers found it easier to transact through apps or through seamless processes and businesses that find it easier to acquire clients for credit or insurance or wealth advice. He therefore saw “many opportunities within several sectors of the industry.” Taking the MSMEs as an example, he explained, “This is a huge space and opportunity where fintech has continued to achieve a lot of success. There are 60 million MSMEs in the country and many fintech startups have tried to penetrate this and serve these MSMEs. I think the vertical marketplaces have done very well.”