RBI rules may force fintech firms to leverage NBFC operations
This is a shift for the digital lending industry, which has largely focused on expanding its lending distribution platform to demonstrate scale and rely on loss guarantee coverage practices such as First Loss Default Guarantee (FLDG) to engage in lending activity through risk-taking with banks and financial institutions.
But while the RBI guidelines provide a relative advantage to those lending to fintech firms with an active NBFC, building the necessary capitalization to lend further will be a painstaking effort.
“The digital lending guidelines have clearly taken the shine off technology innovation that platform lenders were bringing and put the focus on NBFCs and regulated entities,” said the founder of a digital lending firm, who did not wish to be named.
“Now, to have skin in the game, fintechs will be forced to work on capitalizing NBFCs and building an asset-heavy business instead of being easily accessible. Hence, the growth rate of these fintechs will slow down as they focus on raise capital. Valuations will be driven by asset quality for digital lending players versus high growth,” the person added.
The central bank launched on Wednesday the first part of the digital lending norms, which only allow payments and repayments of loans among borrowers and entities regulated by the banking supervisory authority.
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Furthermore, any fees payable to a loan service provider must be collected by the regulated entity directly from the borrower. This has made it clear that the RBI is keen to encourage the licensed entities that it can manage.
“The biggest interpretation is that the FLDG is only for those who have an NBFC. In case you don’t have an NBFC, it will be difficult for these fintech entities to participate in the risk-taking process as even regulated entities will start pulling out of such schemes , said another fintech company founder.
The new guidelines will focus on the revival of the digital NBFC and lead to more capital raising from lending startups, the person said.
While fintech firms are still evaluating the guidelines, the immediate scope of work for some has been to shift lending contracts from the platform business to the NBFCs.
Some fintech firms told ET that they were working on building missing links in the consent architecture to receive data from customers, as well as building clear audit trails for partnerships with technology service providers.
Capital, a nightmare?
According to industry leaders, going by the current market conditions, it will be difficult for new age lending companies to raise equity capital, which will further affect the raising of debt for NBFC arms.
“For fintech firms that have not focused on building their NBFCs, growth will be hampered as they will have to take into account both existing FLDG norms and deploy equity in co-lending partnerships,” the founder of another fintech firm which has active NBFC business sa. “Hence, they need to capitalize their NBFCs well. Banks will not give large amounts of debt to capitalize these NBFCs overnight. NBFCs are built on trust and take 2-3 years of good operations to build reputation.”
As customer transparency continues to be a cornerstone of digital lending guidelines, fintech firms will need to make a sharper distinction between their NBFC and lending distribution arms while providing loans.
“RBI’s guidelines have focused new age digital lending startups to follow stronger governance norms. Fintechs will have to change lending flows and clarify the role of the different entities in the group (to the customer) involved in the lending process. Supply of data to platform distribution business will be stopped and moved to the regulated entity in the group setup, a payments industry executive said.
Focus on co-lending
The RBI has shown a clear preference for regulated entities, hence it will be more difficult for newer unlicensed lending fintech firms to enter the segment as guidelines reduce the role of platform distributors to mere direct sales agents (DSAs).
“The new guidelines clearly give the power back to the banks who will decide not only to lend to NBFCs but more importantly on co-lending partnerships, which were largely on hold until the new guidelines were out. With less liquidity in their own NBFCs, fintechs will be forced to explore more co-lending initiatives,” said one of the founders quoted earlier in the story.
After the Covid-19 moratoriums, the digital lending industry had actively moved to the co-lending model in an attempt to reduce risk.
The RBI had recently banned prepaid payment instruments (PPIs) to be loaded through lines of credit. This severely affected fintech firms, including Slice and Uni, forcing them to look at branded cards and partner with banks.
“Co-lending will largely gain prominence now due to compliance. It’s a good idea considering the stance of the FLDG is still not clear,” said another person quoted earlier.
