The Reserve Bank of India‘s (RBI’s) most recent digital lending guidelines intensified the pressure on new age loan companiesforcing them to focus on their non-bank financial company (NBFC) and book building, as the regulator gives importance to regulated entities.
This is a game changer for the digital lending industry, which has largely focused on growing the lending delivery platform to show scale and build on collateral hedging practices. such as first loss default guarantee (FLDG) to participate in lending activity by taking risks with banks and financial institutions.
However, while the RBI Guidelines give a relative advantage to those who lend to fintech companies with an active NBFC, it will be difficult to build the capitalization necessary to lend more.
“The digital lending guidelines clearly took away the shine of technological innovation that platform lenders were providing and put the focus on NBFCs and regulated entities,” said the founder of a lending company digital, who did not wish to be named.
“Now, to have skin in the game, fintechs will be forced to work on capitalizing their NBFC and building an asset-heavy business rather than being asset-light. Therefore, the growth rate of these fintechs will slow down as they focus on raising capital. Valuations will be determined by the asset quality of digital lending players versus strong growth,” the person added.
The central bank on Wednesday released the first stage of digital lending standards, which allow loan disbursements and repayments only between borrowers and entities regulated by the banking regulator.
In addition, all fees payable to a lending service provider must be collected by the regulated entity directly from the borrower. This has clearly shown that RBI is keen to encourage licensed entities that it can govern.
“The biggest interpretation is that FLDG is reserved for those with an NBFC. If you don’t have an NBFC, it will be difficult for these fintech entities to participate in the risk-taking process, because even regulated entities will start to withdraw from these agreements,” said another fintech founder.
The new guidelines will focus on reviving digital NBFC and lead to greater capital raising from lending startups, the person said.
While fintech companies are still evaluating the guidelines, for some the immediate scope of work has been to transfer loan agreements from their platform business to their NBFCs.
Some fintech companies have told ET that they are working on creating missing links from the consent architecture to receive customer data as well as creating clear audit trails for partnerships with service providers. technological services.
Capital, a nightmare?
According to industry executives, given the current market conditions, it will be difficult for new era lending companies to raise equity, which will further impact debt fundraising for their arms. NBFC.
“For fintech companies that have not focused on building their NBFCs, growth will be hampered, as they will need to consider both existing FLDG standards and invest their own capital in co-lending partnerships,” the founder of another fintech company that has active operations of NBFC said. “Therefore, they will have to capitalize their NBFCs well. Banks will not grant large amounts of debt to capitalize these NBFCs overnight. NBFCs are built on trust and require 2-3 years of good operations to build a reputation.
As transparency to customers continues to be a foundation of digital lending guidelines, fintech companies will need to make a clearer distinction between their NBFC and loan distribution arms while issuing loans.
“The RBI guidelines have focused on new era digital lending startups to follow higher governance standards. Fintechs will need to change lending flows and clarify the role of different entities within the group (to the client) involved in the lending process. The provision of data to platform distribution businesses will be stopped and transferred to the regulated entity in the group setup,” a payments industry official said.
Focus on co-lending
RBI has shown a clear preference for regulated entities, so it will be more difficult for new unlicensed lending fintech companies to enter the segment, as the guidelines reduce the role of platform distributors to mere direct sales agents ( DSA).
“The new guidelines clearly re-empower banks to decide not only to provide debt to NBFCs, but more importantly co-lending partnerships, which were largely on hold until the new guidelines were released. 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 article.
After the Covid-19 moratoriums, the digital lending industry had actively turned to the co-lending model in an effort to reduce risk.
The RBI had recently banned prepaid payment instruments (PPI) from being loaded via credit lines. This has severely affected fintech companies including Slice and Uni, forcing them to consider co-branded cards and working with banks.
“Co-lending will largely gain in importance now because of compliances. It’s a good idea given that the position on FLDG is still unclear,” said another person quoted earlier.