Current digital lending rules issued by the Reserve Bank of India (RBI) have increased pressure on next-gen lending companies, forcing them to focus on their NBFC units and book development as the regulator prioritises to regulated organizations.
This represents a shift for the digital lending industry, which previously focused on expanding the lending distribution platform to demonstrate scale and relies on loss guarantee coverage procedures like the Guarantee of first-loss default (FLDG) to participate in risk-taking lending activity. with banks and financial institutions.
It will take a lot of work to develop the capitalization needed to lend more, even though RBI standards favor lending to fintech companies with an active NBFC. The founder of a digital lending company, who wished to remain anonymous, said the rules had “obviously taken away the shine of technical innovation that platform lenders were offering and brought attention to NBFCs and organizations regulated”.
Fintechs will now have to focus on capitalizing their NBFC and building an asset-heavy business rather than being asset-light in order to have their skin in the game. Therefore, as they focus on getting liquidity, the growth rate of this fintech will slow down. The source continued that for digital lending participants, the quality of their assets will drive valuations rather than rapid expansion.
The first part of the digital lending regulation, which only allows loan disbursements and repayments between borrowers and businesses subject to regulation by the banking regulator, was announced by the central bank on Wednesday.
In addition, all fees due to a loan service provider must be paid by the borrower directly to the regulated body. This demonstrated how keen the RBI is to support licensed businesses that it can control.
“The most common understanding is that FLDG is only available to people who have NBFC.” Even regulated organizations will begin to withdraw from these agreements; therefore, it will be impossible for these fintech companies to engage in the risk-taking process if they do not have NBFCs, according to the founder of another fintech company.
According to the source, the new regulations would emphasize the revival of digital NBFCs and encourage greater capital raising from lending companies. Fintech companies are still evaluating standards, but for many the first task was to transfer loan contracts from their platform companies to their NBFCs.
Some fintech companies have told ET that they are focused on closing gaps in authorization architecture for receiving consumer data as well as creating transparent audit trails for vendor agreements. . Industry insiders say that given the state of the market, it will be difficult for new-era loan companies to attract equity capital, which will negatively influence the ability of their NBFC arms to raise funds.
The founder of another fintech company with active NBFC operations said, “Growth would be limited for fintech companies that have not focused on establishing their NBFCs, as they will have to consider both existing FLDG rules and invest their own money in co-lending agreements.
They must therefore properly capitalize their NBFCs. Banks will not provide significant funding to quickly capitalize on these NBFCs. NBFCs are built on trust and building a reputation takes two to three years of successful operations. When offering loans, FinTechs will need to draw a clearer line between their NBFC and their loan distribution arms when offering loans, as consumer transparency is still a cornerstone of loan regulation. digital.
“The RBI requirements have made it more important for modern digital lending businesses to adhere to higher governance standards.” Fintechs will need to change lending processes and clearly define (for clients) the roles of different group members involved in the lending process. Data will no longer be sent to platform distribution companies; instead, they will be moved into the group’s regulated organization, according to a payment industry official.
New unlicensed lending fintech companies will find it more difficult to enter the market as RBI has made it clear that it prefers regulated companies and regulations limit the role of platform distributors to that of mere direct sales agents (DSAs) .
“The new rules return control to banks, who will make decisions regarding co-lending partnerships, which had been largely suspended until the new guidelines were issued, as well as debt financing of NBFCs.” According to one of the founders quoted earlier in the article, the fintech will be pressured to consider additional co-lending efforts as their NBFCs will have less liquidity.
The digital lending market aggressively shifted to the co-lending model after the COVID-19 moratorium to reduce risk. Recently, the RBI banned the use of credit lines to load prepaid payment instruments (PPI). Fintech companies, such as Slice and Uni, have been harmed, prompting them to consider co-branded cards and collaborate with banks.
“Co-lending will primarily become more popular because of compliance.” Since the position on FLDG is still unclear, it’s a good idea, according to the person previously quoted.
Edited by Prakriti Arora