India’s Central Bank Cracks Down on Unsecured Consumer Loans, Hitting Fintech Lenders
India’s Reserve Bank has implemented measures to curb the growing stress in the market for unsecured consumer loans. The move specifically targets fintech lenders like Paytm, which have increasingly relied on riskier borrowing for growth.
In November, the Reserve Bank of India announced that lenders must increase the risk weight for personal loans from 100 percent to 125 percent after data showed that delayed payments were on the rise. This regulation aims to prevent the escalation of consumer debt and delinquencies by pushing up the cost of capital and slowing growth for companies that have poured into higher-risk credit card or retail lending for fatter margins. RBI Governor Shaktikanta Das warned banks to avoid “all forms of exuberance” following the imposition of these new curbs.
The impact of the central bank’s measures has been swift. Paytm, one of India’s largest fintech groups, saw its shares fall over 30 percent, with Warren Buffett’s Berkshire Hathaway selling its stake in the company shortly after the RBI’s order. The company has also announced plans to cut back on small-ticket loans below Rs50,000.
Smaller fintech lenders face an uncertain future in the wake of these regulatory changes. Reports suggest that Zestmoney, a group offering unsecured personal loans, is shutting down in response to the new regulations.
Peeyush Dalmia, a senior partner at McKinsey, warned that the regulation will likely force some companies to collapse. “The more serious folks who were very focused on profitability, very focused on risk, they’ll start to benefit.”
The growth of unsecured loans in India, driven by the country’s robust economic growth and a growing middle class, has attracted both fintech and non-bank financial lenders. This competition has led traditional banks to expand into personal lending as well. However, the increasing competition has pushed lenders into ever riskier areas, such as rural microfinance, prompting the RBI to intervene.
The new regulations will require lenders to set aside a larger chunk of capital for the consumer and credit card loans they issue, limiting the amount of funds available to lend and increasing competition for loans.
Industry experts believe that the regulations will push up costs across the industry and lead to a liquidity crunch as lenders rethink their strategies. Fintech companies, which often serve as conduits between financial institutions and consumers, are particularly exposed.
While Paytm has adjusted its lending portfolio by prioritizing higher-value loans, analysts believe that the slowdown in consumer lending will make it more difficult for many fintech companies. Banks, which have been doing this for ages and adhere to regulatory standards, are expected to come out as winners amidst the regulatory changes.
In conclusion, India’s central bank’s move to regulate unsecured consumer loans has sent ripples through the fintech lending industry, forcing companies to reevaluate their lending strategies and adapt to the new regulatory environment. While the impact has been immediate, the long-term effects on the industry remain to be seen.