OVER THE LAST EIGHT months, fintechs have evinced keen interest to secure non-banking financial company (NBFC) licence from Mint Road. Ftcash, 4Fin, GetVantage, Jupiter, BharatPe, Cred, Uni and LendingKart are among those which have been successful in this endeavour — either by getting the nod to set it up mint-fresh, or by acquiring an existing entity.

It marks a remarkable turn in the business models of these players after the Reserve Bank of India's (RBI) November 2021 Report of the Working Group (WG) on digital lending, including lending through online platforms and mobile apps. It set the cat among the birds — the banking regulator signalled that fintechs cannot team up with legacy RBI-regulated entities (REs) — be it banks, or NBFCs — and be in the lending space as an originator of loans for them without having skin in the game. As in: Being asset-light, not running a book of their own. It turned the world of such fintechs — which the RBI defined as "lending service providers (LSPs)" — on its head, forcing them to seek NBFC licences.

On June 8, the RBI made its position clear on first-loss default guarantees (FLDGs) — issued by digital platforms to lenders (banks and NBFCs) on whose behalf they source business. In case a portfolio turns bad, the FLDG is invoked. The trouble was there were no clear guidelines on how much of FLDGs can be issued — it has now been capped at 5% of the loan portfolio. But just how this will play out from here needs to be watched as the picture is still evolving.

Take LendingKart for example. Set up in 2014 by Harshvardhan Lunia, it gobbled up digital-lending platform Upwards for ₹100 crore in February this year — the largest deal of its kind. It will help LendingKart diversify into personal loans to the low-income segment and sits well with its positioning of being a vendor of capital to micro, small and medium enterprises (MSMEs). Now Lunia has always been in the business of lending, but push him as to why fintechs are chasing NBFC licences, and he's candid on a subject not many are willing to go on record. "There's been a material change after the RBI released its digital lending guidelines. These helped bring in greater transparency and improve customer confidence," says the firm's founder and CEO. "Fintechs will have to use their books if they want to be in the lending game," he adds.

Turn in the Plot

So, what's changed so dramatically for fintechs to yearn for NBFC licenses?

The working group put the spotlight on what the banking regulator termed as the "rent-an-NBFC" model by digital lenders acting as LSPs. Under this, LSPs bear the loss up to a pre-decided percentage of loans generated by them on behalf of the REs were it to turn dud. The report said credit risk is being borne by LSPs without having to maintain any regulatory capital. That loans backed by FLDGs are akin to off-balance sheet portfolio of LSPs wherein nominal loans sit in the books of REs without having to partake in the lending process. What it meant was simple: Fintechs without being REs were teaming up with those which were. So, why were REs entering into such deals with fintechs in the first place? Well, it helped them to grow their books without adding to the costs involved had they done it on their own.

Rajeev Suri, managing partner at Orios Venture Partners, cites the reasons for the shift in play: NBFC licences allow for more flexibility in innovation as this is typically in product, and distribution; and could help fintechs (read LSPs) keep a bigger share of the margin. As without a licence, they would be dependent on REs, and the consequent uncertainty it brings about. "All said and done, there's more clarity emerging across the regulatory landscape as well, both in loosening some rules (say, digital paperwork) and tightening others (such as on lending rules) which is resulting in more fintechs taking the plunge (securing an NBFC licence)," he says.

That said, the story ahead is set to get even more interesting — bagging an NBFC licence, in itself, will not lead to a change in fortunes for LSPs. The impact on lending can vary for fintech companies based on their market presence and access to funding. Those with established products and market positioning are likely to face fewer challenges. "But for those still in the early stages, or lacking an established presence, it can be more challenging, especially during a funding winter," says Mayur Modi, co-founder at Moneyboxx, which provides business loans to micro entrepreneurs in smaller towns. This is because they have to rely heavily on external funding to provide loans. "If funding becomes scarce or more expensive during a funding winter, it can significantly impact their lending capacity, their ability to offer competitive loan terms to borrowers," he signs off.

Look at the big picture. KPMG's bi-annual Pulse of Fintech H2'22, has it that global fintech investments (be it via mergers and acquisitions, or capital from private equity and venture capital firms) — at $164 billion in 2022 was down 31% over the previous calendar. Indian fintechs held up better at $6 billion with a fall of 24% during this period. Global figures for the year-to-date (calendar 2023) are not yet public, but Grant Thornton's league table shows deals at $1.142 billion made for a drop of 53%. And of this, Walmart's $200-million investment in PhonePe for a minority stake accounted for 81%.

V. Raman Kumar, founder and chairman of CASHe, which finances millennials, says business models based on regulatory arbitrage are out of the window. He calls attention to two key RBI circulars issued in 2022 to drive home the point: Pre-paid instruments (PPIs) cannot be funded from credit lines from NBFCs (issued on June 20), and tighter digital lending norms (August 10). "My firm never got the valuations that fintechs typically command. And people were telling me that I wasn't clever enough. It's very clever to get valuations, but ultimately, the business is on somebody else's banking rail when you issue a PPI and allow it to be used as a credit card," says Kumar. India will not be an exception. A report by Coatue (run by hedge fund and portfolio manager Philippe Laffont) on Fintech and the pursuit of prize: who stands to win over the decade (October 2022) is categorical that "the next generation of enduring fintech requires a focus on owning the balance sheet, maniacal re-bundling, a business-to-business leaning, and building high-margin sub-verticals."

Bottomline: To be in the lending space, you have to put your money where your mouth is!

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