This is a shift for the digital lending industry, which has largely focused on growing the lending-distribution platform to show scale and rely on loss guarantee cover practices such as First Loss Default Guarantee (FLDG) to participate in lending activity through risk-taking with banks and financial institutions.
However, while the RBI guidelines give a relative advantage to those lending fintech firms with an active NBFC, it will be a painstaking effort to build the required capitalisation to lend further.
“The digital lending guidelines have clearly taken the sheen away from technology innovation that platform-lenders were providing and put the focus on NBFCs and regulated entities,” the founder of a digital lending firm, who didn’t wish to be named, said.
“Now, in order to have skin in the game, fintechs will be forced to work on capitalising their NBFC and build an asset-heavy business rather than being asset light. Hence, the pace of growth for these fintechs will slow down as they focus on raising capital. Valuations will be driven by the quality of assets for digital lending players versus high growth,” the person added.
The central bank on Wednesday released the first leg of the digital lending norms, which allow loan disbursals and repayments only among borrowers and entities regulated by the banking regulator.
Further, any fees payable to a loan service provider are to be collected by the regulated entity directly from the borrower. This has made clear that RBI is keen on encouraging those licensed entities that it can govern.
“The biggest interpretation is that FLDG is for only those who have an NBFC. In case you don’t have an NBFC, it is going to be difficult for these fintech entities to participate in the risk-taking process as even regulated entities will start pulling out of such arrangements,” said another fintech firm 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, for some the immediate scope of work has been to shift lending contracts from their platform business to their NBFCs.
Some fintech firms told ET that they were working on building missing links of the consent architecture to receive data from customers as well as building clear audit trails for technology service provider partnerships.
Capital, a nightmare?
According to industry executives, going by the current market conditions, it will be hard for new-age lending businesses to raise equity capital, further impacting debt fundraising for their NBFC arms.
“For fintech firms that haven’t focused on building their NBFCs, growth will be hampered, since they will have to account for both existing FLDG norms as well as put in their own capital in co-lending partnerships,” the founder of another fintech firm that has active NBFC operations said. “Hence, they will have to capitalise their NBFCs well. Banks will not give large amounts of debt to capitalise these NBFCs overnight. NBFCs are built on trust and take 2-3 years of good operations to build reputations.”
As transparency to customers continues to be a bedrock for the digital lending guidelines, fintech firms will have to make a sharper distinction between their NBFC and lending distribution arms while providing loans.
“RBI’s guidelines have put the focus for new-age digital lending startups to follow stronger governance norms. Fintechs will have to change lending flows and spell out the role of the different entities within the group (to the customer) involved in the lending process. Provision of data to platform-distribution business will be stopped and be moved to the regulated entity in the group setup,” a payment industry executive said.
Focus on co-lending
RBI has shown a clear preference for regulated entities, and therefore it will be harder for newer lending fintech firms without licences to enter the segment, as guidelines reduce the role of platform-distributors to mere direct selling agents (DSAs).
“The new guidelines clearly put power back to the banks who will decide on not just providing debt 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 pivoted to the co-lending model in a bid to reduce risks.
The RBI had recently banned prepaid payment instruments (PPIs) to be loaded through credit lines. This severely impacted fintech firms including Slice and Uni, forcing them to look at co-branded cards and work along with banks.
“Co-lending will largely gain prominence now because of compliances. It is a good idea considering that the stance on FLDG is still not clear,” said another person quoted earlier.