Amit Kumar, Co-founder, GalaxyCard, a digital credit card start-up, had just gone live with a non-banking finance company (NBFC) when the IL&FS default crisis erupted in September 2018. The NBFC, which had started discussions with GalaxyCard in January 2018, had big plans but changed its mind. “Nine months of integration, legal paper work and banking transactions went for a toss in just 10 days,” says Kumar. Many NBFCs that had tied up with fintech firms or were in the process of doing so are not even willing to talk, says Kumar. As a result, a lot of fintech lenders are finding it difficult to raise funds. Some are even closing down.
The liquidity crunch has put a spanner in the works for such firms despite the fact that the potential market of millennials and salaried professionals remains. Akshay Mehrotra, Co-founder and CEO, EarlySalary, sees a huge untapped market in consumers with credit scores of less than 750 and loan size below Rs 1 lakh for less than one year tenure. “The salaried individual segment is a Rs 4.5 lakh crore opportunity (by 2023/24) based on 201 million individuals,” he says.
India is the second-biggest fintech hub in the world, after the US, with 2,035 start-ups in the sector against just 737 in 2014, according to the India Fintech Report 2019 by Medici.
However, fast paced growth in a short span doesn’t guarantee sustainability. China’s peer-to-peer (P2P) lending segment flourished in the past four-five years but witnessed multiple defaults from June 2018 after it surfaced that a few P2P operators had duped investors. Thousands of platforms disappeared over two years.
In India, regulations are trying to put things right.
Road to Regulations
The Reserve Bank of India’s, or RBI’s, recent draft circular on liquidity risk management for NBFCs and Core Investment Companies proposes to focus more on granular buckets (0-7 days, 8-14 days and 15-30 days instead of 30 days now) for asset liability management. It also talks of introducing liquidity coverage ratio requirements in line with banks and having more transparency in borrower or concentration details.
While a long-term positive, the regulations will pressurise margins. Yields on liquid assets would be lower than cost of funds for most NBFCs, says brokerage PhillipCapital’s report. But most large NBFCs have cash balances (after IL&FS default) that cover around 60-120 days of net outflow.
The Securities and Exchange Board of India also has a framework on ‘innovation sandbox’ to provide an ecosystem to test at a small scale.
There are, however, concerns around cyber security. “The proposed framework has not provided for user privacy and data security,” says Deepika Sawhney, Partner, Corporate Professionals. Besides, in the current set of proposals, compliance with data protection laws lies with the participating entities. “The cost of compliance may be too high for a company that is starting out,” says Monish Anand, Founder, Shubh Loans.
Deep pockets would help fintech firms ride this storm, but many do not have that kind of backing. This has led some to look at other ways of staying in action, as a lot depends on their model of operations.