Reserve Bank of India’s (RBI) focus on upholding regulatory standards and consumer protection could invite greater scrutiny of the lending models adopted by fintechs, and ultra-high yields, analysts at consulting firm BCG wrote on Friday. They believe that while embedded finance and products like BNPL are set to drive digital payments and credit penetration, achieving profitability at scale remains elusive.
While the use of credit cards on UPI rails will further improve penetration of digital payments, the role of non-banks is unclear and would be shaped by regulation, Prateek Roongta, Rajaram Suresh and Sheetal Jasrapuria wrote in a report.
An increase in the merchant base will drive P2M payments and expand credit access and sharper credit decisioning, they said, though fintechs will be subject to more regulatory responsibilities. Securitisation and tapping the debt market could help alleviate pressure on fintechs’ cost-of-funds, and therefore yields.
The authors wrote that India’s fintech growth story held strong in 2021, with a 157% Y-o-Y growth in funding to $8 billion, led by payments at around $2.7 billion, closely followed by lending at $2.6 billion. While Indian fintechs saw a Y-o-Y drop of roughly 30% in funding for the quarter ended June 2022, the dry powder with institutional investors (PE/VCs) has increased by $3.2 billion in the last six months, indicating the potential flow of capital with improvement in macroeconomic fundamentals.
They said lending is likely to become even more valued given the democratisation of data and that the valuation profile of Indian fintechs is expected to shift from payments to lending.