RBI’s Amendment To Securitisation Norms Another Bolt From The Blue For BNPL Players

The Reserve Bank of India (RBI) has been proactive in weaving technology into banking. Even as the central bank is enabling tech innovation, its amendments to the regulatory guidelines sometimes throw down fresh challenges to fintech companies.

An update on the RBI’s ‘Master Direction on Securitisation of Standard Assets’, dated December 5, that went largely unnoticed poses one such fresh challenge, particularly to players in the ‘buy now pay later’ (BNPL) space and microfinance institutions (MFIs).

According to the update, lenders cannot undertake securitisation activities or assume securitisation exposures on underlying assets of loans with residual maturity of less than 365 days.

Explaining the significance of securitisation, Utkarsh Sinha, Managing Director of Bexley Advisors, a boutique investment bank firm, said, “Securitisation is the key to the lending model of several for non-banking finance companies (NBFCs) wherein riskier loans are bundled with lower risk ones and sold as a collective block to a buyer, effectively removing the debt from the books of NBFCs and enabling further lending.” 

How BNPL Will Take A Hit

The impact of changes in the securitisation norms will be more pronounced on startups in the BNPL space and MFIs because these categories have tie-ups with NBFCs for lending business.

“This amendment (by RBI) will mainly impact MFIs as well as BNPL/ consumer durable/ gold loans/ short-term loan fintech providers. Even those with a good quality book will not have the benefit of lowering their cost of funds via securitisation. The impact on MFI will be more pronounced since securitisation is a key funding tool,” said Monish Anand, CEO & founder of MyShubhLife, a digital-lending and savings platform which is close to acquiring a housing finance company.

Priyanka Seth Wadhera, CFO of Indifi Technologies, another digital-lending platform, is also of the view that the RBI update is pertinent to a number of BNPL schemes, consumer loans and MSME credit that have short tenures so that the risk uptake by the lender is limited. 

Why BNPL Often Finds Itself In RBI’s Crosshairs

It is pertinent to note here that BNPL is popular because it is cheap credit. The product is often extended at zero interest cost. The model has gained popularity in travel and tourism, edtech, and high-end consumer items which involve larger loan amounts. 

In the BNPL model, fintech players with their digital prowess connect financiers (NBFCs) with merchants/ customers. It cannot be said that BNPL is completely transparent and therefore the RBI keeps a close watch on this model.

‘First Loan Default Guarantee’ or FLDG arrangement in the BNPL space has been under the RBI lens because a certain portion of the risk is underwritten by the digital partners who are outside the regulatory capital buffer requirement.

A Shift to Long Tenure Loans A Sustainable Solution

Anand of MyShublife emphasised that the RBI’s step will challenge the existing risk models which are more tuned towards short-term loans.

Fintech startups and MFIs can look at balancing their portfolio by offering long-tenure loans, he said, adding that short-term risk models are easily replicated and lazy models while long-tenure loan models are proprietary and more tenable.

Wadhera of Indifi Technologies said it will be difficult to hedge the impact of this challenge for fintech companies and MFIs. 

“It is in such cases where the co-lending route or becoming banking correspondents/ lending service provider for banks will be optimal options to explore,” she said

She further pointed out that with the requirement of a minimum holding period being three months, any loan up to an original maturity of 15 months has also been ruled out of securitisation along with any asset pool with residual maturity of 365 days. 

“For the investing banks, the asset pool with a residual tenure was a win-win as they had access to the priority sector lending pool while limiting their exposure. They too will have to change their strategy and now look for longer tenure pools,” she said.

Borrowing Cost To Rise 

The RBI’s decision is seen as a step aimed at avoiding systemic risks emerging from short-tenure credit. 

Many NBFCs rely on higher churn and short-duration lending to assess a borrower’s credit worthiness and establish his/ her credit history while increasing the credit limit.

“The lesser the gap between the issuer of debt and its ultimate holder, the higher are the credit standards that get established. Over time, erosion of these standards is natural and can lead to systemic risks,” Sinha of Bexley Advisors said.

He welcomed the RBI’s move saying securitisation is a lever available to offload risks from the books of NBFCs, but it is not a way to eliminate risks.

“By removing the ability to securitise the short duration loans (and likely, the highest risk and the highest cost), the RBI’s move will lead to lesser lending on higher standards. A by-product of this would also be increased cost for borrowers, which reduces overall borrowing,” he said.

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