RBI’s Digital Lending Norms Remove Key Regulatory Overhang From Paytm: Goldman Sachs

Brokerage Goldman Sachs has said that the release of the Reserve Bank of India’s (RBI’s) guidelines on digital lending remove a key regulatory overhang from Paytm and the fintech major’s financial services business practices are in line with the new guidelines. 

“We think these guidelines should result in limited-to-no impact on Paytm’s business/ monetization model, and should help remove one of the key overhangs on the stock,” Goldman Sachs said. 

It also noted that other key recent regulatory developments in the space, including linking of UPI with credit cards and release of RBI’s Payments VIsion 2025, are ‘largely neutral or positive’ for Paytm.

Goldman Sachs also said that the revenue model of Paytm’s buy now, pay later (BNPL) business would likely be ‘unimpacted’ by the new norms.

Paytm’s BNPL revenues are largely scattered across three components – convenience fee from the consumer, late payment fee from users and the merchant discount rate (MDR) paid by merchants.

While the convenience fee and late fee components are in compliance with the central bank’s new guidelines, the MDR monetisation wheel is not regulated under the newly issued norms, Goldman Sachs said. As a result, it does not foresee any revenue impact on Paytm’s BNPL product.

“However, we note that per RBI’s guideline, disbursals and repayments are required to be executed only between the bank account of the borrower and the regulated entity; we would await more clarity on the operational aspects including whether the presence of nodal bank accounts is allowed,” it added.

Meanwhile, the brokerage continues to remain bullish on Paytm stock due to strong momentum in its operating metrics and impending growth over the next five years. It has a ‘Buy’ rating on the stock with a target price of INR 1,000.

On Thursday, shares of One97 Communications, the parent company of Paytm, closed 0.19% lower at INR 825.50 on the BSE.

On Wednesday, the RBI released the regulatory framework, based on the recommendations of a working group, to address concerns related to the evolving digital lending ecosystem.

As per the new guidelines for regulated entities (REs) and lending service providers (LSPs), all loan disbursals and repayments have to be executed between the bank accounts of the borrower and the RE without any pool account of the LSP or other third party. The new norms also prohibit automatic increase in credit limit without explicit consent of the borrower. 

The new guidelines have been announced to curb growing incidents of charging exorbitant interest rates from customers and unethical recovery practices employed by digital lenders. In one such incident, a woman was sexually harrased for not making payment,  while another man died of suicide after being harassed by digital loan sharks. 

According to an Inc42 report, India’s addressable fintech opportunity is projected to reach $1.3 Tn by 2025. Of this, lending tech is likely to account for 47% or $616 Bn, emerging as the largest market for fintech companies in the arena.