Report Warns Of Renewed Regulatory Scrutiny On Lendingtech Space

The lendingtech sector in India is likely to come under renewed scrutiny of the Reserve Bank of India (RBI), a report by the Boston Consulting Group (BCG) said.

“RBI’s (Reserve Bank of India) focus on upholding regulatory standards and consumer protection could invite greater scrutiny on fintechs’ lending models…,” said the report titled ‘Past Perfect, Future Tense?: Themes shaping the future of Fintechs in India’.

It also added that digital lending and online payments will be the major themes that will shape the future of Indian fintech space.

BCG noted that lendingtech startups are expected to lead the fintech space in terms of valuation by financial year 2024-24 (FY25). Lending startups will form 35% of the total valuation profile of fintech startups by FY25, up from 13% in FY21, it said.

The consulting firm also urged lendingtech players to look at securitization and tap into the debt market to alleviate some pressure on their cost of funds and yields.

Cost of funds refers to the amount that companies have to spend in order to get money to lend to their customers. 

UPI Payments & Credit Cards 

“UPI-enablement of credit cards is set to turbocharge digital payments penetration”, the report said.

While the scope of linking UPI with credit cards is currently only limited to RuPay, the report  called for onboarding other international players such as Visa and Mastercard. 

In a word of caution, BCG also said that the role of non-banks in driving credit card penetration continues to remain unclear. Blaming the ‘evolving’ regulatory stance on issuance of credit cards, the report said that the RBI’s stance raises questions on the viability of many fintech business models. 

Essentially, the report was referring to the much talked about June 21 diktat from the RBI that barred non-bank fintech players from loading prepaid payment instruments (PPIs) with credit lines.

On the payments ecosystem, it said that the increase in merchant base would drive peer-to-merchant (P2M) payments and expand credit access across the segment. 

Pointing out the recently unveiled RBI Payments Vision 2025, the report reiterated that it could drive innovation and growth, but would likely burden fintech players with ‘expanded regulatory responsibilities’.

Crypto, Insurtech, And More 

Projecting that capital will continue to be a constraint for crypto startups, the report said that the recent market crash has tempered stakeholder expectations and the industry needs to tread carefully.

“Large crypto fintechs will continue to operate with caution in an evolving regulatory landscape,” warned the report.

On the other hand, the consulting company predicted a new regime of insurance regulations. According to BCG, this could unlock newer operating models as well as partnerships between insurtechs and incumbents

Additionally, the report also said that the RBI’s account aggregator framework and the unified software platform India Stack would enable end-to-end digitisation of insurance onboarding journeys and competitive pricing options for customers. 

“The National Health Stack will significantly unlock value in retail health insurance, with more insurtechs plugging into this ecosystem,” added the report. 

While 2021 saw fintech startups close to $8 Bn, the current year has not augured well for the space. According to an Inc42 report, startup funding fell 37% quarter-on-quarter (QoQ) in Q2 of current year 2022 (CY22). Fintech, however, emerged as the most preferred sector in the first half 2022, raising raised $3.4 Bn across 159 deals

Meanwhile, volatile market conditions and apprehensions of a recession have wreaked havoc across the space. Mass layoffs and cost-cutting measures have led to consolidation in the space even as expansion plans have been put on hold.

In June, Sequoia-backed fintech player Rupeek laid off around 200 people across multiple teams. Insurtech platform Nova Benefits also fired more than 70 employees in a cost cutting exercise earlier last month. In February, Bengaluru-based fintech startup OkCredit laid off 40 employees. 

The biggest jolt to the space came in the form of crypto exchange Vauld that laid off around 30% of its workforce and suspended operations in the country.