SUMMARY
The Reserve Bank of India hiked the repo rate by 50 basis points to 4.9% which will increase the borrowing cost for fintech players
Experts believe the rise in interest rates will hit the buy-now-pay-later (BNPL) players who operate on very low margins
However, digital lenders believe that due to their shorter loan tenures and hassle-free procedures, the rate hike will have no impact on their business
Digital lenders are not unduly worried about the rate hike by the Reserve Bank of India (RBI) as they do not anticipate a slowdown in credit offtake, even as the tighter monetary policy will immediately increase the cost of funds for the new-age lenders.
However, the buy-now-pay-later (BNPL) players definitely need to worry about the central bank withdrawing from the “accommodative policy” it adopted in the wake of the Covid-19 pandemic, which crippled the economy.
The RBI on Wednesday raised the repo rate by 50 basis points (bps) to a two-year high of 4.9% to tame rising prices. This is the second rate hike in just over a month. After an unscheduled meeting earlier on May 4, the central bank had raised the repo rate by 40 bps, signalling the beginning of the end of the “accommodative monetary policy”.
End Of Zero Interest Rate Offered By BNPL Players?
The RBI is not done with the rate hike cycle yet and more tightening measures are on the anvil for sure, according to banking experts. It can be safely said that the days of “accommodative monetary policy” are over. As the central bank is certain to continue hiking interest rates, the fintech sector, particularly the BNPL players, may come under pressure.
BNPL is a fledgling sector at present and players in this space across the world are already struggling. “Margins on BNPL will be tight, thus posing questions on profitability,” Avinash Godkhindi, MD & CEO of fintech startup Zaggle, told Inc42.
With the help of the database of clients and their repayment track record, BNPL players may select clients whose repayment capacity is beyond apprehensions, he added.
BNPL is attracting consumer interest because it finances consumption. However, from a business point of view, the BNPL industry is yet to showcase a sustainable profitability path.
According to Ajay Chaurasia, head of product at digital lending platform RupeeRedee, higher lending rates will “definitely” impact BNPL players as the margin is already very thin in this competitive environment. “We will soon see the free usage or zero percent interest will start going away after the hike in repo rates,” he told Inc42.
Do BNPL Players Need to Discover A New Model?
Chaurasia is of the view that the BNPL players need to refashion their business model as the cost of funds rises. At the end of the day, you need to be profitable, he added.
Higher costs of funds, coupled with thin margins and profitability, may force BNPL companies to refashion their business models. Those with strong sustainable business models may not require any knee-jerk changes in their strategy.
“(But) Players with weak economics and burning money for fastest customer acquisition will find it tough, especially considering the current sentiment in the funding ecosystem, and may need to adapt,” Pallav Jain, CEO and cofounder of BNPL startup ShopSe, told Inc42.
Anurag Jain, executive committee member of the Digital Lenders Association of India (DLAI), however, has a different viewpoint on this.
“Credit products are priced according to a well-thought-through backend model, with the cost of credit and anticipated risk as the key determining factor for pricing. Change in repo rates may impact the rates but the model will not get impacted on an immediate basis,” he said.
Digital Lending – Growth Momentum Set To Continue
The DLAI is of the view that the repo rate hike brings it closer to the pre-pandemic levels, which is more of an indication of the economy moving back to normalcy.
“We don’t anticipate any slowdown in the consumption patterns in India as of now and, hence, do not expect a slowdown in demand for credit,” said Anurag Jain, who is also the founder of KredX.
Concurring with the views of DLAI, Chaurasia said there is a rise in demand for digital lending despite the higher interest rates as it is convenient and smaller amounts are available for consumers to fulfil their daily needs.
“It’s growing every year multifold and we will see more growth in the coming times as lending is getting more accessible to the users via technology.”
The digital lending market, aided by innovative products, has been expanding. The demand side is expected to keep the momentum going ahead. “By exploring more options and increasing the customer base by aggressive marketing, digital lenders will be able to sustain the growth momentum,” opined Godkhindi of Zaggle.
The cumbersome and opaque procedures followed by traditional lenders work in favour of digital lenders. Digital lending is looking to resolve this issue with traditional lenders and address the demand which is mostly unmet as of today.
“Since the financing at point of purchase industry is still at a very nascent stage, we don’t anticipate a slowdown in growth in the medium-term,” said Pallav Jain of ShopSe.
Consumers, in fact, may choose to stay away from long-term loans, which are most likely to get costlier, and go for digital lenders that are faster and offer products that can be customised.
Anurag Jain pointed out that the digital lending players saw a huge spike in digital payments and in the overall preference of consumers toward digital financial services such as loans during the pandemic. “We expect the trend to continue and are ready for another quarter of high growth numbers.”
Pallav Jain, however, said that the growth in the near term will vary between products, depending on penetration and impact on customers in absolute terms due to rate hikes.
“For example, consumer financing at point of purchase has a very low penetration and relatively lower ticket size and hence should continue to see growth.”
Will Digital Lending Rates Go Up?
As the cost of funds goes up, everybody is pondering how the successive rate hike will impact the borrowers in the digital lending space. Will the digital lending rates go up? According to Chaurasia, digital lenders with longer tenure and bigger loan books will definitely revise the interest rates. While smaller NBFCs and digital lenders with short-term loan tenures like 3, 6, 9, 12-months might not increase it, he said.
“RupeeRedde is a growing company and at this point we would take this hit and not increase the interest rates for our customers,” he said.
Banks normally lose no time in increasing lending rates in tune with the monetary policy initiatives of the RBI. According to Pallav Jain, digital lenders raising debt from the market are expected to bear a higher cost. They will, however, find it tough to immediately pass it on to the customers, especially to the better profile customers, in view of ease of access to multiple providers in the digital world.
Digital lenders typically have shorter loan tenures and, therefore, the rate hike is unlikely to impact the existing borrowers.
“In the long-term, the industry players have been expecting an increase in rates and the rate hike will be in line with overall increase across the banking and finance industry,” Anurag Jain said.
Godkhindi of Zaggle, however, has a different view on the impact of rate hike on digital lending. He said that the frequency of availing credit through digital routes may come down which would impact the profitability of fintech companies.
“Either of the lenders must take the cost hit. This will result in margin shrinkage or if the lenders decide to pass on the cost to customers, then the cost of serving the loan will become dearer. This can lead to a reduction in the frequency of customers availing loans thereby eroding profits of fintech players,” he said.
ShopSe, a BNPL startup, has some of the largest financiers as its partners, including banks and NBFCs. But it has not seen any adverse impact on the customer yet in terms of increased rates, Pallav Jain said.
No Big Repercussion Seen On Recovery
Godkhindi also pointed out that loan recovery, largely a function of underwriting, may marginally be impacted as loans become costlier. “With active follow-ups, recovery may not get impacted in the long run,” he said.
Digital lending is typically for the short-term. The average loan tenure is 6 months to 1 year and ticket size is also small. So, recovery shouldn’t bother digital lenders. Chaurasia, however, cautioned that recovery of longer tenure collateral-free loans may get impacted by RBI’s rate hike.
Anurag Jain, however, said that rising lending rates will not impact the recovery of digital lenders. “Recovery is directly linked to the intent and ability of a customer to pay. Since the interest rates do not have an impact on the income of consumers, recovery will not get impacted.”
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