Fintech funding may drop this year as RBI circulars take the wind out of growth sails, BFSI News, ET BFSI
Indian fintech firms are likely to be hit by the two recent Reserve Bank of India (RBI) circulars on loading credit on prepaid instruments and on digital lending.
While fintech companies are looking to find ways to work around the RBI circulars, their funding is likely to be hit further.
Fintech funding is likely to be lower than in 2021, which saw a huge $10 billion in funding across more than 580 deals in FY21. It was three times the $3.5 billion received in 2020. The first half of 2022 has seen conservative funding of $4.2 billion, which is lower than H1 FY21, but twice the funding received in H1 FY20, according to a Bain report.
Going by the pace and global rout in start-up funding, Indian fintechs are unlikely to hit 2021 numbers.
While payments and lending continue to attract the bulk of funding (60 per cent), other segments, including financial infrastructure, wealthtech, and neobanks, are now catching up.
The prepaid instruments
In July, the Reserve Bank of India (RBI) via a circular banned loading of credit line on non-bank prepaid payment instruments (PPI), ending the booming business of extending credit lines by mobile-wallets and buy-now-pay-later (BNPL) platforms via instruments that mimic credit cards.
Fintechs have cumulatively issued around 5 million cards in India and have more than Rs 5,000 crore of assets under management. On average, they disburse under Rs 3,500 crore every month. These firms have together issued around 2 million cards on a monthly basis during this year, which is much higher than the 1.3 million-1.5 million credit cards issued monthly by traditional lenders during the first quarter of calendar 2022.
About 80 different card products were launched, reflecting the rapid growth in this segment.
Following the central bank’s directive, neobanking firm Jupiter stopped issuing its Edge ‘credit cards’ challenger while KreditBee, LazyPay, and Kissht also stopped issuing prepaid cards with credit lines.
Ever since Bengaluru-based fintech startup Slice started issuing ‘credit cards’ challenger in 2019, the segment has seen rapid growth with the entry of players such as Uni Cards, Jupiter Edge, and BharatPe’s PostPe which launched their own prepaid cards with credit lines or a revolving credit mechanism similar to that of a credit card.
The RBI has not stopped fintechs from giving loans. A credit line becomes a loan only when a customer draws money from it. The customer can use a part or the full amount of the approved credit line.
These ‘self-styled credit cards’ function like real credit cards, but are actually prepaid cards. Mainstream credit cards use credit BIN (bank identification number). While the banking regulator doesn’t have a problem with prepaid cards being loaded with money through a debit card or credit card, it’s the rotation of credit through a just-in-time loan at the time of payment that’s a problem. It then becomes a credit card.
Slice has now stopped card operations as it transitions to a new system following the RBI’s new guidelines on digital lending.
Slice has asked users to open a prepaid account that will be linked to cards.
“To ensure a smooth transition, we will temporarily block your card during November. We will notify you in advance in the Slice app when we upgrade you to the all-new experience before November end,” it wrote in an email to its customers.
It said customers would be able to open a Slice mini prepaid account, where they could add and withdraw money.
Digital lending guidelines
The central bank earlier this year issued digital lending norms, under which the disbursal of loans and collection of repayments must be executed only between borrowers and entities it regulates, with no third party involved in this process.
In its digital lending circular, the central bank also submitted a list of recommendations to the government, including enacting a law to ban unregulated lending activities. The RBI had said the cost of digital loans must be disclosed upfront to the borrower and that there should be no allowance for increasing credit limits automatically.
All fees and charges owed to the loan service provider must be paid by the lender and not by the borrower.
To allow for a smooth transition to the new digital lending guidelines, the Reserve Bank of India on Friday said all entities under it had until November 30 to ensure all existing digital loans abide by the new rules.
These changes may lead to altering of commercial structures, product design, and relationships with lenders, raise costs and hit the growth of fintechs.