After asking banks and non-banking finance companies to take a calibrated approach to growth, the Reserve Bank of India has signalled fintechs to tamp down.

In a meeting recently held with fintech heads, the regulator is said to have told many companies, especially those involved in loan products and/or operating as loan service providers, to cut down growth.

RBI’s concern, according to sources, is that despite curbs in risk weights in unsecured loans, there is little or no moderation in growth. “This isn’t good from a systemic perspective,” said a highly placed source aware of the matter. While a few fintech leaders have communicated to the regulator that high growth is coming off a low base, the reasoning hasn’t found favour.

“Target growth at around 15–20 per cent is the message given to all of us,” said a CEO of a lending fintech who didn’t want to be named. Currently, fintech lenders are among the fast-growing entities and almost every fintech across the board may have closed FY24 with 35-50 per cent growth. “This warning has put us in a spot,” said the CEO.

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It’s in the DNA

Fintech heads and investors are in a huddle, trying to work out alternatives. The sector is once again back with fundraising plans with clarity emerging on operational aspects such as loss-default guarantees. However, the DNA of fintech lenders is fast growth, and valuation multiples are often linked to how quickly the loan book can expand.

“On one hand, we don’t want to take the risk of not complying with RBI’s warnings because we have seen how non-compliance can backfire. But, on the other hand, how do we satisfy our investors. If growth slows to 15-20 per cent, generating 30 per cent plus returns is almost impossible,” said another fintech CEO. Also, with most players looking at turning profitable or breaking even ahead of their slated IPO plans, slowing down growth may set the clock backwards. “Volumes and scale are important to turn profitable and that cannot happen if growth slows,” said another CEO.

What next

While venture debt is no substitute for equity, many fintechs are looking at adding debt to their balance sheet to improve return profile and thereby bump up valuations a bit. Since many operate in the unsecured lending segment (whether for personal loan or small business requirements) where pass-through of cost of funds isn’t an issue, fintechs are also looking at alternative business models.

“Lately, there has been an increased interest in gold loans and loan against property. Such type of loans will ensure that there is productive use of gearing,” said a senior executive of a fintech company, adding that since many companies are still in early stages of exploring these options, it will automatically reset growth rates. “But this may also increase our cost structures, and everything will depend on how good we handle that,” she added.

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