India Ratings and Research (Ind-Ra) has warned fintech Non-Banking Financial Companies (NBFCs) to be cautious with their unsecured consumer lending in FY25. Two big challenges raise this vulnerability: funding cost pressures and fund mobilization pressures, which may further lead to slow loan disbursement.
With that in mind, it should be expected that Fintech NBFCs will work to tighten their rules of lending and make modifications to the risk management approach. Such tightening may delay their march towards reaching profitability; earnings might not pace up with an increase in Asset Under Management (AUM). Since most of the loans are for a tenure of less than two years, any deceleration in lending will affect their asset quality ratios.
“Fintechs would need to calibrate their on-book and off book AUM growth strategies, given the tighter funding environment for them. Slowing disbursements, higher funding costs and rising delinquencies need close monitoring in the near-to-medium term,” says Karan Gupta, Director, of Financial Institutions, Ind-Ra.
We are shifting gears from high growth to a cautious stance.
During FY23 and at the beginning of FY24, several large NBFCs have partnered with fin-techs to disburse unsecured loans to new customer segments. This provided better returns with increased risks. As FY25 approaches, these companies are expected to be more cautious given the fact that unsecured loans behave differently and may lead to higher credit losses.
Fintech NBFCs are increasingly looking to alternative sources like alternative investment funds (AIFs) and family offices for funding, as banks and larger NBFCs reduce their lending exposure. This shift has led to higher borrowing costs, squeezing margins and impacting profitability. Regulatory changes and tighter funding conditions further complicate matters, making it harder for fintech NBFCs to sustain growth
A key risk that persists is asset quality. The non-performing loans ratio above 90 days increased from 2.0% in March 2023 to 2.4% in June 2024, indicating rising stress. The RBI has voiced concern over personal loans below INR 50,000, cautioning about possible defaults on account of easy access to credit and overborrowing by borrowers.
Experian Report: Fintechs Capture 52% of India’s Small Personal Loan Market by End of FY24
In FY25, fintech NBFCs in India must navigate a tougher environment marked by higher funding costs, slowing loan growth, and rising defaults. Balancing growth with tighter risk controls will be key to their stability and success.
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