Fintech firms are targeting the fast-growing alternative lending market through the NBFC route in India in 2023

Print

Email

The demand for credit is growing at a rapid rate in India and the trend is projected to further continue over the next five years. The tech-savvy population, coupled with increased internet and smartphone penetration, has created the perfect growth environment for players operating in the segment. In addition to individuals, SMEs are also approaching alternative lenders to meet their credit demand in India.

To tap into the high-growth potential of the alternative lending market, an increasing number of firms are seeking to enter the segment through the non-banking financial companies (NBFC) route. This trend has gained momentum ever since the Reserve Bank of India tightened the digital lending rules in 2022. Over the last few months, fintech firms have either acquired NBFCs or sought an NBFC license from the central bank.

• BharatPe, in April 2023, acquired a majority stake in Mumbai-based NBFC Trillion Loans. The NBFC provides secured and unsecured loans to small and medium-sized enterprises. The 51% stake in Trillion Loans will enable BharatPe to reach a wider set of underserved and unbanked businesses as well as consumers.
• In April 2023, Jupiter, the neobank platform in India, revealed that the firm had secured the NBFC license from the central bank. The move will enable the neo banking platform to expand its services into the fast-growing lending market. The license is also expected to double its disbursal rate for the year.

Till April 2023, Jupiter disbursed small ticket loans of less than INR 50,000 with a tenure of 3-6 months. The loans were disbursed in partnership with Trillion Loans. However, with the NBFC license, the firm is planning to provide loans worth INR 50,000 to INR 100,000. As part of its strategy to expand its presence in the lending segment, the firm also raised US$12.5 million in January 2023.

Getvantage, in May 2023, also revealed that the firm had secured an NBFC license from the Reserve Bank of India. The revenue-based financing and lending platform announced that it will conduct the lending business through its NBFC arm GetGrowth Capital. Getvantage announced that it would infuse INR 500 million into GetGrowth Capital and seeks to raise INR 2 billion in total to scale its lending business.

• Over the next 18 months, the firm is planning to disburse INR 5 billion in working capital to over 1,000 small and medium-sized businesses. Among the businesses that are targeted by the firm include B2B software-as-a-service providers, quick-service restaurants, and e-commerce, among others.

PhonePe, one of the leading fintech firms in the Indian market, is also seeking to get an NBFC license from the central bank. The firm, in April 2023, started its digital lending pilot targeting merchants. PhonePe, which holds 50% UPI transactions market share, has a strong user base in India. With the NBFC license, PhonePe can become a dominant player in the consumer-focused lending business vertical over the next five years.

After the central bank announced digital lending guidelines in September 2022, the majority of the NBFCs paused tie-ups with fintech firms. The ban on the first loan default guarantee model resulted in more and more fintech firms exploring a range of other options to extend loans, including acquiring NBFCs and getting a license for themselves. However, in June 2023, the central bank approved the FLDG program and capped the amount at 5% of the total value. 

• The FLDG program assists banks and NBFCs in mitigating potential losses. Furthermore, it also instills confidence among them that the fintech firm understands the credit risk. As part of the FLDG program, fintech firms assist banks and NBFCs recoup the losses, when customers default on their payments.

While fintech firms have welcomed the move from the Reserve Bank of India, some of the banking firms and NBFC players have requested higher guarantees from fintech firms in exchange for their lending partnerships. The 5% cap could, therefore, mean that certain banking institutions and NBFCs might not take the risk and pull out of the segment.

As a result, PayNXT360 expects fintech firms to keep taking the NBFC route going forward, either through acquisitions or getting a license for themselves from the central bank. Regardless of the strategy adopted by fintech firms, the alternative lending segment in India is poised for an accelerated growth trajectory over the next five years. Consequently, PayNXT360 expects more and more firms to enter the alternative lending market in India, thereby also driving innovation and a competitive landscape in the fast-growing sector.