India Ratings (Ind-Ra) has cautioned fintech non-banking financial companies (NBFCs) to reevaluate their business models and moderate loan disbursements due to tightening funding conditions and regulatory concerns regarding aggressive growth strategies. The ratings agency highlighted the need for fintech NBFCs to exercise caution in expanding their unsecured consumer lending portfolios in FY25, as increasing funding costs and asset quality pressures loom large.
In a statement released on Wednesday, Ind-Ra emphasized that fintech NBFCs should focus on tightening lending parameters, revising risk management frameworks, and adjusting provision coverage levels in the current financial year. These measures, while necessary, may extend the time it takes for some fintech NBFCs to achieve operational breakeven, as internal accruals are expected to lag behind the growth of assets under management (AUM) in the near term.
With the average loan tenure being less than two years in most cases, a slowdown in incremental disbursements is likely to directly affect reported asset quality ratios, further stressing the need for cautious growth, Ind-Ra warned.
In FY23 and the early part of FY24, many large NBFCs partnered with fintech players to offer unsecured loans to a new customer base. While this segment provided better yields and improved portfolio diversification, these NBFCs have been cautious about limiting the proportion of unsecured loans in their overall portfolio due to the inherent risks.
Ind-Ra also noted that fintech NBFCs with 100% exposure to unsecured lending may need to become more selective when onboarding customers and fine-tune their business models accordingly. The credit cost behavior in this unsecured space differs significantly from secured loan portfolios, making risk management even more critical.
As fintech NBFCs navigate these challenges, adapting to the evolving regulatory and funding landscape will be key to maintaining sustainable growth and profitability in the medium term.
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