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The acid test for India's "fin-tech"

A banker is a fellow who lends you his umbrella when it's shining but wants it back when it begins to rain. The adage seems true for a host of Indian fin-tech lenders who have stopped lending amidst a surge in demand in the aftermath of COVID.

Fin-Tech had become quite the buzz in India with everyone and their cousin looking to lend to the large untapped retail market in India. The ethics of glorified payday firms lending at 30% to folks with limited financial literacy aside, in today's post, we look at how the current crisis will be an acid test for India's booming fintech space.

The gap that exists

The traditional banks are generally quite conservative to whom they lend (and rightfully so). It helps if you are salaried. If you're running a profitable business that works too. But what if you're a student looking for some money for a weekend trip, or running into money troubles towards the end of the month on an entry-level job. Traditionally there weren't a lot of places you could go to barring your friends and family. The regular sources of financing either involved paperwork or simply wouldn't lend to you. What technology allowed was giving you a host of data points that you could use to form an opinion on the person's risk profile other than the traditional credit metrics. When the fintech move started, the hope was more such firms would come in increasing accessibility to credit at affordable rates.

While there are good companies out there, what we got, for the most part, was glorified pay-day loan companies. Not only do these firms lend to customers at rates as high as 30% a year, some of these firms actually quote these rates as being "low" on their websites.

Regulation, growth, and risk

While regular banks too blow up from time to time, for the most part, these are controlled well under the watchful eye of the central bank. What the regulatory oversight does is provide a certain modicum of risk analysis and application while lending to customers, as banks are forced to maintain certain critical capital ratios. The primary intent here is to safeguard the capital that retail investors have saved via fixed deposits and other instruments in these banks.

FinTech players currently have extremely little regulatory oversight. Flush with cheap international capital and eyes set on a large addressable market, these firms have their eyes focussed primarily on growth. Which is great when the economy is doing well, but can backfire painfully when things go even slightly downhill.

Where do we go from here

Most players seem to have hit the brakes, for now, stopping lending to new folks, and trying to accelerate repayment to folks they have already lent to. The consensus seems to be to survive to fight another day. Things would be easier said than done though.

With an unsecured unsalaried user base who would be facing a cash crunch themselves, paying back a "small app" on the internet who lent them 10K wouldn't be a top priority for many. The limited financial literacy which helped these firms lend to these people at the rates they did will now come back to bite them as folks with relatively little care for their credit score would prefer defaulting than paying back the principal let alone the huge interest that would start to build up. Funding taps from the traditional VCs will also run dry as a sector that was once the darling now becomes the problem child.

The hope is that the firms that come out alive from the crisis will be run by a better management team, have stronger risk management practices in place, and would work towards a more ethical and sustained growth of India's retail credit space.

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About the Author: The post is written by Ganesh Nagarsekar. Ganesh is a graduate from IIM Calcutta and has worked with J.P. Morgan and Goldman Sachs, before founding GSN Invest.


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