The Indian buy-now-pay-later (BNPL) fintech sector, once hailed as a transformative force in consumer financing, is now grappling with a series of challenges that threaten the growth and stability of players in the industry. One of the sector’s leading players, ZestMoney, recently faced a major setback when its planned merger with Walmart-backed fintech firm PhonePe fell through. FLDG cap
One significant factor is the regulatory intervention by the Reserve Bank of India (RBI), which has introduced stricter guidelines to govern the sector’s operations. These guidelines, introduced in December 2022, classify BNPLs as Lending Service Providers (LSPs) and outline regulations for their collaboration with regulated banks and NBFCs to resell packaged loans. A subsequent set of guidelines issued in June further zeroed in on lending arrangements between digital lenders, including BNPLs, and NBFCs. Of particular note is the focus on first-loss default guarantees (FLDGs) that digital lenders provide to cover potential non-performing assets (NPAs).
In the past, BNPLs had offered generous FLDGs to lending partners, often ranging from 20% to 100% of the loan amount, as a safeguard against losses due to bad loans. However, the recent RBI guidelines have imposed a cap of 5% on these guarantees relative to the overall loan portfolio. While these guidelines were generally welcomed within the fintech community, concerns have been raised about their implications for BNPLs that cater to higher-risk consumers with limited or no credit history.
The capped FLDGs present a significant challenge for BNPLs that operate in riskier consumer segments. The regulatory shift means that the onus of managing risks is now transferred to the NBFC or bank that provides capital to the BNPL. This change has the potential to drive up costs, reduce profitability, and even pose challenges for BNPL startups in securing future capital infusion. As a result, some players within the industry may find it increasingly difficult to sustain their operations under the new regulatory framework.
Marketing expenses
Moreover, BNPLs have historically allocated a substantial portion of their capital towards marketing expenses, which have experienced exponential growth in recent years. This trend, coupled with the 5% cap on FLDGs, is placing additional strain on the financial health of BNPLs. For instance, ZestMoney’s marketing expenses ballooned from Rs 3.55 crore in FY18 to Rs 97.82 crore in FY22, constituting a staggering two-thirds of its total revenue. Despite their aggressive marketing efforts, none of the top-funded BNPL players have managed to achieve profitability.
Consolidation nigh
Experts suggest that in the wake of the new guidelines and the increased scrutiny, the BNPL industry may witness consolidation. This consolidation is likely to be driven by a renewed focus on the quality of loan books and a potential weeding out of weaker players that struggle to adapt to the evolving regulatory landscape and investor priorities.
While the BNPL model has thrived on the narrative of India’s burgeoning consumption story, the current challenges stemming from stricter regulations, mounting marketing costs, and evolving investor preferences are compelling players in the sector to recalibrate their strategies. The fate of the BNPL industry is likely to be determined by the ability of startups to navigate these regulatory hurdles and pivot their approaches to ensure sustainable growth in a landscape that has grown more complex and competitive.
