FinTech lenders face potential customer migration to traditional banks and NBFCs due to an anticipated increase in interest rates. The Reserve Bank of India’s decision to raise weights on unsecured loans is expected to drive up the cost of funds for fintech firms.
Here’s how the RBI move may queer the pitch for FinTechs.
Cost of funds and interest rates
Higher cost of funds may prompt fintechs to consider raising interest rates for retail customers. Financially strong FinTechs may absorb the increased cost, but others might have to adjust rates. The move creates an opportunity for banks to attract premium customers who are sensitive to interest rate movements.
Customer sensitivity
Premium customers, residing in metro cities with better salaries and high credit scores, may shift back to banks and NBFCs. FinTechs currently attract these customers with convenience, but a significant rate hike may alter their borrowing patterns.
Industry impact
Interest rate hikes are not expected to be industry-wide; only firms with high exposure to unsecured loans may opt for it. Premium customers with an average loan ticket size of Rs 3-4 lakh are particularly attractive for FinTechs.
Diversification of product portfolios
Fintech lenders may diversify their product portfolios to mitigate the impact of the RBI’s decision. The move is expected to drive companies to explore products with lower risk weights and expand their customer base.
Debt capital structure
Firms lacking diversity in their debt capital structure are likely to be more affected by the rising cost of funds. The impact underscores the importance of a diversified approach to withstand market fluctuations.
Loan growth moderation
Fintech lenders anticipate a moderation in loan growth due to increased capital requirements set by the central bank. Lending institutions will assess risks more cautiously, focusing on responsible lending to creditworthy individuals.
