ZestMoney’s closure was primarily driven by its non-bank lending partners’ decision to terminate credit lines to the fintech startup.
Two people in the know said partner lenders to ZestMoney like Aditya Birla Finance had conducted multiple diligence meetings over the last six months with the startup’s new leadership, before they decided to pull the plug last week.
Though ZestMoney had raised a small equity round recently, it needed credit lines from partner NBFCs to continue operations.
“The senior leadership at Zest told the tech and product teams to start looking out and they are now trying to go for a firesale of the customer base and the platform,” said a senior fintech industry executive requesting anonymity.
Also read | ZestMoney to shut down by December-end, lay off 150 employees
Larger impact on the industry
Three founders of major consumer lending applications said overall, there is a slowdown in unsecured small-sized loans.
“The message from our lending partners is that they are going to be careful with loans extended in the sub Rs 50,000 category; overall, small ticket size personal loans are not something they are bullish about,” said one of the founders cited above.
Another founder pointed out that going forward, banks and large NBFCs will turn increasingly cautious to work with fintechs holding bad loans. They would instead prefer a fintech that is profitable, has a strong book and has strong underwriting capabilities, he added.
This would be over and above the borrowing rates which are generally expected to go up following the Reserve Bank of India’s mandate to take higher credit guarantees for unsecured loans.
Meanwhile, Paytm on Wednesday said it would scale down the ‘Buy Now, Pay Later’ (BNPL) business: Paytm Postpaid. The company instead intends to focus on bigger ticket size personal loans and merchant loans.
The volume of small ticket size personal loans has gone up by four times over the last few years, Mumbai-based NBFC InCred Finance said in a note earlier in the day. It said bad assets among small ticket sized personal loans deteriorated to 11.4% in March 2023 from 6.6% in March 2021.
Impact on BNPL
While banks are expected to go slow on unsecured personal loans, categories like BNPL, small ticket size and short duration consumer lending are bound to be hit in the first wave.
“BNPL was imagined as a good starting point for a consumer with no credit history; once the borrower performs well the ticket size can be expanded slowly, but that model is being challenged,” said one of the founders cited above.
Also, under scrutiny are small ticket size loans offered at very high interest rates for short durations, popularly known as pay-day loans.
“There will be a lot of knee jerk reaction in the industry too; banks will audit their books and ensure that there is no risk build up in the space and this will cause a slowdown,” said one of the founders. “This will have a direct impact on us since we will have to slow down disbursals.”
Interestingly, after the pandemic and the debt crisis triggered by the financial fraud at IL&FS in 2018, the fintech lending ecosystem was just starting to recover. Some apps reported profits in the last fiscal and were planning to scale up operations this year. Now those plans hang on the balance.
