RBI's risk-weight bombshell could spark consolidation in fintech industry, say experts

Disruptors on tenterhooks! That's the state of affairs in the fintech industry.

The Reserve Bank of India (RBI) has recently directed banks and non-banking financial companies (NBFCs) to increase the risk weights for consumer credit and bank credit by an extra 25 percentage points. This means that banks and NBFCs will need more capital, and as a result, the interest rates for loans to consumers might go up.

This will have a direct impact on NBFCs and more particularly on fintech firms.

Fintech companies, facing a potential funding crunch due to the anticipated decline in bank support, may be forced to seek capital through the public markets or consolidation, particularly those with a higher concentration of unsecured loans.

The fintech companies will now be forced to come to the market to raise money as bank funding drys up. "I will not be surprised if, in the next 2-3 months, there are multiple fintech companies out in the market to raise money. It has to happen,” said Jairam Sridharan, MD, Piramal Capital & Housing Finance Ltd.

Sridharam made this comment at India's debt capital market summit in Mumbai on Friday.

Many fintech NBFCs provide completely unsecured loans. They will require a larger amount of capital. “There will be a spate of fintech NBFCs either selling out or trying to raise capital as a direct consequence of the higher risk weights,” added Sridharan of Piramal Capital.

“We should look at diversifying the liabilities. That’s what the RBI has been saying to NBFCs, especially reducing their dependence on the banking system,” said Rakesh Singh, MD &CEO of Aditya Birla Finance Ltd.

“We are all happy to explore NCDs or public NCDs. This provides an alternative source of finances. This will also help in building a sustainable liability over a period of time,” added Singh.

The outstanding credit of banks to NBFCs increased by a staggering 31 per cent year on year, reaching Rs 12.9 lakh crore in January of this year. A CareEdge report noted, "The growth has remained robust due to the high expansion in the NBFC asset book and additional borrowings shifting to banks because of differentials between market yields, interest rates offered by banks, and reduced borrowings in the overseas market."

“This is  an opportunity for mutual funds to invest in the NBFCs,” said Rajeev Radhakrishnan, chief investment officer (fixed income) at SBI Mutual Fund.

However, the mutual funds'  debt exposure to NBFCs plunged by 11.6 per cent YoY to Rs.1.49 lakh crore. The share of MFs has consistently declined for the last several quarters. The CareEdge report attributed this to a combination of higher interest rates in the bond markets, led by elevated long-term G-Sec rates, and risk aversion in the debt capital markets, restricting funding availability for NBFCs rated lower than the highest categories.

Currently, debt mutual funds are not allowed to invest more than 10 per cent  of their AUM in any scheme in triple-A-rated corporates. In fact, the exposure limits go down for lower-rated corporates.

In the pre-2020 period, mutual funds were increasingly investing in lower-rated corporates or disproportionately higher shares in the corporate sector. In 2022, Sebi corrected this anomaly due to frequent defaults and the Franklin Templeton fiasco.

Also Read: Kick-start your December by strategising your FY24 tax savings