RBI’s Choking of Consumer Credit is Set to Negatively Affect the Indian Fintech Startup Ecosystem

Consumer credit in terms of unsecured personal loans and credit cards was on the rise throughout India. However, with the latest mandates from the RBI, both banks and non-banking financial companies (NBFC) are now going to find it difficult to start handing out these loans.

As per the RBI, this step has been taken to cool down the massive growth in the consumer credit sector. Studies show that consumer credit has been growing at an almost double rate compared to the total credit expansion in the country.

This is largely owed to the growth of small credit and BNPL (buy now pay later) startups, and the curb is primarily on NBFCs, it will ultimately end up affecting these startups.

Why is the RBI Going After Lending Startups?

Paytm, one of the largest NBFCs in India, will definitely be among the startups affected by this decision. Their ability to lend credit or BNPL options will be choked as a result of the RBI mandate, and they will have to tighten their credit standards.

As per analysts from Goldman Sachs, the amount of competition provided by NBFCs is leading to slower growth in regular credit, and the steps taken by RBI are particularly to correct this course.

Corporate enterprises such as SBI, IDFC First, and Bajaj Finance, have been some of the key players in India’s financial credit ecosystem. But now, NBFC borrowings comprise more than 50% of the credit issued across the country. As a result, borrowing based on mutual funds and insurance are on the decline.

The RBI has already made it clear that it will be costing NBFCs more to borrow from banks. So, the startups that depend on the banks to provide unsecured loans are having to shorten their credit lines and pick customers who are on top of the food chain.

The existence of decentralized credit lines through NBFC startups has ultimately resulted in more sales for consumer products, which will once again be affected by this RBI mandate.

A fintech founder recently commented on the move claiming that it will lead to a reduction in growth for such startups, and especially the smaller ones that deal in 4-figure lending amounts will probably have to shut shop.

The increase in risk weightage by the RBI is currently increased by 25%, and they exclude vehicle loans, education loans, and gold loans.