Did RBI setback Paytm's lending dreams?
Godfather move.
Welcome to the 198th edition of the GrowthX Newsletter. Every week I write 2 pieces on startups & business growth. Today’s piece is going to 95,300+ operators & leaders from startups like Google, Stripe, Swiggy, Razorpay, CRED & more
The RBI is a godfather of Indian fintech startups. This week, the godfather decided to increase "risk weight" to 125%. This impacts you, me & a ton of fintech giving out loans left, right & center - here's how 👇🏼
What's a risk weight, really? 🤔
Imagine HDFC giving out a ₹100 rupee loan.
Out of this loan, ₹8 needs to come from HDFC's own capital
Rest ₹92 can come from people (like you & me) who have deposits with HDFC.
Is the risk weight the same for all kinds of stuff?
Nopes. Take government bonds for example, if the government lends out ₹100, they only need to have ₹0.25 shareholder (government's own) capital.
What does 125% risk weight mean?
With 125% risk weight, banks will now have to have ₹10 for every ₹100 lent.
So, why would this affect, say Paytm?
To understand this, you must quickly understand how Paytm gives out loans. See, Paytm is neither a bank nor an NBFC. It has lending partners who give out loans & Paytm makes a 2-5% commission on that loan amount - simple.
But this 125% risk weight is making this tough. You see, Paytm's lending partners will now need a lot more "own capital" to lend out the same amount of loan. This means two things will happen.
First/ NBFCs will lend at a much higher iinterest💰
This might reduce the commission Paytm makes because fewer consumers will take a loan at high interest. High interest drives down demand.
Second/ NBFC will reduce their loan book size 📉
This will happen immediately for those lending partners who don't have a lot of their own shareholder capital. I can imagine what they must be going through right now - reducing their quarterly targets, for sure.
So, what will happen to Paytm’s lending business? 👇🏻
1/ Paytm postpaid will take a hit 🙏🏻
These are loans with 0% interest rates. Now, the higher shareholder capital requirement would mean consumers with lower credit ratings will get smaller credit lines or no credit in some cases.
2/ Cascading impact on personal loans 💰
40% of consumers who use postpaid take a personal loan. It's cascading to a much larger impact on the high-margin loan business for Paytm.
3/ Margin spread might go down 😕
Will have to wait and watch how the consumers react to the higher interest rates by NBFC, who are its lending partners
The solution: Focus on merchant loans 👇🏻
The only way out in the short term to reduce impact is to to move a lot of Paytm loan business to be focused on merchants whose payments Paytm handles. They have much lower default rates and lower risk than a retail customer of Paytm.
No wonder Paytm added 10,000 on-ground sales folks to capture and push this merchant adoption kickoff for 10 Crore target merchants this year. Interesting to see how this pans out in the coming quarters.
That's all for now 🪄
If you’re building a lending business - the credit market is blowing & the godfather will keep coming back & doing what's right for the retail customer, even if it means lower access to credit for some.
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