Indian fintech companies that focus on loans to individuals took off during the covid-19 pandemic and continued to boom after lockdowns eased, but their path to profitability remains a work in progress.
Indian fintech companies that focus on loans to individuals took off during the covid-19 pandemic and continued to boom after lockdowns eased, but their path to profitability remains a work in progress.
Total consumption loans—comprising personal loans, consumer durable loans and credit cards—given by the fintech sector in 2022-23 stood at ₹84,000 crore, according to credit bureau TransUnion Cibil. For the same year, overall consumption loans by the financial sector, including banks and non-bank financial companies (NBFCs), was ₹11 trillion.
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Total consumption loans—comprising personal loans, consumer durable loans and credit cards—given by the fintech sector in 2022-23 stood at ₹84,000 crore, according to credit bureau TransUnion Cibil. For the same year, overall consumption loans by the financial sector, including banks and non-bank financial companies (NBFCs), was ₹11 trillion.
Despite its early days and small size, the fintech sector is already crowded. The number of fintech firms giving more than 5,000 loans in a year more than doubled from 24 in 2018-19 to 54 in 2022-23. Over the same period, fintech companies that gave over 100,000 loans a year rose six-fold to 36. Growth in the number of other categories of lenders, which give similar types of loans, was slower.
Fintech lending is heavily skewed towards personal loans and consumer durable loans, which make up about 97% of fintech loan portfolios. For NBFCs and private banks this figure is 41-44%, and for public sector banks about 10%.
Fintech firms also heavily skew towards certain types of lending, such as buy-now-pay-later (BNPL) loans—essentially, zero-interest loans offered on purchases, repaid in instalments. While their loan products are gaining traction, the path to profitability remains bumpy, as articulated in a global context by the Bank for International Settlements, a financial institution owned by central banks of countries.
Loan rangers
The original proposition of fintechs was to use technology to push traditional financial products to consumers. Their key offering in India was the BNPL loan. Consumers could buy goods such as smartphones and other consumer durables from e-commerce sites with a click, and pay for them in multiple instalments, ostensibly at no additional cost. Merchants love BNPL because it brings in customers who may not be able to pay for a high-value purchase at one go.
Such technology enabled fintech firms to process almost 70% of consumer durable loans and 57% of personal loans within a day in 2022-23, far ahead of other types of lenders. But this came at a price. In its latest financial stability report, released on 28 December, India’s central bank pointed to “some signs of risk build up in consumer credit”, citing downgrades exceeding upgrades, declining standards of underwriting, and individuals taking multiple loans.
Sell now, profit later
As the global fintech industry is leaning, technology alone does not confer a long-term competitive advantage. The recent BIS report on the global BNPL market, based on a survey of some of the world’s largest fintech firms such as Affirm, Afterpay and Klarna, said: “Major BNPL platforms… face profitability challenges. High operating costs for marketing, administrative and technology expenses, among others, have prevented these platforms from breaking even since 2018. In addition, the return on assets for BNPL platforms was notably low in 2021-22 due to rising credit losses, and intensified competition from neo-banks and big techs entering the BNPL market.”
Operating costs for large global fintech firms was particularly high, and pushed these institutions into the red. The median return on assets of the group of fintech companies analysed by the BIS consistently fell between 2018 and 2022 from -5.9% to -15.6%.
Risky business
For Indian fintech firms, bad loans in consumer loans and personal loans are higher than those of established lenders.
Fintechs globally tend to lend to much younger people with weaker finances. The BIS report said: “The majority of BNPL app users across countries are under the age of 35. Younger and tech-savvy individuals, including ‘Millennials’ and ‘Generation Z’, often do not possess credit cards and are generally less financially literate than older generations. Consistent with this, a survey of US BNPL services reveals that they are more often used by individuals with low income levels and less educational attainment.”
In India, 2021-22 data from VCCEdge for 119 fintech firms into digital lending shows that 46 were making losses at the operational level and 62 at the net level. Going forward, the key challenge for fintech companies will be to pivot away from riskier types of lending and achieve more balanced portfolios.
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