Hello everyone, 

Welcome to the 57th edition of The Pattern, a weekly where we dissect and analyse the latest rumblings in the world of finance and technology. Let’s get started. 

How long before FinTechs run out of ‘jugaad’? 

It’s been a tough week. I say tough because the hyperactivity and the din of the media noise from India’s digital banking and FinTech sectors can make one dizzy. It’ll be hard to exaggerate just how frenetic the activity has been. 

On one hand, there is a beeline for banking partnerships from consumer FinTechs which saw their business all but eliminated with successive regulatory notifications. On the other, there’s an equally long queue for licences - be it through the stables of RBI or through a buy-in from old, defunct or barely alive NBFCs. 

Not unlike the chaos at the annual Zara sale. Except, the damage here is much larger. 

For some companies, it’s a matter of survival. Consider ZestMoney or Slice - different kinds of companies but both pioneers of India’s BNPL story and both struggling to survive. Even with its NBFC licence and multiple partnerships, ZestMoney found itself looking for a white knight acquisition - the deal with PhonePe ultimately fell through. And now, ZestMoney is reportedly pivoting to becoming a technology company by sharing its proprietary stack to other FinTech hopefuls.

Slice, meanwhile, all but lost the game when RBI shut down side loading of PPI lines with credit. The company is now trying to build two things - one, a UPI experience to bring users in through cashbacks. And two, a personal loan product that’s expected to generate revenues. 

This is ‘jugaad’ at its best. Companies across the board are pivoting faster than one could say the word and trying their best to retrofit their organisations into whatever’s the flavour of the season while juggling half-a-dozen regulatory bouncers. 

Companies are enlisting consultants, law firms and what have you to get their hands on a licence. 

“If you see the number of players applying for a licence or buying one, that number is huge. Every week, I get at least three queries for an NBFC buyout…I received at least 30 applications and I have rejected 25 of them. These startups lack net-worth or banking background; neither can they get any banker on their board," a FinTech consultant told Mint.

On the other hand, neobank Jupiter got itself an NBFC licence and it’s preparing to enter the digital credit fray. The neobank has learned. Its first foray into credit was Bullet - a credit product on UPI that got traction and suddenly disappeared, much like many other similar products that tried to utilise UPI to offer credit. 

Things have changed now and UPI can now be linked with either a RuPay credit card or a pre-approved credit line from a bank. But Jupiter’s NBFC licence will help it to do way more than that. 

Jupiter now stands among 100s of digital credit aspirants across NBFCs trying to be digital and FinTechs vying to be NBFCs - trying to make it in a world ruled by Bajaj Finserv, ICICIs and HDFCs - all licensed and entrenched players at the top of their game. Exciting times. 

Here’s what we have learned: 

1. FinTechs can no longer be lead-generation engines for banks and NBFCs - not profitably 

2. Trying to launch a product without express regulatory approval is futile 

3. Just doing digital lending is no guarantee for success or survival - especially in markets as crowded as this 

4. NBFC/banking licence is necessary but not a sufficient condition for building a strong FinTech company 

5. The pecking order of Indian financial services isn’t going to change any time soon 

Growth spurts

The other curious incident this week that jumped out to me was RBI telling AU Small Finance Bank to grow ‘slowly’. At least according to unnamed sources that spoke to BQPrime. The SFB management was cautioned by the banking regulator to  temper its loan book growth  since it didn’t match the rest of the industry. 

Apparently, the bank’s management was also issued a reminder-reprimand when its quarterly results continued to show explosive growth in its loan book. 

“After the growth numbers did not match the central bank's advisory, a senior RBI official called the bank’s managing director and chief executive officer in August and reiterated his displeasure that guidance had not been heeded, the second person quoted above said. 

Post-August, the central bank also communicated directly with key members of the board of directors of the AU Small Finance Bank, not just on growth but also on the high attrition levels at the branch level, which coincided with high targets being set for front-facing staff,” the publication reported. 

However, the bank seems to be on a similar trajectory for the upcoming year too. The bank is  targeting  a loan book growth rate of 27%-28% for this year - the rest of the industry’s loan books grew 15% or so on average. 

It’s an interesting nugget that tells you a lot about the way RBI looks at the financial system and the steps it would take to ensure no funny business happens under its watch. Short term pain for long term stability, one thinks. 

Here, RBI Governor Shaktikanta Das, in a recent address on financial stability - 

“Many a times, vulnerabilities arise from inappropriate business models adopted by banks and other financial entities. Over-aggressive growth strategies or mindless pursuit of bottom lines, for instance, are often a precursor to future problems. While we do not interfere with business decision making, Regulated Entities must demonstrate adequacy of internal controls and loss absorption capacity to match the risks that their business models may generate.”

I’d like to encourage you to pay attention to what's said and all that’s left unsaid in these exchanges between the regulators and the ecosystem - it’s several economists’ worth of foretelling on what’s to come. 

Closing notes from a recent piece by former RBI Deputy Governor NS Vishwanathan:

“These prescriptions are invasive, but made with the humility of doctors who know that post-mortems have a certainty that prescriptions don’t and the confidence that we don’t have to be Western to be modern.” 

Fin. 

Between the digits

 44% -  Year-on-year growth in outstanding advances at AU SFB between July-August 22. This was followed by 43% in the previous quarter and 33% in the quarter before that. 

3500 apps -  Google took action against  3,500 lending apps  in the country in the last year, according to a report. Expect this number to rise as the screws tighten. 

27% -  India has just 27% financial literacy, compared to 33% average in the rest of the world. 

This is all from me this week. As always, some reading recommendations follow. 

Reading list 

1. Indian SaaS in the middle of a great reset in funding winter

2. Fintechs and M&As — why they don’t make the cut

3. RBI Looking At Indian Banks' Business Models "More Closely", Says Shaktikanta Das

4. Exclusive e-book: A digital lender’s guide to KYC

5. MyShubhLife partners with FinBox to disburse loans through Account Aggregator to 10 lakh NTC users