Hello everyone, 

Welcome to the 89th edition of The Pattern, a weekly newsletter where we unpack and dissect the latest from the world of finance, technology, and the economy. Let’s get started. 

Big woes for small ticket loans

In the Indian financial system, fighting the city hall is useless. With the RBI’s recent diktat, small-ticket personal loans are downbeat after a stratospheric rise in recent years. The effect might not be permanent but the regulator has partially succeeded in its vision - of reining in unchecked growth in unsecured credit to reduce overall leverage and overheating in the economy.

The central bank tried a bunch of tricks to achieve this - nudges in speeches and words of caution in statements. When nothing else worked, it told lenders to set aside more capital to cover personal and NBFC credit by announcing higher risk weights. 

The announcement was expected to have minimal long-term impact on the sector, but it’s not the letter but rather the spirit of the order that the financial services industry has embraced. 

"There is a clear signal from the RBI to pull back, so we will," Reuters quoted a top banker saying at a private sector bank that lends to about a dozen fintechs. "We have signalled to our fintech partners that we don't want to be present in the less-than-50,000-rupees loan category."

This gets validated even further when one looks at Paytm’s public statement this week, where the fintech said that it’s curtailing its small ticket postpaid and BNPL offerings to avoid asset quality issues and also moving away from specific borrower cohorts even as it monitors risk and asset quality metrics. 

This is big. Paytm’s turnaround has come mainly from its rocketship takeoff of credit products across postpaid, term loans, and other products on its platform. The company’s current monthly run rate for just postpaid products is around Rs 3,000 crore, and it hopes to cut this in half. The total disbursement is expected to moderate from Rs 6,000 crore to Rs 4,500 crore per month. 

As Paytm focuses its strategy towards higher ticket-size credit products, it’s expected that the rest of the industry will follow suit if they aren’t already reorienting their businesses. Most fintechs have tie-ups with banks and NBFCs to fund these small-ticket products and it seems like the top-down tightening might moderate the growth in this segment a bit in the coming quarters. Macquarie estimates that the overall loan growth will reduce to 12%-14% from 15% currently. 

Balance in the fintech universe might finally be restored. 

The all-seeing watchdog 

It’s not just personal credit disbursement where the RBI makes its voice heard. Reports suggest that lenders are also relooking at their underwriting algorithms in the light of the regulator sounding caution about the robustness of such algorithms. 

In a working group report submitted to the RBI, the central bank in principle accepted the following recommendation:

“REs to ensure that the algorithm used for underwriting is based on extensive, accurate and diverse data to rule out any prejudices. Further, the algorithm should be auditable to point out minimum underwriting standards and potential discrimination factors used in determining credit availability and pricing.” 

Additionally, the recommendations added that digital lenders should adopt “ethical AI” which protects customer interest and promotes transparency, inclusion, responsibility, and privacy. 

“It is also important to be careful, apply human judgement at some point, and not blindly follow the algorithm. When someone says to be careful, we usually go back and evaluate our model again. This means that we put the data of deals that have gone through and those that haven’t and evaluate the model to see if it needs more tightening as the variables are far too many,”  said Virat Diwanji, group president and head of consumer banking at Kotak Mahindra Bank.

It’s not just this bank though; most lenders seem to be on the move to recalibrate their models and audit their efficiency before the regulator comes knocking. 

In other news , the RBI is setting up a cloud service for financial institutions’ data, a repository to collect FinTech players’ details, releasing guidelines for web-aggregators of loan products and draft guidelines on connected lending. Hold my rule book. 

This is all for this week. As always, leaving some reading recommendations and interesting data points for you. 

Between the digits 

88% - In FY23, short-duration loans with less than a six-month repayment period touched 88% of total disbursals from FinTechs - up from 63% in the previous year. 

7% - The RBI revised the expected GDP growth for the current fiscal from 6.5% to 7% in the latest monetary policy review while keeping the key interest rates unchanged. 

12.5% - A VISA report on the payment trends during the recent cricket World Cup suggests that cross-border contactless payments rose by 12.5% during the tournament as compared to July when 36% of the cross-border payments in India were contactless. 

Reading list

1. Brilliant long read: Catching The NBFC Wave

2. View: The murky uses of India’s private credit funds

3. Connected lending: Das & Co gets serious about a bank system that Raghuram Rajan had warned

4. How BankConnect enables fast and thorough user verification for online trading platforms

5. Deceptive tactics and dark patterns: A crackdown incoming?

Don’t miss: Exclusive Panel On AA 

I’d like to share that we are hosting a webinar where a panel of experts will discuss the future of the AA framework, from the perspective of Technology Service Providers and Financial Information Users. 

Do sign up !

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates.  

Cheers,

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.