Hello everyone,  

Welcome to the 99th edition of The Pattern. We’re just one edition away from 100 consecutive weeks of bringing you the latest from the world of economy, finance and technology. Let’s get started.  

FinTech needs a peacekeeping mission  

The pandemonium in the world of FinTech continues unabated. On the one hand, we have a large consumer FinTech trying to keep the lights on after a disciplinary action by the regulator. On the other hand, we see struggle across very large businesses that are built on the core thesis of digital origination and the increased credit appetite among Indian borrowers. These businesses are now in the middle of a tough pivot – to go fight in the same crowded arena they wanted to avoid in the first place.  

These aren’t two ends of the spectrum – this is the lived reality in the world of FinTech today. One could argue that this commotion and chaos is a characteristic feature of all anarchist situations that ultimately must give way to peace and order. But, the troubling part here is the sheer bloodshed that’s likely to come if things don’t sort themselves out.  

After all, we’re looking at the world’s third-largest FinTech industry struggling to find a stable footing. Unsecured lending giants are pulling back on personal loans because the regulator has put artificial obstacles to limit over-leveraging. Those running neobanks or payment banks are yet to find a business model that doesn’t burn away a year’s lunch money on acquiring fickle customers who are mostly just deal-hunting.  

Add to this the regulator’s effort to get FinTechs to work and comply like banks, and we’ve found ourselves in quite a soup.  

And it’s not just the FinTechs that are struggling. The banking sector is set to experience some pain too. Just last week, we wrote about how there’s a deposit shortage at banks which might lead to a curtailment of credit deployment to maintain deposit-to-credit ratios.  

Now, it’s being echoed by research agencies too. India Ratings in a recent report said that deposit growth is likely to further moderate from 13.8% currently to 12%-13% in FY25. The agency further said that the credit growth will then further reduce in FY25 on the back of a reduced deposit base. When will the cycle turn? We don’t know yet.  

“The RBI’s worry on the unsecured loan portfolio stems from the fact that, generally as the interest rates start rising, the unsecured portfolio becomes vulnerable to default and growth rate starts tapering down. However, we have seen that in last 15 months, in spite of the repo rate going up, the growth of unsecured business have continued,” said Virat Diwanji, Group President and Head – Consumer Banking, Kotak Mahindra Bank.  

If a mammoth like Kotak is forced to re-evaluate its lending strategy and pay closer attention to its books, the pain in the FinTech world can safely be assumed to be higher by orders of magnitude.  

What’s the way out?  

Turns out, the government wants to get in on the action. Specifically, the Finance Ministry. In recent events, the Finance Minister Nirmala Sitharaman has voiced the government’s support for startups and emphasized that it’ll help startups broker cordial relationships with the regulators.  

“The government is very much with these startups. We want to be sure that they will be given assistance because they intend to carry on with innovation. The compliances will have to be simplified and will have to be made user friendly,” Sitharaman said . 

The minister has also instructed the regulators – RBI and SEBI, presumably – to meet with FinTechs every month and address their concerns. In the meeting, the FM reiterated that KYC processes must be simplified and compliance to regulations must be ensured by the regulators.  

This is good news. It should give FinTechs a moment of relief that the government isn’t completely antagonistic towards them. However, public pacifism must be backed up with action.  

And there’ll be more work to find order in the sector than most anticipated. This is so because the natural course of innovation is to find unorthodox solutions to problem statements, which collides with the regulatory expectation of complete devotion to the letter of the law.  

If indeed the intent is to simplify lives for FinTechs while maintaining legal compliance, the task for the government is cut out. It's to find an enabling ‘middle path’ to FinTech regulation that keeps innovation alive while ensuring consumer protection and stability in the larger financial market.  

Is this a herculean task? Yes. Can it be done? Yes.  

The government must be complimented for at least taking up the mantle but one must remember that this isn’t a regulator vs industry battle – it's more a negotiation of boundaries and must be approached with care and caution.  

Splitting the difference isn’t such a bad idea, after all.  

This is all from me for this week. I will see you next week. As always, leaving some interesting data and reading recommendations below.  

Between the digits  

22.5 lakh crore – The government says it has disbursed more than 22 lakh crore in loans through the Mudra scheme to MSMEs. However, the MSME credit gap persists and worryingly, might be getting worse .    

8.4%? - The latest figures peg India’s GDP growth in Q3FY24 at a dazzling 8.4% against the expectation of 6.6%. Economists are now debating whether it’s too good to be true ? 

Reading list  

1. Experts suggest regulatory reassessment to boost fintech sector and ease compliance burden  

2. Growth in bank credit to industry decelerates to 7.8% in January: RBI  

3. RBI’s assault on unsecured lending sends fintechs scrambling  

4. Kotak Mahindra Bank aims to grow gold loan book faster than the industry  

5. Why are banks suddenly opening new branches in the digital era?  

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