The Reserve Bank of India (RBI) is set to implement new guidelines that are expected to significantly impact fintech companies, particularly those relying on Digital Loan Guarantees (DLGs). The move aims to bring more transparency and responsibility to the provisioning norms around stressed loans. However, this may come at a cost for new-age digital lenders.
Currently, fintech companies leverage DLGs from third parties as a cushion against expected credit losses. For instance, if a company anticipates a credit loss on a portfolio of loans, it can use a DLG—typically about 5%—to offset that risk. This allows them to maintain lower provisioning on their books.
Under previous provisioning practices, suppose a company had a loan book of $1 billion with an expected credit loss of 8%. With a 5% DLG in place, the company was required to provision only for the remaining 3%, resulting in a total provisioning of $30 million. However, the new RBI directive mandates that DLGs must be excluded while calculating provisions for stressed loans. This means the company would now have to provision the entire 8%—i.e., $80 million upfront.
While the amount covered under DLGs can still be recognized as a write-back once realized, the immediate requirement to provision the full expected credit loss upfront will weigh heavily on fintech balance sheets.
This regulatory change is not expected to significantly impact traditional banks, which typically have higher capital reserves and more stable provisioning models. However, for fintechs and NBFCs, this could be a game changer.
Take Paytm for example. A significant portion—nearly 75%—of its revenue comes from merchant loan disbursals, of which about 80% are backed by DLG arrangements. This model has so far helped fintechs like Paytm expand aggressively while keeping provisioning requirements low. With the new norms, Paytm might be forced to either increase its provisioning or build its own distribution and collection networks, which would mean higher capital consumption and potentially lower returns on equity (ROE).
Investment bank Macquarie has already flagged these concerns, downgrading Paytm to an "underperform" rating and setting a target price of ₹730, implying a downside of approximately 13% from current levels.
In summary, while the RBI’s move aims to tighten the financial system and ensure more robust risk management, it could significantly impact the scalability and profitability of fintech players. Companies relying heavily on the DLG model may need to revisit their strategies and prepare for a higher provisioning environment that could reduce loan volumes and pressure overall margins
Disclaimer:
The content of this blog is for informational purposes only and should not be construed as financial or investment advice. Readers are advised to consult with a qualified financial advisor before making any investment decisions. The opinions expressed are based on current publicly available information and are subject to change without notice.
