The Pattern #36: Credit booms but banks and FinTechs face a challenge

Mayank Jain   /    Head - Marketing and Content    /    2022-11-18

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    Hello everyone, 

    Welcome to the 36th edition of The Pattern - a weekly newsletter where we untangle the web of rumblings in finance, technology, and economy for you. 

    There’s lots of gloom and doom around the world - especially for technology companies and the never ending trickle of layoff news. The times seem especially tough and, hopefully, will get better. But wear your seat belts and hold on to your jobs while the storm passes. 

    Now on to the world of FinTech - there has been a slew of developments that are likely to be observed by both the policymakers and the market participants - not least because an overall slowdown in the economy is currently coinciding with a larger than life boom in credit disbursals. 

    Credit goes boom 

    How big is the boom? Overall credit disbursement has jumped by 15% year-on-year, with retail books showing the most growth. This is further fueled by an incoming spike in the demand for unsecured credit, and most experts say there won’t be a let-up - at least for the next two quarters. 

    This comes at a good time for the banking sector, which seems to be recovering well from the NPA mess and is seeing strong financials across the board. The NPAs are down to 5.9 percent, a seven-year low, and are expected to further reduce to around 4% in the next two years. 

    This means two things. 

    One, there’s a mad rush to meet the rising demand for credit. As a result, banks are financing NBFCs more than ever for ‘on-lending’. This simply means that banks lend NBFCs money that these non-banks use as capital to lend onwards to the end borrowers. The current spike in the bank credit to NBFCs is more than 30% year-on-year - double the overall credit growth. 

    Two, banks are forced to borrow more from the open market to fund these capital requirements. As a result, the bank borrowings are up 2X from March to October this year. This is especially important because usually credit growth is funded by liquidity surplus - the money you deposit in savings accounts of various kinds. But Indian depositors seem to have gone missing

    “There has been a rise in bank borrowings during the year. This situation has risen mainly due to the fact that bank deposits growth has trailed credit growth, thus creating a liquidity issue. Banks are also holding excess SLR (Statutory Liquidity Ratio) paper,” Bank of Baroda’s Chief Economist Madan Sabnavis toldBusiness Standard. 

    If you’d ask me, the credit boom is most required in the agriculture sector. Estimates suggest that most agri-financing is still very inadequate and almost non-existent for lower ticket size use-cases. To address this, we’re bringing together a glittering panel for a webinar on agri-tech focussing on credit product innovation that can address the credit gaps in the agricultural sector. 

    In attendance will be Shyam Singh from DeHaat, Hitesh Joshi from Agrostar, Rajat Deshpande from FinBox and more. You do not want to miss this. Click the link below and reserve your spot! 

    FinTech dents - the good and the bad 

    While banks manage liquidity and try to lure in more depositors to keep the credit party going, it’s always a good time to look at some on-ground data. This chart shared by IndiaGold founder Deepak Abbot on Twitter shows just how FinTech is making a dent in credit origination. 

    While the value of such disbursals is less than 1%, the origination volumes are now 11% - almost a 2X increase since last August. Looking another way, FinTechs now disburse half as many loans as the PSU banking sector. Good times, indeed. 

    However, there’s another concerning piece of news. 

    A recent survey released by LocalCircles shows that 59% of Indians with existing loans said they had received detailed loan offers from other lenders. This is an indication of a data breach at various levels that people’s personal finance information is being used to send out loan offers by competing lenders trying to poach borrowers. 

    This is especially important as FinTechs are still learning to keep pace with the regulatory guidelines from the Reserve Bank of India. At the same time, a new data protection bill seems to be in the works that does away with many provisions of the previous draft and even appears to favor storing data outside the country. 

    Coincidentally, just two days ago, our CEO Rajat Deshpande wrote a piece for Financial Express on why we need a clear and thorough data protection law for FinTechs and the banking sector to thrive in the age of digital. You can read that piece here

    As we await the new data laws, it remains to be seen how the policymakers manage to take data protection away from the zero-sum game it is and create a data-empowerment-driven framework that works not just for the industry but also the citizens. 

    This is all I have for this week. Leaving lots of interesting reading recommendations below. 

    Reading list 

    My colleague Shamolie wrote an insightful piece on why credit booms aren’t always good news. You can read that analysis here

    1. RBI is taking stock of the sustainability of double-digit credit growth

    2. Five metrics that every lender should track to improve their onboarding journey outcomes

    3. SBI, ICICI, IDFC, HDFC in RBI's list for digital currency pilot

    4. E-Rupee has a branding problem 

    5. Introducing FinBox’s multi-lender platform 

    6. FTX Came Dangerously Close to Upending Futures Markets

    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 never miss any of our updates.  Cheers, Mayank

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