RBI’s Directive Slows Growth in Indian Fintech Sector

The Reserve Bank of India’s (RBI) recent directive to fintech companies to moderate their growth is causing investors to become more cautious. In a meeting with lending-focused fintech firms, the RBI asked those growing at over 30% to limit their expansion to 15-20%, according to industry sources.

“This directive is a double-edged sword for fintech startups,” said Anisha Patnaik, Founder of LexStart Partners. “While robust systems and practices are essential, investors also expect high growth rates in a promising sector like fintech.”

Data from financial consultancy platform The Digital Fifth shows a sharp decline in investments in the fintech segment, dropping to $203 million in the first four months of 2024 from $1.57 billion a year ago. This indicates a more selective approach by investors.

“We are trying to understand what the RBI is aiming for and their perspective on fintech growth,” said Sandeep Patil, partner and head of Asia at QED Investors. “High-quality growth should be prioritised, and until the quality of the loan book is clear, growth should be measured.” QED Investors has invested around $150 million in Indian fintechs, including Jupiter, FPL Technologies, and OneScore.

The fintech industry has faced increased regulatory scrutiny over the past year. The RBI’s recent order for Paytm Payments Bank to shut down most of its operations exemplifies this tough stance. In November, the central bank directed banks and non-banking financial companies (NBFCs) to increase risk weights on unsecured personal loans, affecting co-lending partnerships and slowing fintech loan disbursals.

Amid these challenges, fintech firms are re-evaluating their business models and growth strategies. Many are diversifying their product offerings, particularly in the micro, small, and medium-sized enterprises (MSME) segment and secured loans. “This shift will require redesigning products, technology, and distribution channels,” said Sameer Singh Jaini, CEO of The Digital Fifth. “This transition will increase costs and temporarily impact fintech companies negatively.”

Experts believe that enhanced regulatory oversight will promote sustainable business models, leading to long-term stability in the fintech lending market. “Slower growth from increased regulatory compliance can help fintechs maintain adequate capital buffers, absorb potential loan losses, and ensure financial stability,” said Sagar Agarwal, co-founder and managing partner of Beams Fintech Fund. Agarwal added that these regulatory changes will eventually make the fintech lending market more attractive to investors and stakeholders. Beams Fintech Fund’s portfolio includes Niyo, Credgenics, and InsuranceDekho.