Unsecured loans crackdown rattles Paytm and fintech in India

India’s renewed focus on curbing unsecured loans has hit fintech providers such as Paytm. The Reserve Bank of India’s (RBI) crackdown on unsecured loans is aimed at addressing concerns over a potential credit bubble in the consumer sector. The proposed reforms will cause the reduction of the loan limit from INR 2.5 lacs ($3,300) to INR 1 lac ($1,300), which could potentially hit start-up lending platforms significantly.

  • The intervention by RBI is driven by the surge in delinquencies, especially in micro-loans, which are largely taken out by low-income borrowers with weak credit profiles.
  • Ritesh Bhatia, a Mumbai-based independent cybersecurity consultant, has pointed out the perils of such loans. Despite their small size, collecting on these loans can be expensive. As the total value of digital lending is expected to surge to $100 billion by 2024, this could put potential strain on the economy if not addressed properly.
  • The new loan cap could impede the growth of startups that mainly offer unsecured loans with a ceiling of up to INR 2.5 lacs, arguably restricting the accessibility of loans to thin file or new to credit consumers.
  • Companies like Paytm could potentially face a huge blow due to these proposed reforms. Paytm Postpaid, a loan product by Paytm, offers an interest-free short-term personal loan ranging from $30 to $325, which qualifies as an unsecured loan. Any reduction in the loan ceiling could drastically affect its operations.

The policy changes appear to be an attempt by the RBI to restrain an industry that has seen quick growth over the past few years. However, it remains a concern how the move might stifle innovation and curtail financial inclusivity from the standpoint of fintech startups in the country.