The recent announcements by the Reserve Bank of India (RBI) regarding fintech lending and pre-sanctioned loans through UPI are likely to hit the buy now pay later (BNPL) players further.
Last year the RBI had clipped the wings of BNPL players by disallowing nonbanks from loading prepaid instruments — digital wallets, or stored-value cards — using credit lines. The only valid options for a buyer are to prefill their wallet with cash, or to debit their bank or credit-card accounts.
The credit on UPI highlights the regulator’s commitment to financial inclusion, with regulated entities driving product innovation and deployment. The move to allow UPI users access to pre-approved loans could be a game-changer for formalizing credit for over two-thirds of the 30 million UPI user base.
According to the National Payments Corporation of India (NPCI), over 99 per cent of UPI users are linked to their bank accounts, and pre-sanctioned loans would function like personal loans, but through UPI. The loans will have a cut-off limit, unlike BNPL products, and it remains to be seen whether banks will allow customers to dip into limits multiple times. Pricing the loans attractively below credit card revolver rates of 36-48 per cent will be crucial when it comes to competition with credit cards.
BNPL sector
The BNPL payment industry in India has recorded strong growth over the last four quarters, supported by increased ecommerce penetration.
Medium to long-term growth story of the BNPL industry in India remains strong. BNPL payment adoption is expected to grow steadily over the forecast period, recording a CAGR of 12.2 per cent during 2023-2028. The BNPL Gross Merchandise Value in the country will increase from $11,628.8 million in 2022 to reach $25,387.2 million by 2028.
The BNPL space has grown significantly amid the growing traction for flexible payment methods among consumers in Tier II and Tier III cities of India.
The challenges
While personal loans have accounted for 12-18 per cent of private banks’ retail portfolios, banks will have to evaluate whether they want to target new-to-bank or new-to-credit customers, which goes against the practice of pre-sanctioned loans based on credit history. Pricing loans based on the customer and not the product may be necessary for new customer segments, which could prove challenging for banks.
Before introducing pre-sanctioned loans, banks will have to determine whether they see this credit product as a new market segment or an add-on to their existing play. The risks of the former could hit asset quality and financials. However, it also presents them with a huge opportunity to expand their credit base.
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