RBI Action May Usher In Fintech Consolidation, Compensation Revamp

The RBI's action on unsecured lending may lead to more layoffs, potential mergers and acquisitions and improved talent density at fintechs, according to industry experts.

The central bank's move was a step towards improving credit and portfolio quality in fintechs in the long run, according to Harshvardhan Lunia, chairman of the Fintech Convergence Council, a fintech industry body.

"This increase in capital requirement will also see large fintechs engage in fundraising endeavours, while some will need to reconsider their loan strategies and diversify their product offerings," said Lunia, who is also the founder and chief executive officer of Lendingkart Technologies Pvt., a large unsecured business loan provider.

On Nov. 16, the RBI announced that unsecured retail loans extended by banks and non-banking financial companies will attract a credit risk weight of 125%, as compared with the previous 100%.

The central bank's action didn't come without warnings. On Oct. 6, RBI Governor Shaktikanta Das noted that certain components of personal loans were "recording very high growth."

"These are being closely monitored by the Reserve Bank for any signs of incipient stress. Banks and NBFCs would be well advised to strengthen their internal surveillance mechanisms, address the build-up of risks, if any, and institute suitable safeguards in their own interests. The need of the hour is robust risk management and stronger underwriting standards," he said.

Newer loans for fintechs will now cost 100–200 basis points more, as they cover the cost of their provisioning, according to Srinath Sridharan, a policy researcher and corporate advisor.

"This puts pressure on fintechs that don’t have their own balance sheet to figure out their niche area. Also, with the Indian domestic debt market being shallow, this skew of quarterly winds of change to various sectors will continue," he said.

"Just because they have tech, fintechs won’t be able to experiment with all consumer segments to lend to. It is advisable for fintechs to focus on consumer cohorts that they see better opportunities in," Sridharan said.

In December, Paytm laid off about 1,000 employees in an attempt to reduce costs. A spokesperson for the company said its "AI-powered automation" will cause "a slight reduction" in its workforce across operations and marketing departments. Fintech startup ZestMoney, too, will be shutting down operations after a sustained glum year for funding, which saw flows drop 62% year-on-year.

Sridharan said that in 2024, it's possible we might hear more financial institutions doing layoffs in the name of AI and "trying to shave costs and build digital presence, or at least claim to."

With more layoffs potentially coming in, the way fintech talent is being compensated might also see a change, as per Arijit Bose, co-founder at HR tech firm Reviewia and a partner at leadership hiring firm Arc Consulting.

"Differentiated skills like strong tech, analytics, AI skills and digital marketing skills, among others, would command more and more premium. In fact, these layoffs are potentially improving talent density in organisations, which should enable them to perform better at least when it comes to controllable metrics," Bose said.

While he doesn't see a large salary correction happening for the current crop, offering extravagant employee incentives and hikes to those looking to switch will now be a thing of the past, he said. "Gone are the days of buying talent with 2x, 3x offers."