Proposed Digital Lending Standards Could Boost BNPL Lending Penetration

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By Shashank Didmishe

Fintech players expect some disruption to be caused by the standards proposed by the Reserve Bank of India (RBI) on the Buy Now Pay Later (BNPL) ecosystem. However, by providing transparency to the largely unregulated sector, fintech players also expect standards to provide much-needed clarity, to enable stakeholders to innovate and penetrate.

Banks, non-bank financial companies (NBFCs), and fintech companies are developing BNPL products for those who have no credit history or access to credit cards. BNPL products are made available to self-employed entrepreneurs such as kiosk owners and street vendors, Ankur Handa, co-founder and product manager of financial technology solutions platform Lentra. However, these products are at a very nascent stage and will take time to fully roll out.

About 35% of BNPL borrowers already have the option of an alternative credit facility, indicating that the BNPL ecosystem has not yet succeeded in fostering credit inclusion sooner than expected. said analysts at Kotak Institutional Equities. Since the BNPL space is still in its infancy, lenders are trying to limit the risk involved, they added.

The RBI, in the draft standards released last year, had noted that the amount of loans disbursed under the BNPL scheme is less than 1% of the total amount disbursed by regular commercial banks. However, the disbursement volume is higher, indicating a small ticket Cut. According At ICICI Securities, the Indian BNPL market reached $3.5 billion in disbursements in FY21 and is on track to grow to $45-50 billion by FY26, thanks to user growth. The BNPL system is popular in e-commerce, food technology, and other online consumer categories.

However, with the increasing popularity of the BNPL payment option, problems such as loan defaults have arisen. The default rate in the BNPL segment is higher. Additionally, BNPL consumers also tend to have higher delinquencies on other credit products, according to the Kotak Institutional Equities report citing data from TransUnion Cibil.

Typically, the role of fintechs is to provide a technological platform to banks allowing them to deploy BNPL solutions. But some fintechs hedge the default risk of transactions through the first-loss default guarantee (FLDG) scheme. Thus, in the event of a default, the banks do not have to declare the NPA. The RBI has apprehensions with this type of arrangement, said Saurabh Puri, commercial director of credit cards and loan products at fintech solutions provider Zaggle.

Typically, under the BNPL platform, consumers receive a line of credit at the time of purchase. The lender does not charge interest for approximately 15-30 days from the date of purchase. However, if the consumer fails to make payments during the interest-free period, the lender charges a penalty and the remaining amount is converted into EMI. Since no interest is charged during the initial term, lenders do not classify these transactions as credit.

NBFCs and digital lending platforms take steps to classify the transaction as a loan when repayment is not made within the interest-free period. However, the default rate is high in the BNPL space. To this end, the RBI Digital Lending Task Force had recommended some changes to the structure of the BNPL. The group had suggested treating BNPL transactions as loans. He had also suggested that the RBI classify BNPL as a loan, placing it under regulatory cover.

In a recent speech, RBI Governor Shaktikanta Das said the central bank would continue to strike a balance between technological innovations and financial sector stability. “The RBI will soon issue appropriate guidelines and measures to make the digital lending ecosystem safe and healthy while enhancing customer protection and encouraging innovation,” Das had said.

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