In 2019, Paytm started offering a one-month buy-now-pay-later (BNPL) loan product, called Paytm Postpaid. Since then, it has built a cohort of users with up to four-year credit history. Now, it is using this customer base to sell personal loans to users and merchant loans to 7.1 million merchants who accept payments through Paytm’s payment devices.
At the moment, there is no dearth of demand for credit. But after the Reserve Bank of India—India’s banking regulator— imposed strict rules on default guarantees, lending practices in the country have changed.
The regulator banned lenders from sharing credit risk with loan-service providers, who distributed loans. This clarified the roles of regulated and non-regulated entities, giving more clarity to regulated entities such as non-banking financial companies (NBFCs) when entering into partnerships. However, it also ended the First Loss Default Guarantee (FLDG) model that lenders used while partnering with loan distributors.
*What turned the tide in Paytm’s favour during the post-FLDG era was its proposal of collection services in these agreements, said an employee of one of Paytm’s lending partners. They added that fintech made a commitment to attain a certain level of collections on the loans it distributed on behalf of the lending partner. *
If Paytm fails to fulfil this commitment, it forfeits a portion of its fee earned from loan distribution. This reassured Paytm’s lending partners, allowing them to allocate larger sums for disbursement through Paytm’s platform.
*This nifty post-FLDG workaround formed a major part of the story behind the jump in Paytm’s loan distributions. *
Prior to the RBI’s FLDG ban, lending-service providers (LSPs) were able to guarantee that they would compensate the lending partners for any credit loss on the portfolio originated by the LSP. But the regulator wanted the regulated lender to shoulder the risk entirely.
*This came as a blow to the intermediaries. Even though default outcomes don’t really affect distributors, lenders’ disbursals are linked to portfolio performance. *
Without FLDGs, lenders have reduced the fees they pay their LSPs to price in the risk, bringing down intermediaries’ margins, said the co-founder of a mid-sized NBFC.
Now Paytm has found a way to not dilute its margins by adding collection services to the mix.
All of its lending partners now rely on Paytm to both onboard borrowers and also collect from them, said a person close to the fintech. And this has increased its average revenue from each lender by a third, they said.
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