More High Quality Borrowers On BNPL Cos Radar

BNPL (Buy Now Pay Later) companies will be tailoring their products and services more towards borrowers who have a good credit history owing to RBI’s recent regulations on the FLDG (First Loss Default Guarantee) model.

The central bank, as per the regulations had mandated banks and NBFCs that fintechs can bear only 5% risk of the entire amount in the loan portfolio under the FLDG model, if in case of a default by the borrower. This has forced BNPLs to tighten their underwriting standards.

Prior to this mandate from the central bank, fintechs were carrying 100% risk of the entire loan amount in the portfolio, under the FLDG model. This facilitated banks and other regulated entities to take more risk and offer loans to more “new to credit customers” and to those who do not have a credit history. However, with the 5% cap on the FLDG arrangement lenders will reduce their risk taking appetite significantly and may prefer to give loans to high quality borrowers and borrowers with a good credit history. This means banks and NBFCs may not approve loans of new to credit customers owing to higher risks.

Nikunj Agarwal, Head, Debt and Lending Alliances, Propelld (Education Financing Fintech) say that “the 5% cap on FLDG arrangements will instigate a more rigorous credit evaluation process. This, in turn, results in a reduction in the approval of loans with higher inherent risks”.

He adds that this approach simultaneously compels BNPL finTechs to focus more on a streamlined approach aimed at targeting higher-quality customers.

An FLDG is a lending arrangement between a bank or NBFC and a fintech, where the latter compensates the former to a certain extent of the loan amount in the portfolio in case a borrower defaults.

The 5% cap on FLDG means lenders too will also reduce the ticket sizes of personal loans.

Ramprashanth Ganesan, Chief Strategy Officer, IppoPay says that “increasingly BNPL Loan Ticket Sizes will come down and Short Term Personal Loans will get contextualized and interesting lending models such as lines of credit for small customers also will evolve.”

A good example for this could be RBI’s decision to allow banks to add pre-sanctioned credit lines to customer’s UPI wallets with their consent.

“With India becoming an extremely data-first country, lenders are increasingly able to develop nifty methods to appropriately price risk for several borrowers who would traditionally have been considered “Thin-File customers” by conventional lenders”, Ganesan adds.

In the last couple of years, RBI has become extremely active in monitoring lenders. Ganesan says “Hence regulated lenders will not resort to non-prudent lending even if it comes bearing high yields and is backed by FLDG”.