India’s burgeoning neobank sector, an investor favourite, will continue facing challenges in credit business, as they expect consolidation in the space, said top industry executives.
Neobanks like Jupiter, RazorpayX, Niyo, Open are some of the prominent entities among scores of such startups that proliferated over the last two years by forming partnerships with licensed lenders. These players extend an array of digital-only services to consumers and small businesses, in return of commissions.
It is to be noted that neobanks are still loosely defined in India, and the scope of regulations governing them is largely a factor of the nature of partnerships they form with the regulated lenders.
For example – a neobank partnering with a non-banking finance company (NBFC) to extend loans to borrowers would be guided by the Reserve Bank of India’s norms around lending. Similarly, those providing a wider set of solutions, such as account opening and merchant management, will need further approvals to be an eligible third-party service provider.
A digital bank opening accounts on behalf of their partner bank needs the license of an institutional ‘banking correspondent’. Similarly, those managing nodal settlement accounts of merchants must acquire a payment aggregator license.
Funding rush in past year
Despite complicated, and somewhat provisional compliance and regulatory rules that govern these entities, they have, over the last two years, been an investor-favourite in India having attracted between $200-$250 million in funding since 2018, according to data gathered from industry sources and business intelligence platform Tracxn, compiled by ET showed.
However, the Covid-19 pandemic induced liquidity tightness in India’s non-bank lenders and sluggish economic parameters especially for small businesses, have forced some of these startups to postpone the launch of their credit products.
Lending, which is a critical component in their business model – both in terms of operations and revenue – is under stress due to compounding liquidity problems in India’s non-bank sector worsened by the ongoing crisis.
“We have gone into a wait-and-watch mode. The initial plan was to launch credit from day one, but now we expect to introduce our credit offerings after another 2-3 months or likely towards the end of second quarter,” Jitendra Gupta, chief executive of Jupiter, told ET.
He said they want to analyse more consumer data, particularly on defaults, moratorium, and basis a consumer’s profile before lending. Jupiter counts Sequoia Capital, 3one4 Capital, Matrix Partners, along with a number of high-profile angel investors, among its list of backers, and is among the most well-funded startups in the segment.
Just like Jupiter, the likes of Open, have partnered with NBFCs to facilitate their credit programmes. These lenders were already reeling under immense troubles due to defaults by big players like Il&FS and DHFL since late last year.
The trend follows that of neobanks facing stress internationally. UK digital bank Revolut, one of the most richly-valued neobanks globally was reported to have laid off staff last month.
“We expect at least three to six months for normalcy to return simply because collections are low. Clarity on moratorium is also needed to ascertain. Pause during lockdown was because NBFCs wanted to be sure businesses wouldn’t shut down,” Harshil Mathur, CEO of Bengaluru-based Razorpay, told ET.
Razorpay owns and operates RazorpayX, its neobanking unit, which was launched In November 2018, and offers services such as cash flow management, transactions and flexible payouts 24×7 to 7 lakh businesses currently on the platform.
In November last year, RazorpayX introduced facilities like current accounts, corporate credit cards for businesses in the capacity.
New disbursements on hold
“New disbursements have completely come to a standstill. It is not even 10% of pre-Covid-19 levels. That is a big problem and a large portion of the demand for credit, is coming from consumers, who have lost jobs or have undertaken salary cuts. It’s been a double whammy,” Jupiter’s Gupta said.
While the first two months – April and May – of the first quarter of fiscal 2021 are being seen as a complete washout, there are certain green shoots that have emerged over the course of June, even as Asia’s third-largest economy begins opening up gradually and under tight restrictions.
“From a business growth perspective, it was pretty low compared to pre-Covid-19 months. Only June, have we seen a recovery, which is almost equivalent to February… In the next ten months we’ll see recovery on the same lines,” Mathur said.
Traditional banks, according to the founders, have begun increasingly looking to partner with neobanks, as they look to onboard new customers given social distancing norms are in place making consumers cut down visits to physical branches and ATMs.
“We’ve also been parenting with banks, selling our enterprise solution to them, and which has really picked up. The banks have started investing in improving their infrastructures, so that once the market gets back, they can compete with the fin-techs,” Anish Achutan, CEO of Open, said.
“In this environment I expect some smaller neo-banks who are perhaps seed funded or have products in the ropes, to be most severely impacted….There could be consolidations among smaller players, and we could see some bigger players who are well-funded or raised capital before the lockdown sensing opportunities for acquisitions in the market,” Navin Surya, chairman, Fintech Convergence Council, said.