Proposed digital lending norms may aid penetration in BNPL lending

By Shashank Didmishe Fintech players are expecting some disruptions to be caused by the norms proposed by the Reserve Bank of India (RBI) on buy now pay later (BNPL) ecosystem. However, by providing transparency to the largely unregulated sector, fintech players also expect the norms to provide much-needed clarity, to enable stakeholders to bring in innovation and penetration. Banks, non-banking finance companies (NBFC) and fintech companies are developing BNPL products aimed at those who do not have a credit history or access to credit cards.

The BNPL products are being made available to unsalaried entrepreneurs such as kiosk owners and street vendors, Ankur Handa, co-founder and chief product officer of financial technology solutions platform Lentra. Although, such products are at a very nascent stage and will take time to be rolled out in a full-fledged manner.   Around 35% of BNPL borrowers already have the option of alternative credit facility, which indicates that the BNPL ecosystem has not yet managed to drive credit inclusion than anticipated earlier, analysts at Kotak Institutional Equities said.

Given that the BNPL space is still in early stages, the lenders are trying to limit the risk involved, they added. The RBI, in the draft norms issued last year, had noted that the amount of loans disbursed under the BNPL system is less than 1% of the total amount disbursed by the scheduled commercial banks. However, the volume of disbursal is higher, indicating small ticket size.

 According to ICICI Securities, India’s BNPL market has grown to $3. 5billion in disbursals in FY21 and is on track to grow to $45-50bn by FY26 driven by user growth. The BNPL system is popular in the e-commerce, foodtech and other online consumption categories.

However, with the increasing popularity of the BNPL payments option, concerns such as default in repayments have arisen. Non repayment rate in the BNPL segment is higher. Additionally, the BNPL consumers tend to show higher delinquencies on other credit products too, Kotak Institutional Equities report said citing TransUnion Cibil data.

Typically, the role of fintechs is to provide a technology platform for the banks enabling them to deploy BNPL solutions. But some fintechs are covering the risk of default for the transactions through the first loss default guarantee arrangement (FLDG).   So when there is a default the banks do not have to report NPA.

The RBI has apprehensions with this kind of arrangement, said Saurabh Puri, chief business officer of credit cards and lending products at fintech solutions provider Zaggle.        Typically, under the BNPL platform, consumers are given a credit line at the time of purchase. The lender does not charge interest for around 15-30 days from the time of purchase.

However, if the consumer fails to make payments in the interest free period, the lender charges a penalty and the remaining amount is converted into EMI. Since, there is no interest charged in the initial period, the lenders do not classify such transactions as credit. The NBFCs and digital lending platforms take steps to classify the transaction as a loan where repayment is not made in the interest free period.

However, the default rate is high in the BNPL space. To that end, RBI’s working group on digital lending had recommended some changes to the BNPL structure. The group had suggested treating BNPL transactions as loans.

It had also suggested that the RBI should classify BNPL as a loan, bringing it under regulatory coverage. In a recent address, RBI Governor Shaktikanta Das had said that the central bank will continue to strike a balance between technological innovations and the stability of the financial sector. “The RBI will soon issue suitable guidelines and measures to make the digital lending ecosystem safe and sound while enhancing customer protection and encouraging innovation,” Das had said.

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