Even as fintech startups that lend to small and medium enterprises welcomed the government’s move to boost the banking system’s liquidity, they have expressed concern over poor monetary transmission by banks and capping of interest rates.
Non-bank lenders have seen cost of capital increase over the last two years, including fintech startups. Flexiloans, Lendingkart, Indifi Technologies and Capital Float are hoping for monetary transmission by banks to ease after the recent measures.
In a series of recent measures, the government has tried to solve the liquidity issue facing the banking system and lenders’ reluctance to lend to non-bank peers.
The government has extended an emergency credit line to micro, small and medium enterprises, provided credit guarantee, and capped interest rates for existing borrowers, although it has yet to announce details of the package.
“The lending rates might be capped at levels where non-banking finance companies (NBFCs) may not be able to do viable lending since their borrowing costs are high. It will be a concern for us and our customers who won’t get the needed stimulus,” said Manish Lunia, co-founder at FlexiLoans.
Fintech lenders in India typically charge MSME clients interest rates of 16-27%.
Lendingkart said if funds are made available cheaper, then capping interest rates will not be a problem.
“It is important for MSMEs to stay alive. Margins are going to be lower and it is perfectly fine. It is not for the NBFCs to profit, it is not a normal situation,” said LendingKart’s founder and CEO Harshvardhan Lunia.
The Reserve Bank of India’s (RBI) first auction in April under its Targeted Long Term Repo Operation (TLTRO) 2.0 for Rs 25,000 crore, aimed at providing liquidity to small and mid-sized corporates including NBFCs and microfinance institutions impacted by disruptions due to the Covid-19 pandemic, received poor response as banks were reluctant to lend.
The government’s credit guarantee announcement is intended to nudge banks towards onward lending to NBFCs.
“The recent TLTRO wasn’t successful. It wasn’t sufficient. This looks more promising, but details are yet to come,” said Alok Mittal, CEO and cofounder of Indifi. “Overall, the notion of putting money into the hands of MSMEs is good.”
Sashank Rishyasringa, managing director of Capital Float, said the key question was how widely it will be transmitted and how many would be eligible under the programme.
“Government has stepped up, if banks step up, we can see success,” he said. “Fresh and lower-cost liquidity is essential to enable transmission.”
The government’s scheme is limited to existing borrowers, fintech lenders say, leaving out a vast majority of small businesses in India who have had little need for formal banking channels till now.
“The current measures will safeguard established businesses that are generating revenue and employment… Any new customers entering the business at the moment will have to wait,” said Piyush Khaitan, founder and managing director of Neogrowth.