Paytm, a leading digital payments company, recently announced a strategic shift in its lending operations. The company plans to scale down its small-ticket postpaid loans, a move that sent its stock plunging by 20%. This decision comes in response to recent regulatory guidance and macro developments in the lending industry.

Impact on Paytm’s Lending Business

The decision to curtail small-ticket loans, which are loans below INR 50,000, is expected to have a significant impact on Paytm‘s lending operations. These loans, also known as Postpaid loans, constituted a substantial part of the company’s loan distribution business. Paytm estimates that the disbursement of Postpaid loans will decline by approximately 50%.

However, Paytm reassures investors that this strategic shift will have minimal impact on margins and revenue. While Postpaid loans had the lowest take rate, the company believes that the expansion of high-ticket personal and merchant loans will compensate for any potential revenue loss.

Regulatory Guidance and Macro Developments

Paytm’s decision to scale down its lending operations is a response to recent regulatory guidance from the Reserve Bank of India (RBI). The RBI tightened the norms for unsecured consumer loans, increasing the risk weighting for such loans from 100% to 125%. This regulatory change prompted Paytm to reassess its loan origination portfolio and focus on more sustainable lending practices.

In consultation with lending partners and in line with its commitment to maintain a healthy portfolio, Paytm recalibrated the origination of loans below INR 50,000. This recalibration primarily affects the company’s Postpaid loan product, which will now play a smaller role in its loan distribution business moving forward.

Expansion of High-Value Loans

While scaling down small-ticket loans, Paytm aims to expand its high-value personal and merchant loans. The company plans to target lower-risk and high-credit-worthy customers in partnership with large banks and non-banking finance companies (NBFCs). This strategic shift aligns with Paytm’s goal of offering more meaningful loan products in the current lending environment.

Paytm has witnessed good demand in the high-ticket personal and merchant loan categories, particularly in the range of INR 3 lakh to INR 7 lakh. By focusing on these higher-value loans, Paytm aims to cater to customers with stronger credit profiles and reduce potential risks associated with unsecured lending.

Lending Partnerships and Disbursement Data

To facilitate its lending business, Paytm collaborates with several lending partners, including Aditya Birla Finance Limited (ABFL), Piramal Finance, Shriram Capital, and Tata Capital. These partnerships allow Paytm to offer loans on its platform while earning commissions and collection charges.

In the second quarter of financial year 2024 (Q2FY24), Paytm disbursed postpaid loans amounting to INR 9,010 crore, representing a significant year-on-year increase of 122%. However, loans below INR 50,000 accounted for a substantial portion of these disbursements.

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It is worth noting that none of Paytm’s lending partners have completely stopped lending to its customers. Certain reports had suggested that ABFL had suspended its lending facilities on Paytm and other fintech platforms. However, Paytm clarified that ABFL remains a partner, and any disruption in loan availability is temporary.

User Experience and Feedback

Following the announcement of scaling down Postpaid loans, some users reported issues with their accounts on the Paytm app. They noted that their Postpaid loan options were temporarily unavailable, despite making timely repayments. Paytm acknowledged these concerns and assured users that the Postpaid loan product would continue, albeit with changes in availability.

Paytm is upgrading its user experience and enhancing security measures, which may result in temporary disruptions. The company aims to provide a seamless and secure borrowing experience for its users and will keep them updated on when they can reapply for the Postpaid loan facility.

Future Outlook and Revenue Impact

Paytm anticipates that the scaling down of Postpaid loans will lead to a mathematical change in its take rate. However, the company does not expect a significant negative impact on its overall revenue. The expansion of high-ticket personal and merchant loans, along with other revenue streams, is projected to compensate for any potential revenue loss.

The strategic shift towards high-value loans aligns with Paytm’s long-term growth plans. The company intends to onboard additional banks and NBFCs as lending partners in the coming quarters, further strengthening its loan distribution business.

Despite the short-term disruptions caused by the recalibration of its lending operations, Paytm remains confident in its ability to sustain growth and meet the evolving needs of its customers. The company’s focus on healthy lending practices and partnerships with trusted financial institutions will contribute to its long-term success in the lending industry.

Conclusion

Paytm’s decision to scale down small-ticket Postpaid loans reflects its commitment to adapt to regulatory changes and maintain a healthy loan portfolio. By expanding its high-value personal and merchant loans, Paytm aims to cater to lower-risk and creditworthy customers while mitigating potential risks associated with unsecured lending.

While this strategic shift initially led to a decline in the company’s stock value, Paytm is confident that the expansion of high-ticket loans and other revenue streams will offset any short-term revenue impact. With ongoing partnerships with banks and NBFCs, Paytm is well-positioned to navigate the evolving lending landscape and continue its growth trajectory.

Disclaimer: The information is only for information purpose only. It is always recommended to consult with certified financial experts before making any investment decisions.