Are loan apps and NBFCs funding India’s huge F&O losses?

(This piece is a part of a fortnightly column that aims to put complex buzzing topics in perspective in a simple and straightforward manner.)

Two things happened over the last few days that could have far-reaching implications on the future of India’s banking and fintech regulation, and also change the way people access loans and investments.

First, at a BFSI industry summit, veteran banker KV Kamath—who currently serves as the Chairman of the National Bank for Financing Infrastructure and Development (NaBFID)—revealed that a staggering Rs 1,50,000-1,70,000 crore worth of losses in India’s Futures and Options (F&O) market was practically being funded by personal and unsecured loans offered by the plethora of fintech apps and NBFCs that have made borrowing ‘fast, easy, and convenient’.

So much so that these platforms even lend to users with credit scores as low as 550. For context, a traditional bank would typically refuse to lend to borrowers with credit scores below 700-750. Add to that, each borrower on these fintech apps has 4-5 active loans even though their income and capacity for repayment is limited or untested. Thus, in pursuit of reducing entry barriers to the formal credit ecosystem and serving the underserved, new-age loan apps and NBFCs—some of which the RBI cracked down on recently—might actually be making matters worse.

Take Sachin Bansal’s Navi Finserv, for instance, which received a “cease and desist” order from the RBI in October. Unsecured loans (with most being small-ticket loans of less than Rs 1 lakh) account for around 90% of Navi’s Rs 11,700-crore loan portfolio. For DMI Finance, which is in the same boat as Navi, the share of unsecured digital retail lending stood at 84% of its Rs 14,550-crore loan book in FY24. That's an overwhelming share of risky lending.

In the second interesting development over the weekend, a top NSE official indicated that markets regulator Securities and Exchange Board of India, or SEBI, was considering introducing an investment eligibility criteria for F&O trading to ensure only “accredited” (i.e. high-income and high net-worth) investors partake in the risky asset class. This is similar to the investment criteria that already exist in the case of AIFs (private equity, hedge funds, etc.) where a minimum net worth of Rs 5 crore and gross income of Rs 50 lakh is mandatory for participation.