Transforming Unsecured Lending: Fintech Companies Focus on End Use of Funds
The Shift in Unsecured Lending Practices
Top fintech companies in the unsecured lending space are increasingly taking steps to ensure that personal loans are used for specified, productive purposes. This transformation is largely driven by a regulatory nudge aimed at reducing the risk of loan defaults.
Purposeful Lending in Focus
These fintechs are shifting their focus towards offering unsecured loans specifically targeted for significant expenses. Key reasons include:
In contrast, these companies are moving away from consumer durable loans that contribute to immediate consumption.
Notable Players in the Unsecured Lending Space
Several noteworthy players in the fintech sector are making strides in this area, including:
- LendingKart
- Axio
- Fibe
- KreditBee
- TruBalance
- Vivifi
These firms exemplify the commitment to ensuring that unsecured loans are utilized for constructive purposes.
Insights from Industry Leaders
Souparno Bagchi, the Chief Operating Officer of Balancehero, shared insights on the focus of their lending practices. “We are focused on tracking the end use of funds for all our unsecured loan products using artificial intelligence tools,” he stated. “90% of our unsecured loans are directed towards individuals requiring funds for medical aid, significant life events, and support for small businesses.”
Utilizing Account Aggregators for Compliance
To reinforce the tracking of fund usage, fintech companies are increasingly collaborating with account aggregators (AAs). Approved by the Reserve Bank of India (RBI), AAs facilitate access to a borrower’s financial data across banks, insurance providers, and payment services.
This collaboration allows lenders to obtain borrower consent and verify financial data, ensuring that funds are used as intended.
Regulatory Support and Risk Mitigation
In light of the risks associated with unsecured lending, the RBI has urged lenders to adopt stricter measures for tracking fund utilization. Many fintech lenders have responded to this call by diverting their focus from consumer durable loans—often linked to driving consumption—towards unsecured small business loans, which are inherently more productivity-driven.
The Focus on Productivity Over Consumption
As articulated by a fintech lender, “RBI sees personal loans for buying consumer durables as driving consumption, while unsecured small business loans are viewed as productivity-driven. Therefore, we have decided to channel our resources into funding productive sectors.”
Conclusion
The trend of ensuring that unsecured loans are used for productive outcomes represents a significant shift in the fintech lending landscape. This strategic change not only aligns with regulatory expectations but also aims to mitigate risks associated with defaults, thereby contributing to a more responsible lending environment.
Questions and Answers
-
What are the primary purposes for which fintech companies are providing unsecured loans?
Fintech companies are focusing on medical expenses, major life events, and supporting small business owners while avoiding consumer durable loans. -
Which fintech companies are notable players in the unsecured lending sector?
Notable companies include LendingKart, Axio, Fibe, KreditBee, TruBalance, and Vivifi. -
How are fintech companies tracking the end use of loan funds?
They are collaborating with account aggregators (AAs) approved by the RBI to access and verify borrowers’ financial data. -
What role does the RBI play in unsecured lending?
The RBI encourages lenders to monitor the end use of funds rigorously to mitigate the risk of defaults. -
Why are fintech companies shifting away from consumer durable loans?
These loans are perceived as driving consumption, while the focus is now on funding productivity-driven sectors such as small businesses.
