Higher Borrowing Costs Leave a Strain on New-Age NBFC Profits

Higher Borrowing Costs Leave a Strain on New-Age NBFC Profits

The unsecured consumer lending industry is experiencing mounting stress as rising borrowing costs and macroeconomic challenges tighten profit margins for digital lending startups. These non-banking finance companies (NBFCs), which cater to underserved consumers outside the purview of traditional banks, are facing significant hurdles to maintain profitability.

Declining Profits Across the Board

In the September quarter of FY24, new-age NBFCs reported either flat or declining net profits compared to the same period last year. Key players like Kreditbee, Fibe, Kinara Capital, and Lendingkart struggled to maintain profitability amid an increasingly challenging financial environment.

For instance, Mumbai-based digital lender CASHe saw its profits plummet by 95% in FY24, despite operational revenue growth of 16.1% to ?650.9 crore from ?560.6 crore in FY23. A steep rise in customer acquisition costs (up by 63.5%) and impairment losses on financial assets (up by 26.9%) were key contributors to this downturn.

Sectoral Impact

The slowdown in the fintech lending sector has broader implications:

1. Push Towards Informal Channels: Borrowers who are unable to access loans through formal channels might resort to informal financing, potentially exposing them to higher risks.
2. Disruption of Allied Businesses: Credit bureaus, account aggregators, and tech service providers, which depend on fintech lenders, may also face declining revenues as a result of the slowdown.

Rising Cost of Borrowing

Industry insiders attribute the decline in profitability to a sharp increase in borrowing costs, which have risen by 150–300 basis points (1.5–3%) across the spectrum. This has further strained the bottom lines of fintech lenders, particularly those offering unsecured loans. Secured lending players have been less impacted, experiencing only marginal cost increases.

Case Study: CASHe

CASHe’s financial challenges offer a snapshot of the broader struggles faced by digital lenders. While its revenue from operations rose, the company’s total expenses surged by 22.4%, driven by:

• Impairment loss on financial assets: ?256.84 crore (38.58% of total costs)
• Finance costs: ?147.39 crore (up by 20.8%)
• Customer acquisition costs: ?40.38 crore (up by 63.5%)

Despite operational growth, CASHe’s profit nosedived to ?1.44 crore in FY24, down from ?26.33 crore in FY23. This reflects the immense pressure faced by fintech lenders to balance growth with profitability amid rising costs and tightening regulatory oversight.

The Role of Virtual CFOs in Steering the Ship

In such a challenging landscape, the role of a Virtual CFO (Chief Financial Officer) becomes critical. Virtual CFOs, equipped with external industry insights and expertise, can offer strategic guidance to help fintech lenders navigate these turbulent times.

1. Cost Optimization: Virtual CFOs can implement robust financial management strategies to streamline operations, reduce overheads, and optimize customer acquisition costs.
2. Funding Strategies: They can identify alternative funding sources, such as equity or structured debt, to maintain liquidity and support expansion plans without over-reliance on expensive borrowing.
3. Risk Management: Virtual CFOs help fintech players diversify their loan portfolios to reduce dependency on high-risk unsecured lending, potentially expanding into secured lending or niche markets.
4. Regulatory Compliance: Staying ahead of regulatory changes is vital. Virtual CFOs can ensure adherence to evolving guidelines, minimizing legal risks and maintaining market credibility.
5. Data-Driven Decisions: Leveraging analytics, Virtual CFOs can provide actionable insights into customer behavior, improving risk assessment and enhancing loan recovery rates.

Path to Profitability

To turn profitable in the current climate, fintech lenders must adapt their business models. Key strategies include:

• Diversification: Expanding into secured lending or offering hybrid products like "buy now, pay later" with flexible repayment options.
• Partnerships: Collaborating with traditional banks or financial institutions to leverage their lower-cost capital.
• Focus on Technology: Enhancing digital platforms to improve efficiency, reduce processing times, and lower operational costs.

Outlook

The fintech lending space is at a crossroads. Companies like CASHe must leverage internal efficiencies and external expertise to navigate the current challenges and position themselves for long-term growth. Virtual CFOs, with their industry insights and financial acumen, are uniquely positioned to help these firms recalibrate their strategies and emerge stronger in the face of adversity.

The journey to profitability may be arduous, but with the right mix of innovation, discipline, and strategic foresight, the sector can weather the storm and continue to democratize access to credit for millions of underserved customers.