Why RBI’s digital lending norms may not impact Paytm, Goldman Sachs explains

The Reserve Bank of India's regulatory framework on digital lending is expected to bring transparency and enhance customer sentiments. Both lenders and borrowers are expected to benefit from the move, among which, is also included One 97 Communications the parent of Paytm. Apart from providing mobile payments and financial services, fintech also has its digital lending platform. RBI's latest norms are expected to make no impact on Paytm. In fact, Goldman Sachs believes the new guidelines are likely to help remove one of the key overhangs on Paytm stock. With that, Goldman has given a 'Buy' rating on Paytm.

RBI released a framework to support orderly growth of credit delivery through digital lending methods while mitigating the regulatory concerns, which has been firmed up.

Under digital lending, there have been concerns related to unbridled engagement of third parties, mis-selling, breach of data privacy, unfair business conduct, charging of exorbitant interest rates, and unethical recovery practices.

Due to this, RBI's working group recommended a framework for the digital lending ecosystem of RBI’s Regulated Entities (REs) and the Lending Service Providers (LSPs) engaged by them to extend various permissible credit facilitation services.

Arafat Saiyed - Senior Research Analysts at Reliance Securities said, "RBI released norms to regulate digital lending to crack down on the growing number of frauds and unlawful activities. All loan disbursals and repayments have to be executed only between the bank accounts of the borrower and the regulated entity without any pass-through or pool account of the lending service provider or any third party."

Saurabh Puri, Chief Business Officer, Credit cards, Zaggle said, "Digital Lending Applications (DLA) powered by Fintechs and Regulated Entities has brought in innovation in the financial system. The Digital Lending Applications uses the power of data and tech capabilities to make the customer experience of borrowing seamless. Lenders and borrowers benefit from seamless customer acquisition, credit assessment, loan approval, disbursement, repayment, and customer service."

RBI’s guideline on digital lending is a step towards curbing these concerns.

Puri said, "We at Zaggle feel that these guidelines will bring in transparency and enhance customer confidence. The guidelines also demarcate the roles and responsibilities of Regulated Entities and LSPs. Overall, this will help the industry grow in orderly fashion; yet encouraging innovation.”

Meanwhile, Madhusudan Ekambaram, Co-Founder & CEO, KreditBee said, "Legitimate players, like us, have already been adhering to these guidelines and would continue to refine the operations further to strengthen our existing transparent and fair practices and customer trust in the digital lending ecosystem to ensure a healthy and sustained growth of the sector."

Paytm shares:

On Thursday, Paytm shares settled at ₹825.50 apiece down by 0.19% on BSE. The shares have touched an intraday high and low of ₹841.50 apiece and ₹820 apiece respectively during the day.

The company's market valuation is around ₹53,562.63 crore.

So far this week, Paytm shares have gained more than 5% compared to last week's closing on Friday.

Should you invest in Paytm shares?

Manish Adukia, Rahul Jain, and Harshita Wadher analysts at Goldman Sachs said, "We view Paytm’s financial services business practices to be in line with the key points as per the final guidelines issued by the RBI (Reserve Bank of India) on digital lending. We think these guidelines should result in limited-to-no impact on Paytm’s business/monetization model, and should help remove one of the key overhangs on the stock."

According to the trio, regulations have remained a key focus area for Paytm investors, and recent developments such as digital lending guidelines, UPI through credit card, RBI’s payments vision document, etc. are largely neutral/positive for Paytm.

"We believe the next catalyst could be potential resolution of user onboarding ban on Paytm Payments Bank (PPBL), which Paytm recently mentioned PPBL is making good progress with. Apart from this, on the regulatory front, removal of any overhang on MDR (merchant discount rate; timeline unclear) could be another catalyst," the analysts added.

For Paytm, Goldman analysts said, one of the key takeaways from RBI’s digital lending guidelines is that the revenue model of its BNPL business should likely be unimpacted.

In its statement, RBI announced that any fees, charges, etc., payable to LSPs in the credit intermediation process shall be paid directly by RE and not by the borrower.

"We note that there are 3 broad components of Paytm’s BNPL revenues: (1) Convenience fee from the consumer; (2) Late payment fee from the consumer; (3) MDR paid by merchants. The first two are charged by the lender to the borrower and shared with Paytm, and is in compliance with the RBI guidelines in our view," the analysts said.

Also, they added, "From our reading, the RBI guidelines do not regulate the third monetization wheel (of MDR), and we thus foresee no revenue impact on Paytm’s BNPL product. However, we note that per RBI’s guideline, disbursals and repayments are required to be executed only between the bank account of the borrower and the regulated entity; we would await more clarity on the operational aspects including whether the presence of nodal bank accounts are allowed."

Following these, the analysts said, "We are Buy rated on the stock with a target price of Rs1,100."

In Q1FY23, the number of loans disbursed through Paytm's platform rose to 8.5 million, representing a growth of 492% YoY and 30% QoQ. The value of loans disbursed grew to ₹5,554 crore -- a growth of 779% YoY and 56% QoQ, thus highlighting the increase in the average value of loans disbursed.