Fintechs Seek Big Bank Blessings, But It Is Becoming A Taller Trek

Even though smaller banks and non-bank financial companies often present themselves as lucrative partners, their endorsement carries little weight as opposed to big players like State Bank of India, ICICI Bank Ltd. or HDFC Bank Ltd.

Onboarding a debt partner like these banks allows fintechs to crack partnerships with other lenders much more easily, according to a fintech lending firm's founder, who spoke on the condition of anonymity. If a firm were to go to a medium-sized bank and the lender sees that it has a loan from a large private or public sector bank, they become very comfortable underwriting the firm, this founder said.

Parijat Gang, an independent digital lending consultant, agreed: "Once a fintech has tied up with a large lender, the smaller and mid-sized banks will find it easier to trust the fintech."

Making friends with a big lender is a complicated trek in itself. Even though a partnership with a big bank was enough of a quality signal for smaller lenders earlier, "if the due diligence at a large bank is lax, it can create risks", Vivek Iyer, partner at Grant Thornton Bharat, told BQ Prime.

While bigger banks were keener to partner up with fintechs of all stripes a couple of years earlier, they have become much selective now—especially following the asset quality challenges faced by fintechs during pandemic-related shocks.

Big lenders don’t partner up with firms that simply promise the moon anymore but have started to pay much more heed to whether the fintechs have adequate checks and balances in place, according to a senior executive who works on such alliances at a large private bank.

“It's no longer the blind following the blind,” Aditya Kumar, co-founder of fintech lender Niro, told BQ Prime.

The approach has changed significantly from before when say “fintech lender X has got these massive lenders backing them, [so] there must be something to it and [they] went and gave more and more and more and more exposure”, Kumar said.

In many ways, the caution is well advised. Seeing that a big bank—like SBI—has underwritten something used to serve as a ‘jump in eyes closed’ signal for other lenders in infrastructure projects in the early 2000s. But that ended in everyone getting their hands burnt when delinquencies ticked up.

In addition to elements like how experienced the fintech’s team is in financial services, their monetisation plans, and who backs them as investors, banks also look at compatibly of scale with their partners, Kumar said.

“If you, as a fintech, are originating Rs 30-40 crore a month for them—which is a lot for a fintech— you're not even as big as the top 20 direct selling agents,” he said, “So, are they going to invest in product, tech capacity and management bandwidth to make you succeed and scale? No.”

Unless a fintech can contribute 7-10% of a bank’s business in a segment, their keenness to partner up with the firm is pretty low. Which is why knocking on the doors of small finance banks and smaller NBFCs is a route that younger lending firms often rely on, the founder quoted earlier said. But when it comes to the customers their balance sheet is used to lend to, smaller and bigger banks aren't usually on a level footing.

"It is not the same customer that the large and small bank are exposed to through the fintech," Garg said. "In case of a default, the rights of different lenders will not come in the way of the other," he said.

Other challenges have cropped up too. With the RBI’s new digital lending norms making regulated entities—both banks and NBFCs—responsible for problems at the fintech end, banks have to be extra careful about who they partner with, said the private banker mentioned earlier.

At the end of the day, “quality begets quality”, Kumar said. Even though smaller lenders can help fintechs take off, making a mark might just depend on how well they can convince bigger players to make friends with them.