Are loan apps and NBFCs fuelling losses for F&O traders?

Two things happened over the last few days that could have far-reaching implications on India’s future 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 1.5-1.7 trillion (Rs 1.5-1.7 lakh 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; on the contrary, 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 remain 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 have actually made matters worse.

Take Sachin Bansal’s Navi Finserv, for instance, which received a “cease and desist” order from the RBI in October. Navi’s more than Rs 11,700-crore loan portfolio is made up of 90% unsecured loans (with most being small-ticket loans of less than Rs 1 lakh). 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.

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SEBI’s new rules could impact 60% of F&O trades, says Zerodha's Nithin Kamath

In another interesting development over the weekend, a top NSE official indicated that capital markets regulator SEBI was considering introducing an investment eligibility criteria in F&O trading such that only “accredited” (i.e. high income and high net-worth) investors are allowed to partake in the risky asset class. This is similar to the investment criteria that already exists 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.

While nothing has been finalised yet by SEBI, the above measures are being considered in order to tame the losses being incurred by lakhs of small retail investors, who have increasingly jumped onto the F&O bandwagon—after being ’finfluenced’ in many cases—to make a quick buck. But, other than a few hundred foreign portfolio investors (FPIs) and proprietary algo traders, nobody really is making money in the F&O market, says SEBI. Or as a stock market veteran puts it: “Only the rich professionals are making money, while the poor people are in losses.”

Are both the developments intrinsically linked? Has one fuelled the other? Read more on The CapTable.

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