![](\"https:\/\/im.rediff.com\/money\/2017\/sep\/04paytm.jpg?w=670&h=900\")
<\/p>\nIn a presentation, One97 Communications (Paytm) announced that it is going to cut back on loan distribution for small-ticket ‘postpaid’ loans as a prudential measure.<\/p>\n
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This decision follows the Reserve Bank of India’s (RBI’s) recent tightening of regulations, raising risk weights on unsecured loans.<\/p>\n
This particular segment accounts for about 55 per cent of quarterly disbursements and was growing at 120 per cent year-on-year in the second quarter (Q2) of 2023-24 (FY24).<\/p>\n
Paytm will now focus on big-ticket personal loans.<\/p>\n
In the presentation, the company highlighted that around 70 per cent of personal loans are below Rs 50,000. It intends to reduce this segment by around 40-50 per cent through a review and reduction in credit limits, non-renewal of existing credit lines for certain customers, and reduction in new customer onboarding.<\/p>\n
The management’s guidance is that this should bring down ‘postpaid’ disbursement run rates by 40-50 per cent in the near term.<\/p>\n
The company intends to offset this impact partly by increasing its focus on higher-ticket personal loans (Rs 3-7 lakh) and merchant loans.<\/p>\n
Demand in these loan segments remains strong, while risk is easier to control.<\/p>\n
For higher-ticket loans, it will continue to receive distribution commission but will not get any collection commission.<\/p>\n
The buy now, pay later (BNPL) business may moderate sharply with disbursements down by 15-18 per cent.<\/p>\n
The company indicated that the monthly postpaid loan sourcing run rate may moderate by 50 per cent from Rs 3,000 crore to Rs 1,500 crore.<\/p>\n
As a result, the total disbursement run rate is expected to decline to around Rs 4,500 crore per month from the current Rs 6,000 crore per month.<\/p>\n
Paytm has on average added 350,000 to 400,000 customers every quarter, but new additions are now expected to reduce by 50 per cent.<\/p>\n
Paytm believes that its sourcing funnel will be largely unaffected, as creditworthy customers will be able to use postpaid services.<\/p>\n
Take rates are expected to be only marginally affected as BNPL as a product has lower take rates, and a pick-up in higher-ticket personal loans should
offset the impact.<\/p>\n
It’s unclear about the longevity of these risk-mitigation measures and the future outlook in low-ticket unsecured loans.<\/p>\n
The company’s relationships with existing lending partners remain intact, and it aims to push growth with three new relationships by the first quarter (Q1) of 2024-25 (FY25).<\/p>\n
It has seven non-banking financial company (NBFC) partners for loan distribution, and it is in the process of integrating one large bank and two large NBFCs by Q1FY25.<\/p>\n
Paytm hopes robust growth in merchant loans and healthy growth in big-ticket personal loans will offset the impact soon.<\/p>\n
Postpaid BNPL is the lowest take-rate business.<\/p>\n
The company’s expected credit loss on BNPL Postpaid had reduced to 0.65 per cent (Q2FY24) from 1.1 per cent (third quarter of 2022-23), but it can see stress signs, and the RBI notification is a disincentive.<\/p>\n
The Paytm stock price had bounced by 60 per cent in the last 12 months on the strong uptick in loan distribution business revenues and operational efficiencies.<\/p>\n
This announcement has led to a significant selloff, with the stock down from Rs 840 to Rs 660 in just two sessions.<\/p>\n
Analysts are downgrading operating profit expectations by 10-20 per cent for FY25, but most have valuation targets that are well above the corrected price.<\/p>\n