The Reserve Bank of India (RBI) has made a decision that will affect Paytm’s loan services. According to BofA Securities Inc., the RBI’s move to increase risk weights on unsecured loans will have consequences for Paytm. This change poses risks to the assumptions about loan growth, especially regarding personal loans, and may put some pressure on interest rates.
Paytm’s financials for Q2 reveal that 56% of their loan value comes from the ‘buy now, pay later’ segment, 24% from personal loans, and 20% from merchant loans. BofA Securities stated that they don’t expect this regulation to have an impact on the ‘buy now, pay later’ and merchant loan segments. Their reasoning is that ‘buy now, pay later’ loans are mostly short-term, lasting for around 22 days, and a slight increase in interest rates is unlikely to significantly impact their adoption. Additionally, merchant loans fall under the priority sector lending category, so no impact is anticipated in this area.
However, BofA Securities pointed out that personal loans will likely become more expensive by at least 50 basis points. They expect Paytm and their non-banking financial company (NBFC) partners to pass this increased cost onto consumers. These regulations are designed to slow down the growth of unsecured loans. Paytm has already been proactively reducing their personal loan growth for the past few quarters, aiming for around 30% growth. BofA Securities believes that any downside risks caused by these changes will be minimal, especially if Paytm is able to onboard more partners.
The overall impact on Paytm is predicted to be less than 5% on their estimated consolidated Ebitda for FY25, according to BofA Securities. They also stated that Paytm may experience a slowdown in signing up additional partners in banks and NBFCs since these institutions may focus less on unsecured loans in the future.
BofA Securities maintained their ‘buy’ rating on the One97 Communications Ltd. stock, which owns Paytm, with a target price of Rs 1,165 per share, suggesting a potential upside of 28.7%. They view the risk-reward ratio favorably and believe that Paytm is in a strong competitive position. The market would likely respond positively to better-than-expected growth or additional partners joining Paytm.
The RBI’s recent guidelines were issued in response to the high growth in the unsecured loans sector. One notable guideline is that consumer loans from banks and NBFCs (excluding home loans, education loans, vehicle loans, microfinance, and gold loans) will now carry a credit risk weight of 125%, up from the previous 100%.