India’s Paytm experiences decline following proposal to limit small-scale personal loans


Published on: December 7, 2023.

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India’s Paytm, a leading digital payments firm, experienced a significant drop of up to 20% in its stocks on Thursday. This decline, which marks its sharpest since going public two years ago, comes as the company adjusts its lending practices in response to stricter regulations imposed by the Reserve Bank of India (RBI) on consumer loans.

Paytm announced on Wednesday that it will scale back its distribution of personal loans worth less than 50,000 rupees (approximately $600), while focusing on expanding its portfolio of high-value personal and commercial loans. However, Goldman Sachs analysts have expressed doubt that the issuance of larger loans will fully compensate for the reduction in smaller loans. As a result, the analysts downgraded One 97 Communications, the parent company of Paytm, from a ‘buy’ to a ‘neutral’ rating, and lowered their price target from 1,250 rupees to 840 rupees.

Due to a slowing revenue growth, Goldman Sachs predicts that Paytm’s net income will turn positive in the fiscal year 2025-26, a year later than originally anticipated. Despite the decrease in the volume of loans issued through their post-paid product, Paytm expects minimal impact on revenue growth. Nevertheless, Jefferies estimates that the moderation in loan disbursal will slightly impact the company, reducing its revenue estimate for the fiscal year 2024-2026 by 3% to 10%. Accordingly, Jefferies has lowered its target for Paytm’s stocks to 1,050 rupees from 1,300 rupees.

Paytm heavily relies on its post-paid loans, which allow customers to repay purchases through installments without incurring any interest. These loans constituted over 50% of the company’s total loans between July and September. However, the recent stock drop suggests uncertainties in the market.
Despite the decline, Paytm’s stocks have still recorded a 25% increase so far this year, outperforming the Nifty financial services index, which has only risen by 10.7%.

In response to the changing lending landscape, Paytm plans to expand its roster of lending partners. Presently, the company has established partnerships with seven non-bank finance companies (NBFCs) and intends to add one bank and two more NBFC partners.

The repercussions of the RBI’s recent regulatory tightening are becoming evident, as growth slows down and delinquencies increase in certain segments of unsecured consumer loans. This second-order impact is a direct response to the new regulations enforced by the RBI, according to analysts at IIFL Securities.

Overall, Paytm’s stocks have experienced a sharp decline following the company’s decision to adjust its lending strategy in response to RBI regulations. Investors and analysts remain cautious about the company’s future prospects as it navigates these changes.

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