Is Paytm Caught Between a Rock and a Hard Place?

Paytm stock was among the worst performers at the bourses this week, thanks to its management announcing plans to scale down postpaid loans of ticket size less than ₹50,000. The decision is a pre-emptive measure, according to Paytm, after consultation with its lending partners, given the present market conditions and regulatory changes.

At ₹651.90 a share, the stock has had some unpredictable swings this year, especially after touching a 52-week high of ₹998.30 a little over a month back. This week’s development has not just increased the volatility in the stock price but has also put it in a place where investors will have to closely watch for how its loan distribution business shapes up.

Small issue

A few weeks back, when the Reserve Bank of India jacked up the risk weighted assets for unsecured loans, it was anticipated that the segment catering to low-ticket unsecured loans may be the most hit. Paytm, which is the most popular in this category, could possibly be taking the biggest hit among digital lenders catering to the retail lending space. To be sure, 70–73 per cent of the fintech’s total loan distributed originates in the less than ₹50,000 loans, or the entry-level personal loan category.

This segment was also in the news for steep delinquency ratios (over 5 per cent). At a systemic level, the RBI has constantly been flagging innovative methods being used to mask the true picture of loan quality in this segment. Interestingly, for Paytm, the sub ₹50,000 loans is one of the best segments with least asset quality issues; its NPA in this segment was less than a per cent as per the fintech’s September quarter results.

The postpaid segment, as Paytm calls the space, is also the fastest growing bulge for the company, accounting for over 55 per cent of total value of loans originated. Clearly, it is the most promising loan acquisition engine for the company and the fastest growing category, given that in September quarter, the postpaid segment posted 122 per cent year-on-year growth, way above the higher-ticket-size personal loans.

Bad timing

The decision to go slow on small-ticket loans comes just when the bullishness on Paytm is improving. While the company still incurs losses at an EBIDTA (earnings before interest, depreciation, and amortisation) level, EBIDTA adjusted for employee stock option costs has turned positive since June FY24. While this is barely an accurate benchmark to rate one’s financial performance, since it’s in adherence to the projections, it is working to Paytm advantage. Usually, small-ticket loans don’t earn high fee income and the management plans to off-set lower growth in this segment by selling more of higher bulged personal loans and merchant loans.

But since post paid loans account for a significant volume of loans distributed, their impact on revenue cannot be ruled out. March FY24 quarter will exactly reveal the hit on revenues.

Meanwhile, Paytm Payment Bank, an associate entity of Paytm, has also run into regulatory issues. It hasn’t been able to onboard new customers for over a year and, going by news reports, it’s only by March 2024 that the strictures on the company may be lifted. With more than one course correction to make, at this point, the downside risks outweigh the positive and Paytm stock may still be a very risky bet to take for most investors.