Markets
Merchant loan business to do heavy lifting for Paytm
Summary
- Paytm plans to capitalise on its growing merchant base to expand its financial services business, which contributes 23% of the company’s revenue and has a higher profit contribution margin.
MUMBAI : Paytm parent One 97 Communications Ltd’s stock rose 8% on Wednesday. While the September quarter (Q2FY25) earnings had a few positives, such as improved traction in merchant loan disbursals and visible cost control efforts, much of this exuberance stemmed from the company receiving the National Payments Corporation of India’s (NPCI) approval to onboard new customers for its unified payments interface (UPI) application.
In early 2024, the Reserve Bank of India (RBI) barred Paytm Payments Bank, an associate of Paytm, from boarding new customers over compliance issues. Now that the NPCI has allowed Paytm to onboard customers onto its UPI app through tie-ups with banks, it can expand its consumer UPI business while its merchant UPI operation is getting better. The company’s merchant subscriptions grew 22% year-on-year (y-o-y) to 11.2 million subscribers in Q2FY25, which resulted in a 9% y-o-y uptick in merchant transactions at ₹991 crore.
Paytm plans to capitalise on its growing merchant base to expand its financial services operations, which currently contributes 23% of the company’s revenue and has a higher profit contribution margin compared to its payments services business. As of Q2FY25, it has 600,000 financial services customers, including consumers and merchants.
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FLDG loan boost
The lending service provider (LSP) has also started extending merchant loans under the RBI’s revised first loss default guarantee (FLDG) norms that require LSPs to pay 5% of the loan portfolio to creditors in case of defaults. This ensures more skin in the game from LSPs, improvement in asset quality, and is likely to boost the volume of loans extended as creditors will have more confidence in the process.
As a result, Paytm stands to accrue higher collection revenues through higher volumes of these FLDG loans if the credit loss is lower than what is budgeted. Hence, more high-quality FLDG loans are likely to boost its profitability, especially when the average takeaway rates on FLDG and non-FLDG loans are the same at 5%.
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Paytm pays the cover charge to lenders in advance, below the 5% cap, as direct expense. It has paid ₹225 crore to SMFG India Credit Co. Ltd so far, its sole FLDG lending partner. Half of its merchant loan portfolio, totalling ₹1,651 crore in Q2, consists of FLDG loans.
Meanwhile, Paytm’s overall loan disbursements at ₹5,300 crore in Q2FY25 was below expectations, with personal loan disbursement contracting. Further, the management reiterated its goal to achieve Ebitda breakeven by the end of the year. Ebitda stands for earnings before interest, taxes, depreciation, and amortization.
In the last six months, Paytm's stock has been up 93%. However, further re-rating will be contingent on faster recouping of lost monthly transacting users, strong bounce-back in the lending business as partner/attrition issues ease, and no further regulatory disruption, said Emkay Global Financial Services report on 23 October.
