Paytm Shares Plunge 20% Amid Loan Strategy Shift and Brokerage Downgrades

Varun Vadhvan
December 7, 2023 |

NEW DELHI — Shares of One97 Communications, the parent company of India’s prominent digital payment platform Paytm, experienced a significant drop in the stock market, plunging by 20% to ₹650.45 each. This steep decline occurred following the company’s announcement to scale back on small-ticket loans in response to regulatory changes.

Analysts have noted that Paytm’s decision to reduce its focus on small ticket-size Buy Now, Pay Later (BNPL) loans is expected to impact its loan originations substantially. This segment represents over half of the company’s total disbursements. The move comes after the Reserve Bank of India tightened consumer lending norms, prompting Paytm to recalibrate its loan portfolio, particularly those under ₹50,000, mainly consisting of postpaid loan products.

Despite this shift, Paytm has emphasized its continued commitment to merchant loans provided to small businesses and unaffected by the recent regulatory guidelines. The company is now pivoting towards higher-ticket personal and merchant loans, aiming to cater to lower-risk and high-credit-worthy customers through partnerships with major banks and non-banking financial companies (NBFCs).

A Paytm spokesperson stated, “As our lending distribution business matures, we are exploring new opportunities to offer higher-value personal and merchant loans. Our focus remains on maintaining high portfolio quality for our lending partners, adhering strictly to risk and compliance standards.”

In a significant strategic shift, One97 Communications, the parent company of Paytm, has announced a reduction in the issuance of loans under ₹50,000. This move is in response to the Reserve Bank of India’s tightened consumer lending norms and Paytm’s new focus on higher-ticket personal and merchant loans. The company aims to target lower-risk and credit-worthy customers through partnerships with large banks and non-banking financial companies (NBFCs).

Paytm’s recalibration of its loan portfolio directly responds to the recent macroeconomic developments and regulatory guidance. The company’s decision is expected to significantly alter its loan distribution business, particularly impacting the volume of loans issued through its post-paid product. Despite this, Paytm anticipates minimal impact on revenue growth, with a potential 40-50% reduction in loan volume.

The Reserve Bank of India’s recent measures, including increased risk weights for lenders and NBFCs on retail loans, have influenced Paytm’s decision. These measures aim to monitor the rapid growth in certain personal loan components and mitigate potential risks.

Brokerage firm Motilal Oswal Financial Services observed that Paytm’s shift away from small ticket size BNPL loans would affect total loan originations. The firm anticipates a decrease in the monthly postpaid loan sourcing rate and a consequent decline in total disbursement rates. Despite these changes, Motilal Oswal maintains a ‘buy’ call on Paytm’s stock, citing steady asset quality metrics and the potential for growth in high-ticket personal and merchant loans.

Most brokerage firms have retained their positive long-term outlook on Paytm stock. Firms like Bank of America, JM Financial Services, Jefferies, and Dolat continue to endorse a ‘buy’ rating, expressing confidence in Paytm’s strategic moves. However, some firms have downgraded the stock or trimmed their target prices while retaining their earlier ratings. Goldman Sachs, for instance, downgraded One97 Communications stock to ‘neutral’ and reduced the price target, citing concerns that the shift to higher-ticket loans might not fully offset the scaleback of smaller-ticket loans.

Market experts believe that Paytm’s stock could experience fluctuations shortly, pending a clearer understanding of how the company’s recent actions will impact its business performance. The company’s foray into higher-ticket personal and merchant loans, mainly targeting lower-risk and high-credit-worthy customers, is seen as a strategic move that aligns with the positive outlook of several analysts and brokerage firms.

As of 2:10 PM, Paytm’s stock has slightly recovered from its earlier plunge in the day. The stock of One97 Communications, the parent company of Paytm, is trading at ₹671.30, marking a decrease of 17.43% or ₹141.75 from its previous close. This update follows the earlier report at 10:45 AM, where the stock was trading at a loss of 18.88% at ₹659.50 per share.