Macquarie analyst says Paytm's lending portfolio quality stands 'rock solid', growth exceeds expectations

India’s leading digital payments and financial services firm Paytm’s loan distribution business is proving to be the biggest driver of profitability for the company.

Paytm’s lending products, which include Paytm Postpaid, Personal loans and Merchant Loans, are underwritten by the fintech giant’s lending partners with Paytm acting as the collection outsourcing partner. Its data-backed focus on credit quality has kept the asset quality under check resulting in efficient collections, growth, and revenue. The portfolio quality was a large factor considered by global brokerage firm Macquarie when it recently double-upgraded Paytm’s stock to 'outperform' from 'underperform', and raised the target price by 80% from ₹450 to ₹800.

Macquarie’s channel checks with some of Paytm's largest lending partners revealed that the performance of the company’s Postpaid loans and personal loans continues to be pretty robust. “The company has now seen several repeat purchases/transactions over the past 12 months, which assures us of the quality of these loans,” it said in a note.

According to the company's data, Paytm is adding half a million borrowers each month, with only 10% of its 85 million monthly transacting users (MTUs) availing any form of credit through the platform so far. The company has further whitelisted 40-45% of its MTU base for its various loan products with lenders, indicating a vast growth potential.

Speaking to a news channel, Macquarie analyst Suresh Ganapathy said, “We really didn’t anticipate the scale at which Paytm could grow loan distribution business.. we have checked with some of their largest partners about the quality of the portfolio which is being originated by Paytm and it actually stands rock solid.”

In the October-December quarter, the number of loans disbursed through Paytm’s platform grew to 10.5 million, a growth of 137% YoY while the value of loans disbursed grew to ₹9,958 crore, a growth of 357% YoY.

Dolat Capital, which has a ‘buy’ rating on Paytm with a target price of ₹1,250, wrote, “Management’s strong data-backed focus on credit quality has kept Expected Credit Loss and bounce rates under check resulting in a virtuous cycle of efficient collections and in turn, scale, and revenue.”

During the latest analyst call, Paytm COO Bhavesh Gupta said that lending portfolios are performing better than the expected credit losses that its partners have assumed. “We are committed to making sure that we keep building this business on the four legs of risk management, compliance, operational efficiency, and profitability," Gupta said during the company's latest earnings call.

He mentioned that 40% of personal loans disbursed in Q3 went to existing Paytm Postpaid customers, giving “much better portfolio quality comfort to our lending partners”.

Founder and CEO Vijay Shekhar Sharma said, “What we have built is a mature business where the partners have the comfort of credit quality, the regulator has the comfort of the guidelines and we have grown organically not acquiring or by making a desperate push of any kind of product in the market.”

Paytm's continued growth in the lending space highlights the company's commitment to providing financial services to the masses and its ability to successfully navigate a competitive market. The company's focus on credit quality, combined with its vast potential for growth, makes Paytm a leader in the digital lending space in India.