Shares of One97 Communications, the parent company of Indian payments platform Paytm, experienced a significant decline after the unit announced its plans to reduce small loans. This strategic shift is expected to have a negative impact on profitability and the company’s ability to attract new customers.
In early trade on Thursday, shares of One97 Communications fell by 15% to 688.3 rupees ($8.26), reaching as low as INR650.65. Despite this decline, the stock has seen a 30% increase since the beginning of the year.
Paytm’s statement on Wednesday revealed its intention to scale down loans that are below approximately $600. Instead, the company aims to focus on growing higher-value personal and merchant loans. This decision is driven by recent macro developments and regulatory guidance, with the objective of attracting lower-risk customers with good credit.
This move follows a regulatory tightening by the Reserve Bank of India, which has made it more costly for banks and non-banking financial companies to offer unsecured consumer loans.
According to Citi Research analysts Vijit Jain and Raghav Behani, Paytm’s decision will lead to a 40%-50% decrease in the issuance of postpaid loans by the first quarter of 2024. As these small loans are crucial for customer acquisitions, reducing their availability is likely to impede growth and profitability in the medium term.
Considering this impact, Citi downgraded its rating on One97 Communications from buy to neutral. Additionally, the stock’s target price was lowered from INR1,300 to INR900.
In conclusion, Paytm’s decision to cut back on small loans has had a significant effect on the company’s stock performance. This strategic shift, driven by regulatory changes and a focus on attracting lower-risk customers, will be crucial in shaping Paytm’s growth and profitability going forward.
