India’s tighter scrutiny of foreign investment has disrupted financial services plans for several Chinese smartphone makers seeking a bigger share of India’s highly competitive financial services market, not just selling hardware in the country,media reported.
Xiaomi and OPPO have more than 100m smartphone users in India, but without so-called “shadow banking” licences, they cannot lend directly to consumers and can only work with Indian financial firms to fund services on their platforms.
In December 2019, Xiaomi launched miCredit, an online lending service in India that connects users with Indian lenders to help them access microfinance. By the end of 2019, its platform had issued $16.5 million in loans. OPPO launched a similar financial service OPPO Kash in March.
However, the Chinese handset brands are keen to build their own non-bank financial firms, which will allow them to sell financial products directly to their smartphone user base, helping to boost profitability, according to people familiar with the matter.
“India is a very important financial services market and changing the rules will have a dampening effect in this area, ” says one industry executive familiar with Xiaomi’s financial services plans. This is because India’s new foreign direct investment (FDI) rules have added new challenges to the approval process, which has been criticised for its cumbersome and lack of transparency.
Since the near collapse of a large bank in 2018, the RBI has been cautious about approving such applications and may now be more stringent. In April, India said it would monitor foreign direct investment from companies in neighbouring countries, widely seen as preventing Chinese companies from taking stakes in troubled local companies during the New Crown outbreak.
Both Xiaomi and OPPO’s NBFC applications have waited about a year for approval by the RBI, the sources said. The policy comes as India’s smartphone shipments are likely to fall by 10 per cent this year as economic growth slows due to the new crown outbreak. Xiaomi and OPPO did not respond to requests for comment.
Potential investors can only seek approval from the RBI for “shadow banking” licences until more scrutiny of foreign direct investment is announced. Industry sources say it will now be a two-step process for companies from neighbouring countries, which could take longer to get approval.
Xiaomi is India’s largest smartphone brand and its biggest international market, according to Market Research. Xiaomi has a 30% market share in India, based on shipments.
Neil Shah, vice president of research at Counterpoint Research, said the NBFC would help increase revenue from other services by giving Xiaomi and OPPO access to user data and consumption patterns. Their smartphone sales are estimated to be only 1-2%.
“Chinese brands are sacrificing hardware margins to build a base of hundreds of millions of users who can monetize those user bases, ” Mr Shah explains. And India’s policy changes could delay their ambitions. “
In recent years, several companies have started operating in India as “shadow banks”, making it easier for them to lend to new customers in the credit ecosystem. PwC, a consultancy, estimates that India’s total credit needs are expected to be $1.41 trillion between 2021 and 2022.
Many companies have experienced regulatory setbacks in other Asian markets, while India remains highly profitable for Chinese manufacturers. Xiaomi’s financial sector, for example, had to close operations in Indonesia by the end of 2018 because of disagreements with regulators over the type of licence required.
Two industry sources said at least 30 applications for shadow bank operating licences backed by Chinese investors had now been submitted to the RBI. The RBI did not disclose such statistics and did not respond to requests for comment.
Santosh Pai, a partner at Link Legal, an Indian law firm, said he had been approached by dozens of Chinese investors in recent months to seek advice on an NBFC licence. “Given that the industry is being closely watched, some investors with poor records may not now consider entering the Indian NBFC market,” he said. “