Dig­i­tal Lend­ing ...................................

While fin­techs can make fast lend­ing, their re­cov­ery process may tend to go the slower track:

Banking Frontiers - - Highlights - Amol Dethe

The story of In­dian fin­tech is now mostly about lend­ing. Two years ago, it was all about pay­ments. In a few years, In­dia’s dig­i­tal pay­ment in­dus­try reached $200 bil­lion and it is now ex­pected to reach $1 tril­lion by 2023, ac­cord­ing to Credit Suisse. How­ever, the fo­cus con­tin­ues to be on lend­ing among NBFCs, mi­cro­fi­nance com­pa­nies, new age fin­techs and an­gel in­vestors. This model is on a trial and er­ror mode, as the lend­ing in­dus­try as a whole grap­ple with de­faults. Yet, the dig­i­tal lend­ing hope is sur­viv­ing. On what? The lack of an ecosys­tem.

“Ac­cord­ing to a mi­cro­fi­nance study, 50% peo­ple in In­dia do not have ac­cess to fi­nan­cial ser­vices. Most small bor­row­ers re­main in the clutches of (tra­di­tional) money­len­ders who lend at ex­or­bi­tant rates of 30-60%. This is more than twice the rate that fi­nan­cial ser­vices can of­fer,” says Somya Sri­vas­tava, CEO at Pray­atna Mi­cro­fi­nance.


In­dia is a credit hun­gry econ­omy and in­di­vid­u­als and grow­ing busi­nesses are con­stantly look­ing for funds. They need fa­vor­able lend­ing rates, smooth pro­cesses and easy dis­burse­ment. And none of these the large banks can or want to cater to. They ig­nore small ticket loans as cus­tomer ac­qui­si­tion costs do not make busi­ness sense. Lack of in­fra­struc­ture is yet an­other im­ped­i­ment. This is a com­mon prob­lem that fin­techs want to solve.

In­no­va­tion was driven by gov­ern­ment’s Mu­dra Bank, Dig­i­tal In­dia Move­ment and Aad­haar em­pow­ered them. Aad­haaren­abled KYC be­came a way to fa­cil­i­tate the en­try of fin­techs into the sec­tor. Large NBFCs adopted the dig­i­tal model and they could lend to peo­ple with­out meet­ing them. Dig­i­tally, mi­cro-lend­ing has few ob­sta­cles that larger banks faced.


Flex­iloans is a new age lend­ing com­pany. Its lend­ing plan uses al­ter­nate data. Aad­haar num­ber is a key iden­tity tool. Flex­iloans be­lieves that un­con­ven­tional mod­els can au­then­ti­cate a bor­rower like trans­ac­tion his­tory, con­tacts, so­cial be­hav­ior, etc. “The idea was to dis­rupt the bank­ing model where they lend to peo­ple they know. Flex­iloans suc­cess­fully built this model and is cur­rently oper­at­ing in 60 cities,” ex­plains Ritesh Jain, co-founder of Flex­iLoans.

Flex­iloans is one amongst many. A large num­ber of com­pa­nies en­tered the dig­i­tal lend­ing space with in­no­va­tive and dy­namic mod­els. They now want to lend with­out phys­i­cally meet­ing the cus­tomer. There is no com­pe­ti­tion in terms of lend­ing rates, but the speed of dis­burse­ment has be­come a com­pet­ing fac­tor. A few fin­techs claim to process loans within hours, a few even in min­utes. A cus­tomer’s so­cial foot­print, trans­ac­tion his­tory, busi­ness in­voices, psy­cho­me­t­ric tests (which ac­tu­ally an­a­lyzes whether cus­tomer has the will to re­pay), im­age and ap­pear­ance, in­clud­ing color of shirts and type of shoes and the place of shop­ping. It also in­cludes what he buys on on­line plat­forms, how he pays and how much he is spend­ing. It checks with True­caller app which is used for on­line de­liv­ery. Lenders are col­lect­ing all such data that pro­vides an ac­cu­rate pic­ture of the cus­tomer. Al­ter­na­tive data is used as a strong source to build credit score. NBFCs re­lied more on the al­ter­na­tive data they have gen­er­ated than on scores from credit agen­cies.

As an ex­am­ple, Trade­bulls Se­cu­ri­ties says 99% loans were dis­bursed on­line and cus­tomers were called for only to sign the POA at the last stage since its manda­tory.

The en­tire lend­ing model is based on of­fer­ing su­pe­rior cus­tomer ser­vice by dis­burs­ing loans as quickly as pos­si­ble and us­ing cus­tomers’ al­ter­na­tive data to iden­tify his risk ap­petite to build re­cov­ery mech­a­nism. NBFCs built a tech sys­tem and also out­sourced op­er­a­tions to many tech com­pa­nies.

Many star­tups got into fi­nan­cial in­no­va­tion and wove a model where they could of­fer the best rate to cus­tomers by part­ner­ing with banks and NBFCs. CashCow is one such ex­am­ple. By sim­ply down­load­ing a mo­bile app, any­body can be­come an agent or ad­vi­sor. The com­pany has part­nered with many fi­nan­cial in­sti­tu­tions and of­fers a va­ri­ety of loans. Cus­tomers can choose the com­pany of­fer­ing best in­ter­est rate and ap­ply for the loan.

“We have 2500 agents/ad­vi­sors oper­at­ing in 15 cities. We be­lieve in of­fer­ing

fi­nan­cial prod­ucts at doorsteps through ad­vi­sors. Ad­vi­sors help cus­tomers to make the right choice,” says Gau­rav Goyal, co-founder, CashCow.


RBIs guide­lines on P2P lend­ing also en­cour­aged new play­ers to en­ter this mar­ket. They mainly of­fer work­ing cap­i­tal to grow­ing busi­nesses or short term funds to in­di­vid­u­als. Early Salary and Weekly Fund are some such com­pa­nies. This model has been cre­ated to de­stroy the tra­di­tional (money) lenders.

But are they suc­cess­ful? How long will this rally last?

This sce­nario has led to a dis­rupt­ing model, re­mark­able tech­nolo­gies and in­no­va­tions. Many of the play­ers ran their busi­ness suc­cess­fully for 3-5 years. But later, sev­eral of them started lag­ging be­hind in the race and some of them were swal­lowed by big banks and IT play­ers.

Many experts and in­dus­try lead­ers in the sec­tor feel that 9 out of 10 such lenders will fail. If this hap­pens, the sce­nario is alarm­ing.


Most of the fin­techs are lend­ing to SMEs. While an­a­lysts and econ­o­mists be­lieve the next growth will come from SMEs and MSMEs, it is not easy. Prop­erty rents are ris­ing and that is the big­gest prob­lem for SMEs in ma­jor cities, since a ma­jor por­tion of their bor­row­ings goes into serv­ing the rent, ac­cord­ing to Piyush Khai­tan, Founder & MD at NewGrowth.

The SME mar­ket is huge but not all of the SMEs are el­i­gi­ble to bor­row from con­ven­tional fi­nan­cial in­sti­tu­tions due to weak credit score. Many of them bor­row from non-tra­di­tional sources pay­ing ex­or­bi­tant in­ter­est. Fin­techs as well as mi­cro­fi­nance com­pa­nies want to be the al­ter­na­tive source for fund­ing for these SMEs.

But this quick dig­i­tal lend­ing model has its draw­backs too. Com­pe­ti­tion is in­creas­ing and cur­rently there are more than 1000 com­pa­nies oper­at­ing in the lend­ing space. While there is a po­ten­tial, such a large num­ber of com­pa­nies does not fit in. “There is space for only 20-25 lenders in the SME lend­ing busi­ness,” af­firms Khai­tan.

Mid-level and small com­pa­nies may have to strug­gle hard specif­i­cally when they do not have enough in­vest­ments. Also, cost of fund­ing is a big chal­lenge for small com­pa­nies com­pared to large in­sti­tu­tions.


One cru­cial is­sue is re­cov­ery. Cur­rently, In­dian banks have bad loans worth `10 tril­lion. In spite of In­sol­vency and Bank­ruptcy Code (IBC), which strength­ens bankers against debtors, re­cov­ery is still an up­hill task. Can dig­i­tal lenders be as quick in re­cov­ery as they are in dis­burs­ing loans?

De­fault­ers in dig­i­tal lend­ing are fewer than the tra­di­tional lend­ing be­cause re­cov­ery and re­pay­ment process have changed. Al­ter­na­tive data which in­cludes cus­tomers’ so­cial foot­prints is the big­gest tool for lenders to re­cover. But how will cred­i­tors reach cus­tomers when ac­tual de­faults oc­cur? “We got the first bul­let, when we have had a de­fault from a cus­tomer who has CIBIL credit score close to 800,” said a spokesper­son of a top dig­i­tal lend­ing com­pany. Per­haps that is the rea­son why many com­pa­nies have re­al­ized that core on­line dig­i­tal model will not work and they have started talk­ing about a Phygital model.

Most of the banks and NBFCs have seg­re­gated cat­e­gories and they have fixed a cap of `500,000 for cer­tain cat­e­gories. Most of the av­er­age small loans are be­tween `300,000 to `300,000. And in­ter­est rates are slightly higher than those charged by large banks to have their po­si­tion strong even if de­faults oc­cur.

So, the ques­tion is how long this lend­ing phe­nom­e­non will last.

“Few of the old play­ers sur­vived due to evo­lu­tion­ary changes. But con­sol­i­da­tion is bound to hap­pen and 95 out of 100 lend­ing com­pa­nies will van­ish in the next 5 years,” af­firms Sharad Sharma, Co-founder, iSPIRT.


Ac­cord­ing to a Deloitte re­port, in­vest­ments in fin­techs who are into lend­ing will in­crease to $11 bil­lion by 2018. The in­vest­ments were $9.3 bil­lion in 2017 and $9.4 bil­lion in 2016.

Fin­techs which are into lend­ing have in­no­va­tive schemes and their pro­ce­dures are quick. What will de­ter­mine their suc­cess is how they scale up, com­pete and re­main in the mar­ket. They have a ma­jor hand­i­cap now - the re­cent Supreme Court ver­dict which re­stricts fi­nan­cial in­sti­tu­tions from mak­ing Aad­haar manda­tory – since Aad­haar eKYC has been a fail-proof pil­lar for them.

“The judge­ment will com­pel these firms to re-eval­u­ate con­sumer on­board­ing process through eKYC. Aad­har is a cru­cial link to bring the last mile un­der for­mal bank­ing ecosys­tem. The judg­ment may im­pact the agenda of fi­nan­cial in­clu­sion as well,” says Manav Jeet, MD & CEO at Ru­bique.

Im­por­tantly, the lend­ing busi­ness has more risk than any other busi­ness. As long as credit is con­cerned, it is im­por­tant for all the dig­i­tal lenders to relook at credit card is­suance mishap that hap­pened ex­actly a decade ago. Credit cards were is­sued freely. Most of the fi­nan­cial in­sti­tu­tions burnt their hands when peo­ple re­fused to pay or were un­able to pay. Re­cov­ery turned into set­tle­ments and banks hired goons. Ul­ti­mately, RBI in­ter­vened. The busi­ness of credit is lu­cra­tive but not easy. It is an un­bal­anced model where money can be dis­bursed within a few min­utes but can­not be re­cov­ered at the same speed.

Sharad Sharma

Manav Jeet

Gau­rav Goyal

Piyush Khai­tan

Somya Sri­vas­tava

Ritesh Jain

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