Over the past decade, Indian Fintechs have raised ~$10 Bn in equity funding and have become the cornerstone of India’s startup ecosystem. Digital Payments and lending startups have been the flagbearer for the sector, attracting $4.2 Bn and $2.5 Bn respectively. COVID19 has further accelerated the adoption of digitization both globally and locally and has brought a structural change across sectors such as payments, lending, e-commerce, communication among others.
Digital Payments in India have grown ten folds over the past five years to an annual payment run rate of $450 bn, with over 200 mn active users and acceptance at 30 mn merchants. This huge uptake in the digital payments has paved the way for the new-age digital lending models and has accentuated the growth of digital lending in India. Digital lending has grown to a $10 billion market capturing more than 40% share in new personal and consumer durable loans.
Digital Lending has redefined the contours of the lending space, as TAT (turnaround time) of delivering the credit and the simplicity of the processes is far superior as compared to traditional financial institutions. Another advantage is that digital lending allows for the digital onboarding of customers and disbursement of loans, thereby eliminating the need of physical presence. The COVID crisis has further worsened the situation as the financial institutions have become very risk-averse, hugely impacting MSME/SMEs, Personal Loans (for new salaried professionals, where there is less/no credit information), Working capital loans/term loans for enterprises (for which no collateral is provided) amongst other segments. In these uncertain times, digital lending enterprises have emerged with innovative credit scoring and lending solutions to provide credit to these segments. Instead of relying on historical financial data, these digital lending enterprises are using alternative data to make fast, accurate and well-informed credit decisions. Some of the recent new-age digital lending models leveraging the large volumes of data generated through digital payments are captured below –
- Alternative Credit Scoring Models – The credit scoring model of traditional financial institutions for businesses or customers is legacy based and not tailored as per the segments of the businesses or the customers. The SME/MSME sector has witnessed the biggest gap in the demand and supply of credit, having been unable to access credit from traditional sources owing to the extensive documentation, collateral requirements, high-interest rates, and long timeframes. In an effort to provide liquidity to these segments, digital lending enterprises have come up with alternative credit scoring models (using data points like POS transactions, accounts receivables, social media, psychometric testing, card spending pattern, the reputation of the employer amongst other factors) in addition to the traditional data (bank, accounting, transaction, and sales data).
A case in point is Incred, which provides personal loans leveraging its alternative credit scoring mechanism.
- Invoice Financing – This model enables working capital financing for borrowers (SME/MSMEs) by discounting the borrower’s customers’ unpaid invoices. It helps the borrowers to meet short-term liquidity shortage by accelerating trade receivables and thus not hampering the growth of the business.
A case in point is Indifi, which provides short term funds to companies based on their outstanding invoices.
- POS transaction model – The model leverages POS transaction data to create lending programs aimed at providing liquidity to merchants who use swipe machines. The POS data provides insights to the lenders in terms of expected cash-flows of the borrower and helps them make an informed credit decision.
A case in point is Neogrowth, which facilitates unsecured funding to the merchants.
- Buy Now and Pay Later Loans – These loans allow “buy now and pay later policy”. The loan is credited to a customer instantly depending on spending habits and repayment history. These loans are small in ticket size with an interest-free repayment period after which a late fee is charged.
A case in point is Simpl Pay, which has tied up with platforms like Zomato and Dunzo to provide this payment option.
- P2P lending – The model works as a digital marketplace, in which it matches individuals or companies with the lenders on the platform. The borrower and the lender mutually agree on the interest rate while a fee is charged by the P2P platform.
A case in point is Faircent, which matches borrowers and lenders on its platform and has received a certificate of NBFC-P2P from RBI.
With the Govt. of India (GoI) and regulators also working towards improved digital financial infrastructure, digital lending is not only delivering hassle-free credit but has provided a strong impetus to financial inclusion, especially helping borrowers who are underserved and are unlikely to benefit from formal sources of finance. The low level of financial inclusion is a barrier to socio-economic development in countries like India, and digital lending can go a long way in bridging this inclusion gap. As digitization becomes the new normal, India would be able to take meaningful strides in becoming a more mature economy and an inclusive society.
ICICI Securities (I-Sec) India’s leading financial services firm, as a part of its CSR initiative, has joined hands with N S Raghavan Centre of Entrepreneurial Learning (NSRCEL), the startup hub at the Indian Institute of Management Bangalore (IIMB), in supporting promising startups in the fintech space through a structured program.
Payphi has been selected as one of the Top 10 startups under NSRCEL’s Fintech Cohort.
Article By – Ankit Bhatia, Manager, Corporate Strategy & Investor Relations, PayPhi