Indian Banking: As India's Banks Stop Lending, Borrowers Turn To Alternate Lending Startups For Capital
Reserve Bank of India (RBI) Governor Urjit Patel
Rahul Bhaskar, does not possess a credit card nor does he have relevant credit history. A 23-year-old software engineer, he has been denied a Rs 20,000 ($300) loan to purchase his favorite smartphone by more than one bank. To fulfill his dreams, Rahul has decided to borrow money from local startups such as Cashe and SlicePay.
The above example is not just one incident but rather a pattern that has emerged over the past few years; India has witnessed a spike in bad loans and non-performing assets that has resulted in more vigilant traditional lenders, especially nationalized banks. This cautious environment has increased the demand for alternative means of lending for small businesses and individuals. According to startup research platform Tracxn, last year 64 alternate lending startups were founded in India, and this year has seen birth of 34 of such firms – making India third ranked in terms of startups facilitating personal loans, behind the U.S. and China, and fourth in terms of business loans.
Indian startups are venturing into lending either through partnerships with Non Banking Financial Corporations (NBFCs) or by procuring their own NBFC licence. This has resulted in a regulatory grey zone as NBFCs are allowed to lend money in their own books but are not allowed to take deposits; they need to follow the know your customer (KYC) norms, risk management norms and good repayment collection policies.
Other than the numerous requirements that a NBFC has to fulfil, for startups keen on lending, the major issue is sourcing funds. If the platforms are registered as NBFCs, the minimum cost at which they can source funds is 15%, which can force them to lend at high interest rates. To overcome this constraint startups prefer to partner with banks as they can offer cheaper interest rates to customers with good credit scores.
Good credit scores are a challenge and a rarity in a scenario where85% of banks have witnessed a rise in Non Performing Assets (NPA’s) in the first six months of the year and majority of the population do not possess a bank account. To cater to this strata of society, Mobikwik, a leading mobile wallet company, will be partnering with NBFCs to enter the lending space later this month, becoming the first among the top wallet companies to facilitate personal loans. Mobikwik will give short-term credit to its users who wish to make a purchase, say a laptop, from one of the company’s merchant partners such as ShopClues, and pay through EMI’s. According to its co-founderUpasana Taku, ”Ninety nine percent of the country does not have access to credit. We want to be a front runner in this space. This is a way to help people who have significant digital transaction history with us to get loans.”
Its competitors in digital wallets, Paytm and Freecharge (a Snapdeal unit), are offering business loans to merchants, chiefly those selling on the e-commerce platforms of their parent companies, but are yet to tap the consumer loan segment. Paytm, which recently started offering two-wheeler loans in partnership with IndusInd Bank, did not wish to comment on its lending plans. Freecharge has been facilitating business loans to sellers on Snapdeal through the Capital Assist programme on the platform. The company spokesperson said Freecharge is not currently entering the consumer lending space but is evaluating the sector.
While fintech startups are attempting to become fully-fledged financial companies, existing alternative lenders have been eyeing segments:
Personal Loans are meant for short time duration and one time purchases. The prominent startups that are disbursing these loans are ZestMoney and CashCare. ZestMoney empowers buyers to purchase from a dozen online marketplaces such as Overcart, Blue-Stone, ValueCart and Velvetcase without a credit card. According to Lizzie Chapman, co-founder and chief executive officer of ZestMoney, “Rather than pay lump sum and suffer big cash-flow volatility, the millennials prefer to shop and pay over time, splitting the cost. For them, this is a more prudent way to afford the things that they want and need in life.”
Business Loans are given by capital float and lending cart to online sellers and small time merchants. Capital float has an existing partnership with Alibaba in India and has started tie-ups with Power2Sme and other Business to Business (B2B). Before taking a decision to dish out a loan this startup looks into past transaction data of the business as well as internal credit scores of customers.
Students Loans are usually disbursed for higher education and without collateral, by Krazybee and Gyandhan. Gyandhan has partnered with SBI and Axis Bank to facilitate loan disbursal to students who do not have any collateral. While taking a decision to disemburse these loans, with an average ticket size of $2.1 million (Rs 21 lakhs), it takes into consideration the employability quotient of the student.
Pay day loans are small amounts of money lent on an agreement, which states that it will be repaid with interest when the borrowers receive their salary. Just like CASHe, a startup that facilitates these loans, EarlySalary gives out loans of $150 million to $100,000 (Rs 10,000-1,00,000) for a period of seven to 30 days, at an interest rate of 24-30%. “We charge by the day; the interest rate for Rs 10,000 ($150) per day is a little less than Rs 9 ($.135). For example if you borrow Rs 10,000 ($150) for 10 days, we will charge an interest of Rs 84 ($1.26)” says Akshay Mehrotra, cofounder, EarlySalary.
Purchase lending is lent in order to make a purchase of goods or services and specifically targets the student community; the amount borrowed can be returned along with interest over a period of time. Other than CashCare, a startup that operates in this field, SlicePay doesn’t offer direct cash to students, but helps them buy products and services that are worth up to $899 (Rs 60,000) from one of its 40 partner platforms. The interest rate charged is between zero and 20%, and students must repay the loan amount within 18 months in form of monthly installments.
Peer to Peer (P2P) lending has been executed by more than 15 lending platforms in India. These entities have facilitated unsecured loans, governed only by their internal policies. Minimal documentation and quick processing of loans draw borrowers to these platforms, while the lenders decide whom they wish to lend to and at what rate, the borrowers choose from the offers they have received. The prominent players in this sector include Faircent, LenDenClub, and Loanmeet.
According to Tracxn, the alternative lending segment attracted $67.6 million in funding across 22 deals in the first six months of 2016, propelled by a $25 million fund-raising by CapitalFloat and $32 million by LendingKart in May and June, respectively. The overall lending space is expected to grow at a compound annual growth rate of 18-20%. As demand for lending is very high, for investors alternate lending by startups will prove to be the largest source of revenue and profit, growing to be as big as $500 billion in forthcoming years.