The digital lending space in the country is abuzz with a bevy of financial technology (or fintech) companies — or peer-to-peer (P2P) lenders, as categorised by the Reserve Bank of India — entering the segment targeting the unmet demand from Indian micro, small and medium enterprises (MSMEs), as well as consumers, for credit.
From a small segment a few years ago, India has now about 338 lending startups, according to the India Fintech Report 2019 by global fintech insights platform Medici and Zone Startups. The traditional ways of banking approve only 25-40 per cent of the loan applications. However, with access to more data for credit scoring such as transaction behaviour, app-based data, location information, social data and others, these new lending models are aiming to increase this threshold by additional 10–15 per cent which is a huge market opportunity, the study said.
Manav Jeet, founder of online lending firm Rubique, said, “Few years ago, the concept of ‘online loan’ in India was confined to information search only. But the scenarios has changed now and people are moving towards transaction with complete digital and paperless journey available in this space.”
There are multiple players and models in this business. “Aggregators with lead selling model, marketplaces offering end-to-end fulfillment, platforms working with banks and NBFCs in co-lending arrangements and new age lenders which are NBFC themselves and P2P lenders,” Jeet said.
The Boston Consulting Group has estimated that India’s digital lending market represents a $1 trillion opportunity in the next five years. “As per this report, digital lending currently contributes to 23 per cent of overall lending market in India which will grow to 48 per cent by 2023,” Jeet said. Piyush Khaitan, founder and MD, NeoGrowth Credit Pvt. Ltd, said, “The MSME lending landscape is evolving and is set to be disrupted by digital lenders, backed by continuous thrust by Government of India towards digitisation through demonetisation, Unified Payments Interface launch, India Stack and the introduction of GST.” There is a shift from predominantly “feet on street” agent-based business model to a more digital approach, he said.
The RBI has brought such companies in its “Peer to Peer Lending Platform” as intermediaries who provide the services of loan facilitation via online medium or otherwise to the participants. The central bank has said NBFC-P2P firms should have a net owned fund of not less than Rs 2 crore or such higher amount as the bank may specify.
As per the recent Omidyar-BCG report, it is estimated that by 2023, MSME digital lending has the potential to increase between 10 and 15 fold to reach Rs 6-7 lakh crore ($80-100 billion) in annual disbursements, creating immense opportunity for both traditional lenders and digital start-ups, Khaitan said. How do they function? “We look at the performance of the business rather than only the credit score of the individual. With tech-enabled underwriting, we are able to provide tailor-made loans to various merchants as per their industry segments ranging from food and beverage, apparel, salon, petrol pumps, automobile dealers etc. with quick turnaround times to meet their urgent funding needs,” Khaitan said.
According to Jeet, as personal loan is non-collateralised loan and approval is completely online, the interest rate is 4-10 per cent more than the interest rates offered by traditional lenders. This means if banks are charging 13 per cent on a personal loan, online lenders charge around 17-23 per cent interest rate.
“The interest rate varies between the financial institutions. But we have witnessed the interest rates offered by new age digital lenders are quite high compared to traditional lenders. Most of the new age lenders are offering online loan in personal loan category,” Jeet said.
While digital lenders do not have specific data on non-performing assets (NPAs) in the segment, industry players say that digital lenders disbursing small ticket size loans have started experiencing high percentage of NPAs. The reason is that there is no connect with customer as the application is processed through a complete online journey. “NeoGrowth operates in a tech and touch business model and the gross NPA levels are around 4 per cent,” said Khaitan.
According to India Fintech Report 2019, in consumer credit, the urban population is likely to leverage fintech lending services to avoid heavy documentation, and the rural population (which is new to credit) can benefit from alternative credit scoring mechanisms to stay away from loan sharks. “This would provide access to a market with over 300 million unbanked households. Hence, identity authentication, credit score, job eligibility and social data to generate ratings for various use cases is likely to draw more attention in the near-term,” the report stated.