Shiva Kumar is a cheerful 24-year-old accountant, who works for a rice merchant in the narrow congested lanes of Balepete in old Bengaluru. A first-generation graduate, Kumar hails from Yadiyur, located 100 kilometres north-west of the state capital.
Kumar quickly realised that living in a city like Bengaluru on his Rs 22,000-amonth salary left him with only limited savings, in spite of his frugal habits. Indeed, when his mother fell sick and needed Rs 10,000 for treatment, Kumar faced a dilemma. His merchant boss refused to lend him money again, having helped him out once earlier. If only he could get a loan, Kumar was confident that he could repay it within a month or two.
"When I approached a nationalised bank where I had opened an account, they asked me for a salary certificate, income-tax returns and a guarantor as it was a personal loan. Where will I provide all that? I work for a rice trader and I am new to the city. The only option was to approach a moneylender. That is when my smartphone came to use, as a friend told me about an app called EarlySalary.com," says Kumar.
Initially sceptical, he applied online on the app with details like his Aadhaar card and bank statement showing salary being credited regularly as well as other sundry details. Within a day, his application was approved and the small loan was transferred to his bank. EarlySalary.com had looked at all details, including his Facebook account, and determined that he was creditworthy. Kumar repaid the loan within 28 days and is now a borrower in good standing. "It was a godsend for me as I needed the money urgently'
Increasingly, this is a scenario being played out across the country. In spite of the large number of financial institutions and banks present across the country, access to financial services has been a huge challenge for a majority of the population. The reason why a number of innovative fintech (financial technology) lending companies with backing from venture capital have sprung up to address this need.
"Existing financial institutions cover at best 15-20 per cent of the urban population. There is a very large segment of individuals and small and medium businesses (SMBS) who are otherwise creditworthy, but don't have access to credit because of current branch lead banking models with their high in-built cost structures," says V.V.S.B. Shankar, the Founder & Director of one such disruptive Fintech company i-lend.
Legacy assessment models for issuing loans and slow adoption of technology has meant that banks in India, including private ones, tend to shy away from low value-high volume, need-based personal or business loans. It has meant that the alternative has been moneylenders with sky-high interest rates.
Rajat Gandhi, CEO of Faircent, another Fintech company, concurs with Shankar's assessment. "While over the past decade and a half, banks have invested in technology, none of the incumbents has passed on cost savings to borrowers. Also, given their current model, it is not economically viable for them to originate and lend small loans, be it for individuals or SMBs."
CIBIL Rating vs Social Quotient
Banks and other lending institutionsin the country have mainly relied on the Credit Information Bureau (India) Ltd (CIBIL) score to determine an individual's creditworthiness. CIBIL gives a numerical score to individuals, which represent their creditworthiness. It is based on past borrowing and repayment history, and majorly benefits those who already have a track record. But what about those who have just entered the workforce and don't have a track record? Remember: a million people enter the workforce in India every month, majority of them in informal sectors.
"We are aiming at those between 21 and 30 years old, who are in their first or second job. In the next six months, we are looking at originating loans of Rs 300 crore per month and our NPAs till date have been less than 1 per cent"
About 85 per cent of the process is usually over the app (the initial application details like name, contact number, scan of bank statement, Aadhaar card/voter ID card, and all other information as well as communication), but there is a 15 per cent last mile where physical signature on ECS mandate and in some cases post- dated cheques are sought.
"We use a proprietary algorithm, which mines a borrower's social network coupled with basic documentation to determine SLQ, which in turn provides the amount of loan the person can borrow. Our turnaround times can be as low as a few minutes," says V. Raman Kumar, who runs an app-based lending platform CASHe. His venture provides loans up to Rs 1 lakh at interest rates between 24 per cent and 30 per cent. The target clientele is 21 to 35 years old.
A successful serial entrepreneur, Raman Kumar says he has put together Rs 125 crore for CASHe to lend since it began operations in April this year. While CASHe originates the loans, it is disbursed through One Capital that is registered as an NBFC with RBI. Currently, it has an Android app only.
Akshay Mehrotra, CEO and Cofounder of EarlySalary.com, which has raised $1.5 million in seed funding from Transcorp Group, targets a similar demography. "We are aiming at those between 21 and 30 years old, who are in their first or second job." The company, which started operations in October 2015, has originated a little over 1,000 loans. The size varies between Rs 10,000 and a maximum of Rs 100,000, with tenure ranging between a week and two months. The company charges 24-30 per cent as interest which, Mehrotra points out, is "lower than that of credit card rates".
The company has both an iOS and an Android app. "In the next six months, we are looking at originating loans of Rs 300 crore per month and our NPAs till date have been less than 1 per cent," says Mehrotra. Currently, it has operations in Pune, Bengaluru, and Chennai. Both Early Salary and CASHe say that about 40 per cent of applicants on their apps become eligible for loans.
Mehrotra, however, is emphatic that Early Salary is not a payday company. Globally, payday companies - which lend money till your next payday, usually at usurious interest rates - in countries like the US and the UK have been accused of taking advantage of desperate borrowers. There have been attempts to regulate them, with only moderate success.
"While over the past decade and a half, banks have invested in technology, none of the incumbents has passed on cost savings to borrowers. Also, given their current model, it is not economically viable for them to originate and lend small loans, be it for individuals or SMBs"
Keerthi Kumar Jain, who runs Vote4Cash, another app-based lender, says his company has disbursed 17,000 loans amounting to Rs 30 crore since November 2014. Vote4Cash provides loans between Rs 1,000 and Rs 50,000 for a period of anywhere between one and 90 days. Interest rate varies between 0.1 and 0.3 per cent per day for every Rs 100 borrowed. "Within 17 minutes of providing all data sought, our algorithm will tell if you are eligible to borrow and how much. About a third of applicants get through," says Jain, who claims to have a gross NPA of just 1.3 per cent.
After the 'success' of Vote4Cash, Jain launched SMEBank.in, a similar venture for SMEs about four months ago. In that period, 178 SMEs have borrowed a cumulative Rs 1.7 crore with a ticket size of Rs 1.17 lakh.
Capital Float, started in October 2013, also lends to SMEs from Rs 25,000 to Rs 1 crore. "When a neighbourhood Kirana store requires Rs 25,000 loan, it is not economically viable for banks to do their due diligence and also lend profitably. This is possible only for app-based, technology-led companies like Capital Float," says its Co-founder Sashank Rishyasringa. The company today has a loan portfolio of Rs 400 crore, and has raised $42 million in funding from the likes of Sequoia Capital, SAIF Partners, Aspada and Creation Investments.
There are three different models in this app-based online lending. The first is venture-based ones like Capital Float and Early Salary. The second is peer-to-peer lenders (P2P) like Faircent, i-Lend and Vote4Cash. The third model is the digital DSA (direct sales agents) followed by the likes of IndiaLends and BankBazaar.
While venture-funded lenders need little explanation, the P2P lending model is a more interesting one. If you have surplus cash, instead of parking it in your savings bank account or a fixed deposit, P2P platforms encourage you to get a better return, though with a degree of risk involved.
For instance, Faircent says it has 7,000 registered lenders on its site and 25,000 borrowers, whereas i-Lend says it has 2,000 registered lenders and 5,300 registered borrowers. Both lenders and borrowers have to register and are subject to know your customer (KYC) norms. "We look at income levels and their financial wherewithal as in P2P models the lending period can be higher than other lenders. Instead of getting 8-9 per cent in a fixed deposit, the lender can get a return of anywhere between 12-20 per cent."
In P2P models, the platform - such as Faircent, i-Lend and SMEBank.in - charges about 1 per cent from the lender and 2-4 per cent from the borrower as a 'fee'. The platform does value addition for the lender by carrying out due diligence on the borrower and provides its risk assessment. And, it assists borrowers by putting them in touch with the lenders. Each loan to a borrower is actually syndicated to threefive lenders so as to spread risk. Also, lenders can compete with each other in a reverse auction process - the lender willing to lend at the lowest rate usually wins. This also helps the borrower.
"We use a proprietary algorithm, which mines a borrower's social network coupled with basic documentation to determine SLQ (social loan quotient)... it provides the amount of loan"
And, finally the direct selling agents (DSAs). Gaurav Chopra, Founder of app-based IndiaLends, is a loan aggregator, who works with 30 financial institutions like Tata Capital, Bajaj Capital, Fullerton India, HDFC Bank, ICICI Bank and IndusInd. Unlike the old DSA who was essentially a middleman, Chopra claims to be more than a "lead generator".
"We assess the customer risk by looking at their online profile, bank statement scraping, etc. Unlike CIBIL, we provide a free credit report to anybody who applies to us. All our documentation is on the app. We then work with the RBI-registered lenders like NBFCs and banks. But unlike DSAs, we jointly own the customer. We are currently doing Rs 10 crore per month in loan origination." Chopra says they have an Android app at present, and will shortly launch on the iOS (Apple/iPhone) platform, too.
"Within 17 minutes of providing all data sought, our algorithm will tell if you are eligible to borrow and how much. About a third of applicants get through"
While a few like Capital Float and CASHe have registered NBFCs, others say that there are no regulatory requirements for this app-based online lending models. Shankar of i-Lend says, "RBI I think has till now deliberately opted for light touch regulation so as not to stifle innovation in the fintech lending space. Voluntary regulation like putting a cap on interest rates, doing KYC and following industry norms will lead to healthy growth for the sector."
But this sector will have to guard against going down the microfinance route, which initially promised much but was later seen to have issues such as poor governance, lack of transparency, coercive recovery practices and high rates of interest. For now, though, it seems to have caught the imagination of entrepreneurs, borrowers and lenders.
So next time you need a loan, all you need to do is download an app and apply.