If I walk on the road, all the small entrepreneurs on my left and right are our potential customers," says Mohit Sahney, whose Rajasthan-based non-banking finance company (NBFC) Finova Capital caters only to the financially underserved people such as tea sellers, tailors and hairdressers. Sahney started the business four years ago, after leaving his decade-old job at private sector ICICI Bank. Similarly, Mumbai-based UGRO Capital, founded by industry veteran Sachindra Nath, specialises in financing select sectors in the SME space. UGRO is also innovating on the distribution front with multiple co-lending models, including what it calls "uberisation" of intermediation. Another new-age NBFC, CredAble, is bridging the credit gap in supply chain financing for MSMEs, as traditional banks and NBFCs serve only the creamy layer of suppliers and distributors. "On a two-month basis, there is a Rs 1 lakh crore working capital credit gap in India. Our mission is to triple the working capital available in India over the next five years," says Nirav Choksi, Co-founder and CEO, CredAble.
Sahney, Nath and Choksi are among the hundreds of finance and technology professionals who are transforming the credit space with their innovative solutions and products. These new-age NBFCs or fintechs are rewriting the rules of the lending business by boarding new sets of customers, out-of-the-box risk assessment tools, tapping newer/smaller geographies and partnering with banks and traditional NBFCs for co-lending.
A recent PWC report says such NBFCs are reshaping the entire lending value chain from customer acquisition and credit scoring to loan servicing and recovery.
Let's look at their business models.
Geographical Proof of Concept
Finova Capital is focussing on microentrepreneurs and smaller loans/geographies. It has built templates for assessing cash flow or income of small entrepreneurs who do not have credit history or proper documentation. For instance, the template for tea stall owners estimates monthly cash flow or income based on the quantity of milk and sugar consumed and the number of gas cylinders used, apart from retail and corporate sales (to offices).The company offers loans of Rs 3-10 lakh for two-seven years. The loan book grew 150 per cent to Rs 245 crore in 2018/19. "I give higher loan limit with longer repayment period than any bank or NBFC," says Sahney. The company borrows from the market for the long term to avoid asset-liability mismatches. Its funders include close to a dozen banks and institutions. The entire NBFC sector was badly hit after the IL&FS crisis as most lenders were using short-term borrowings to lend for the long term.
Finova's strategy is to get business in one state and use the lessons learnt there in other states. "Our major branches in Rajasthan are in rural and semi-urban areas," says Sahney, who is now expanding in Madhya Pradesh, Gujarat and Delhi. His focus - like AU Small Finance Bank, which also emerged from Rajasthan - is areas where people from lower to middle income groups are not served by the traditional banks.
The business, started with a capital of Rs 10 crore, has attracted investments by big private equity firms such as Sequoia Capital and Faering Capital (founded by Deepak Parekh's son Aditya Parekh). Aditya Parekh is also a director on the board. "We have been profitable from the first year itself," says Sahney. The company reported 180 per cent growth in income from Rs 15.38 crore in 2017/18 to Rs 43.05 crore in 2018/19.
Experts say the biggest risk to Finova comes from geographical concentration. A majority of its loans are to MSMEs. "We are expanding into newer markets like Gujarat, Maharashtra and Madhya Pradesh," says Sahney. The company is also keeping the option of co-lending with banks and other institutions open. "We have mastered the templates for lending to those who are underserved and unbanked. We are open to working with other institutions," says Sahney. The success of Bandhan Bank in Kolkata and AU Small Finance Bank in Rajasthan are inspiring regional-focussed NBFCs to scale up nationally and build their case for a banking licence.
Uberisation in Financial Services
Nath of UGRO Capital says the success of such lenders will depend on solving problems not being addressed by banks and traditional NBFCs. South-based Shriram Capital created a business around financing used trucks. Similarly, Mannapuram and Muthoot tapped the potential of the gold loan business. More recently, Pune-based Bajaj Finance stormed the consumer durables finance market which hardly had any bank or finance company because of small ticket size of the loans and low margins. URGO is positioning itself as an SME financer in niche segments. "Only 10 per cent SMEs in India have access to credit. This is a business where growth is not a challenge," says Nath, whose firm has raised around Rs 1,000 crore growth capital from private equity investors. Flipkart Co-founder Sachin Bansal has invested Rs 50 crore through non-convertible debentures.Nath plans to bring in a high degree of specialisation along with scale in the SME space. The company carried out a year-long study of 180 business sectors in terms of contribution to GDP, availability of bank credit and regulations. The list was filtered down to eight broad sectors - healthcare, education, chemical, food processing & FMCG, hospitality, electrical equipment, auto component and light engineering. There is further sub-division of sectors to whom UGRO plans to lend. For instance, healthcare has sub-sectors such as eye/dental clinics, pharmacy, radiology and pathology. Similarly, education has segments such as K12 and playschool. "We have picked up sectors that are macro resilient," says Nath.
Like UGRO, Indifi has set its eyes on hotels, restaurants, travel agents along with mobile, apparel and grocery stores. Neogrowth is focussed on two broad segments - retailers with point of sale machines and online sellers.
All these new NBFCs are not relying solely on financial records and income tax returns to determine the borrower's creditworthiness. "We have modified the credit bureau score with a build-in proprietary score," says Nath. UGRO has multiple customer acquisition strategies and has brought in the concept of "uberisation" of financial services. "We are tying up with intermediaries such as chartered accountants and software service providers with SME customers to reach out to customers," says Nath. The second big channel is ecosystem financing. The third is the co-lending model in rural areas where it plans to tie up with NBFCs with a good branch network. The company recently tied up with another NBFC, Sunvest Capital, a specialist in rooftop solar financing, for co-lending to MSMEs. It has set up a corpus of Rs 20 crore for this. It has also entered into a co-origination partnership with banks like SBI and Bank of Baroda. "Our aspiration is to cover a loan from Rs 1 lakh to Rs 1 crore," says Nath. Ugro's monthly disbursals are over Rs 100 crore. The target is Rs 1,200 crore by March 2020.
Little Loans, Very Short Term Tenure
Imagine a company giving loans of as low as Rs 5,000 for a month. Bengaluru-based Avail Finance is doing exactly that. Its targets are low-income group and blue-collar workers like security guards, maids, drivers. "It is the first loan for most of our borrowers," says Ankush Aggarwal, Founder, Avail Finance. "Our model is anchor-led. We partner with staffing agencies. This reduces instances of defaults/frauds," says Aggarwal. The company charges 2 per cent interest per month for amounts higher than Rs 5,000. It also has a loan product of Rs 20,000 for a five-month period. Most of its customers earn less than Rs 20,000 a month and have no regular employment, credit history with bureaus or proper identity and residential proof documents.Like Aggarwal's Avail Finance, Bon Credit is serving gig economy workers such as taxi drivers and delivery agents. Chennai-based Open Tap caters to mid- to low-income workers who earn Rs 6,000-25,000 per month. Pune-based Early Salary, as the name suggests, offers loans against future salaries. Then there is New Delhi-based Money In Minutes, which gives small cash loans of Rs 10,000 to Rs 25,000, with a repayment period of two to four weeks. One of its interesting products is a "bad credit loan" for people with bad credit history. There are also dozens of peer-to-peer lenders serving the small loan segment by providing a meeting platform for lenders (investors) and borrowers.
Banks and NBFCs have in the past stayed away from small ticket and short tenure loans. Some who entered the segment burnt their fingers around the 2008 global financial meltdown. The fintechs are now filling the gap.
Supply Chain Gaps
Banks and traditional NBFCs have been into supply chain financing for long. But almost 80 per cent vendors, suppliers and distributors do not get short-term working capital support because of lack of collateral or strong balance sheet. The new fintech players are using technology to connect large corporates with their supply chains. Several players such as CredAble, KredX and Vayana Network are using the cash flow method to lend to such players. These vendors and distributors can sell their invoices or receivables on an online discounting platform to get instant funds. This has been made possible due to regulatory encouragement. The Reserve Bank of India (RBI) has come out with an online discounting system called TReDS. Three players have already got licences for offering an online-discounting platform. A recent finance ministry-appointed committee has recommended integrating GSTN data with TReDS exchanges to enable cash flow-based lending by banks and NBFCs.Even as the government is creating a platform to facilitate lending to these small supply-chain entrepreneurs, the fintechs are spreading their wings. Mumbai-based CredAble says the 60-day credit cycle has a Rs 1 lakh-crore gap. "Our mission is to triple the available working capital in India over the next five years," says Choksi of CredAble. The company focusses on suppliers and distributors in sectors such as logistics, transportation, facility management, raw materials and packaging. Choksi's company works with leading private sector and multinational banks."We own the relationship with the enterprise and its vendors and suppliers. We bring in banks and other capital market participants to undertake supply chain financing. We act like an investment banker," says Choksi.
Supply-chain financing, say experts, is set to achieve substantial scale with government and fintechs (working with banks) pitching in to help vendors and suppliers, which are mostly MSMEs.
White Spaces in Education Sector
Lending to the education sector has always been restricted to loans for higher studies in India and abroad. Public sector banks, which always complained of higher NPAs in the education segment, focussed on low-ticket size education loans whereas private and foreign banks looked at loans for studying in the top-notch institutes. Segments like lending to schools, especially play schools, coaching centres and vocational and higher studies institutes, remained neglected. Not now. South-based Varthana lends to affordable private schools. It offers a Rs 5 lakh unsecured loan for three years. The only eligibility is that the school should have a three-year record and facilities for at least 300 students. It also has a secured product offering loans up to Rs 2 crore for larger schools for a period of eight years. The school should have a three-year track record and facilities for at least 500 students. Another NBFC, Intec Capital, offers loans to private schools, coaching centres and private vocational colleges.
Challenges and Way Forward
These new-age NBFCs are set to increase their contribution to consumption and GDP. At present, they all are starting with growth capital raised from venture capitalists and private equity players. Experts say investors' enthusiasm can be a good proxy to gauge their impact on the ground. A finance ministry report quoted total investment of $2.3 billion by private equity and venture capitalist players in fintechs in 2016 and 2017. In the first half of calendar year 2018, the figure was $640 million. Globally, fintech investments reached a record $57.9 billion during the period.
- Scaling up is a challenge, real picture to emerge after three-five years
- Competition from small finance banks and traditional NBFCs
- Raising resources from market and banks is not easy
- Concentration risk as they operate in limited geography, with single product
- Private equity presence, likely dilution of promoter equity, as companies scale up
- Too many fintech players competing in the same space
Clearly, India is in a sweet spot. There is a huge potential for credit expansion as our credit to GDP ratio is abysmally low at 57 per cent. For China, the figure is over 200 per cent (See Huge Potential for Credit Expansion).
At present, traditional NBFCs' share in banking industry advances is about 20 per cent. Their share in balance sheet is just 15 per cent. Also, the NBFC is a fragmented segment with 10,000-plus entities, whereas there are about 100 commercial banks. According to a report, Beyond Fintech by the World Economic Forum, fintechs are setting the foundation for disrupting the incumbent financial institutions. Their biggest differentiation is customised solutions unlike banks' one-size-fits-all approach. They are also shifting from collateral lending to cash flow-based lending, which in itself can open up a huge market. In terms of risk management, they are relying on much larger databases (e-commerce transactions, RTO data ) and social media tools than the traditional credit bureaus, which use just the banking relationship to arrive at a credit score.
The real success of these NBFCs will be tested when they scale up and face stress on loan books. They also have to go through many economic cycles to test the capacity of borrowers to pay in difficult times. Going forward, there are also issues like data privacy. At present, customer data is freely shared with third parties without consent. "The industry should ensure that consumer consent is obtained upfront and data governance standards are in place to safeguard customer data," says a PWC report. The industry will have to ensure good corporate governance, strong management and long-term sustainability of profits. The biggest competition will come from small finance banks and tech-savvy private banks as they can easily replicate the products using their low cost of funds to their advantage. "Banks prefer to play in higher loan-ticket size. There is a huge opportunity for all if one looks at parameters like credit to GDP or mortgage to GDP ratios in India," says Sahney of Finova Capital.