The Borrowers’ Alternative

A new crop of online lenders needs to prove that their businesses are more than an online flash-in-the-pan

Manavjeet Singh was at a crossroads in his career. With two decades of banking expe rience, he felt dulled by another job switch. Having worked with Yes Bank, Reliance Consumer Finance and HDFC Bank in senior management roles -and with an offer to helm retail banking for another large bank in hand -he needed to take a call on what he wanted to do next.

Having worked closely with an assort ment of lenders during his career, he was aware that many of them failed to secure credit with traditional financial institutions, since they failed to meet narrow and stringent lending norms. Rather than build out this capability, perhaps from within a larger financial services house, he decided to start his own venture in 2014, first called Best deal finance and then rebranded to Rubique, to target this unmet need. “We believe that for every borrower there is a lender out there somewhere and technology will help match them better,” he says.

Old rules of the game may need to change for this to happen. “We want to move away from the traditional way of hunting for credit using an offline influ encer (chartered accountant, financial advisor, friend or even car dealer),” says Singh. “As customers get more comforta ble using technology and smartphones, they are gravitating towards platforms like ours to hunt for the best deal.” Initially, Singh f d up to unyielding h faced ld financial f l services companies and reluctant customers, but eventually broke through. “The first six months weren’t easy,” he admits. “After some struggle, we today work with 60 financial institutions, who list over 100 products on our platform.”

To make this breakthrough, Rubique couldn’t be seen as just another aggregator of financial products. “Many sites offer you just a lead for a product and only end up confusing the customer further,” he adds. Instead, Rubique offers to close the loop for its customers -both small business owners and consumers -and expects to work with 100-plus financial services firms, with 250-odd products.

In the past couple of years, several other ventures have sprouted to slake this thirst for consumer and small company credit -especially those who fall off the radar of larger lenders. While a few such as BankBazaar and EarlySalary are focused on consumers, several others such as Rubique and Capital Float have zeroed in on the nascent market for small business lending.

Technological Gambit

Arjun Shetty and Adhil Shetty, the unrelated cofounders of BankBazaar, an online platform for consumer finance, have raised over $100 million from the likes of Sequoia Capital, Amazon and Fidelity, since its inception in 2007. By Adhil Shetty’s own admission, the real rapid growth in consumers has happened in the last two or three years.

In January 2013, BankBazaar had just a million visitors to its platform, but that increased to five million two years later and in March this year it hit nine million.Two years from now, Shetty expects this to hit 50 million visitors. (By Shetty’s own admission, the smallest sliver, barely 1.5-2%, become paying customers for platforms such as BankBazaar, placing the onus on driving higher volumes.) On the back of these ambitious growth targets, Shetty has an even bolder strategic goal.” We want to build a completely paperless lending platform and revolutionise the way consumer loans are handed out,” he declares in his Mumbai office, located in a business park just off the Bandra Kurla complex. While financial services have jumped to come aboard this venture -75 and counting -the technology and regulatory teams too are working at breakneck speed to make this a reality. “We believe the imminent arrival of India Stack (which includes Aadhar, eKYC, eSign and a unified payment interface) will soon make this a reality,” he adds.

While early players on the consumer side of the lending market acted essentially as digital direct sales agents by pointing potential lenders to sources of credit, BankBazaar closes the loop. “Contrary to traditional bank websites (80% of traffic coming from those owning accounts with that bank), we see the reverse, with most users looking beyond,” he claims.Rather than take the word of friends, family and assorted advisors, Shetty is betting on us ers, especially digitally-savvy millennials, considering a wider set of options.

As companies in the alternative lending space have taken root and shown strong signs of growth, a clutch of investors have raced to back these ventures. While BankBazaar may be the oldest and most highly backed, several others have raised funding too. For example, Lendingkart raised some $32 million in debt and equity a year ago, led by Bertelsmann India; Capital Float raised $25 million in March this year from investors including Creation Investments Capital Management and Rubique was backed by Kalaari Capital.

“India is a credit-hungry economy,” says Mridul Arora, a principal with SAIF Partners.“There is a massive opportunity to build digital platforms for both consumers and businesses to earn viable credit.” Rather than just building a listings business in this space, he argues that the real innovation will be actually delivering credit to this hungry population, online and eventually paperless.

Trust Issues

Not everyone buys this unbridled enthusiasm.Around a year ago, the founders of altflo, a startup in Chennai, began the process of building a platform to match investors and investees, but discovered that India’s regulators haven’t defined the equivalent of an accredited investor (as in the US) in the country, so regulations around private investments involving issuance of securities are hazy.

“In India, there’s no differentiation between a retail investor investing 50,000 in a mutual fund scheme or an IPO and a high net-worth investor ploughing millions into a startup, as far as regulators go,” says Varun Agarwal, cofounder and COO of altflo.

Others argue that the conversion rate (number of people visiting these platforms to actually making a transaction) remains as low as the ecommerce sector. Given the focus on people and companies’ money, issues of trust too remain, with conservative customers preferring the inertia of an existing bank, mutual fund or insurance provider over shopping for (potentially cheaper) alternatives.

Despite these concerns, the growing interest in alternative lending extends not just to consumers, but to businesses too.

For over two years, Harshvardhan Lunia and Mukul Sachan, friends since middle school, are betting on meeting the requirements of these customers, with their venture Lending kart. “There are many ways of evaluating credit worthiness of potential customers who are unused by mainline financial services companies,” Lunia, a former banker with ICICI Bank and Standard Chartered, contends. He points to metrics such as cash flow and transaction data for small businesses that can be considered, for example, to build an alternative credit profile.

Lunia reckons that it isn’t just financial services companies narrowing access to credit based on existing parameter, but the physical limitations for banks in meeting this burgeoning demand. India has almost 5,000 towns and cities and even large firm like ICICI Bank’s SME financing arm has 248 branches in 147 cities.

This is the gap Lendingkart hopes to plug -it has already disbursed close to 225 crore in loans across 135 cities, covering some 3,000 small businesses and according to Lunia, his venture will cover 350 cities by next year. Despite these ambitious plans, he’s under no illusion that Lendingkart’s growth will be a cakewalk. “Lending is not as easy as it looks,” he adds. “There are plenty of problems to solve on both sides before credit becomes freely available.”

Funding Small Merchants

Experts agree that there are issues with the existing system of lending and this may aid the growth of these platforms. “Small business loan assessment involves lengthy documentations, credit assessments and financial assessments,” says Neha Punater, partner and head, Fintech at management consultancy KPMG India. “This leaves (credit) out of reach of micro enterprises and small businesses with a profitable history but lacking sufficient financial documents.”

She adds that 90% of small businesses in India do not have access to any form of formal finance. “In a country like India where the policy push is more geared towards small and micro enterprise as the engines of growth, these alternative lending models will support, compliment, compete with and even beat formal financial institutions,” she adds.

Gaurav Hinduja is the scion of a family business (in August 2007 his family sold Gokaldas Exports, India’s largest textile maker, to private equity fund Blackstone for `660 crore), who knows the intricacies of bagging loans from financial services companies. After his family sold Gokaldas, he completed his MBA from Stanford and teamed up with B-school classmate Sashank Rishyasringa to found Capital Float. “We are looking to revolutionise an unmet need partially served by high-cost money lenders and chit funds,” says Hinduja.

According to his and other estimates, there is an unmet need of anywhere from $200 billion to $400 billion among small Indian enterprises, some of which is being fulfilled by these high-cost sources. “None of the existing banks are leveraging technology for SME lending,” he adds. “This is a difficult market to serve, with small ticket sizes (often below `15 lakh), which are often unviable for large institutions with costs to manage.”

Instead, Capital Float is helping small merchants (think sellers on Amazon or Flipkart or drivers on Uber or Ola), with their short-term credit needs, using a customer’s digital footprint as one way of judging credit worthiness. In two years of establishment, Capital Float has disbursed 500 crore in loans and Hinduja claims this will hit 2,000 crore this fiscal.

Small businesses often find themselves in a bind because their clients delay payments by as many as 90 days and this leads to a vicious circle of urgent high-cost borrowing to meet immediate working capital needs. When these small businesses approach banks and other (conventional) finance firms for a line of credit or OD, they ask for security and collateral to give them funds. Instead, KredX, a startup funded by Manish Kumar, who previously worked with Capital One and HSBC, wants to use these invoices itself as a means of handing out credit.

“We provide a platform for these hard-up companies to sell their invoices at a discount,” says Kumar. KredX (until recently labeled Mandi, but rebranded to aid its international push), digitises these invoices and then from that platform assorted buyers can purchase them, giving small business owners capital in around 48 hours. “The unorganised hundi system works on cash and knowing someone in the system,” he adds. “We aren’t reliant on these old school networks to grow our invoice discounting business.”

In the past year, KredX claims to have discounted over 1,000 invoices and says it is going to aim at a conservative (in the startup world) growth of 30% month-on-month. “We are focused on building a sustainable online platform and we are not chasing unrealistic 100%-plus growth rates,” he adds.

Financial Security

Even as Agarwal puts altflo’s lending platform on the backburner, he and his cofounders are pivoting the business. “What we’re focused on building out is a platform for investors -first through on-going engagements with some of the biggest global VCs and PEs and then setting our sights on the broader financial services ecosystem -to manage, and draw insights from, the deluge of private company data,” he says.

As financial services companies of all sizes look for more data to secure their investments, Agarwal and Co believe their platform will help them take better decisions.“In the next two or three years, we want our platform to be used by the entire financial services ecosystem,” he says. “There’s no fixed format for these private enterprises to provide their financial and operational data; based on their specific portfolio tracking and analysis requirements, we help build a bespoke dashboard for data and document gathering, organising, visualisation and analysis. At the end of the day, India for altflo is something of a pilot project for a much broader global roll-out of its data aggregation platform.

For India’s new age alternative lenders, the moment of reckoning may be around the corner.

Source : The Economic Times (Magazine)

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Author:

Neeraj; an entrepreneur & a visionary in the field of Railway, Defense & Automobiles, is a graduate in commerce and a Harvard Business School Alumni. He’s an expert in govt. liasoning & contracting and has an exceptional network & connections at both local as well as global level. He’s an expert in Market Strategy & Planning and has served number of overseas companies as an advisor/consultant. He takes a profound interest in upcoming startups & is very receptive towards ground-breaking ideas & innovations. He likes to brainstorm those ideas and if the values & philosophies matches; he is even ready to invest his resources, serve as a mentor or act as an incubator to futuristic businesses.

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