Will online lending platforms survive when banks emerge from their sluggishness?
In the formal segment of debt financing in India, there is a huge credit gap.
The credit gap can be defined as the unmet credit need of MSMEs, in addition to the available access to credit from formal institutional sources of finance.
The gap between demand and supply issues in MSME finance in India can be established from a figure shared by World Bank Findex – it estimated the credit gap at around Rs 20 lakh crore in 2017.
According to another study, about 40 percent of businesses still do not have access to loans.
The estimate may sound alarming, but the credit gap was worse a decade ago, when only 11.2 percent of businesses in the country had access to loans from formal financial institutions, according to the Fourth Census. Indian MSMEs (2006-07). .
Which makes you wonder what was the new idea that changed the face of the credit industry in a decade.
The answer is an increase in alternative lending (online lending), which has contributed to loan growth of 15% CAGR over the past 7 years, according to Credit Suisse Estimates, 2016.
Lendingkart, Capital Float, Aye FINance, Indifi Technologies and many more are such alternative fintech lenders who have made a huge contribution to reducing the credit gap.
In addition, there is another type of credit gap – in consumer credit – which is just as high. In India, less than 20 percent of Indian households have easy access to loans, according to the World Bank’s Findex.
India’s private debt-to-GDP ratio is only 12 percent, while for the developed world it is over 50 percent, according to an industry expert.
This segment has also witnessed the rise of other fintech lenders such as Faircent, IndiaLends, LoanTap and others, which are contributing to the growth of consumer lending in India.
At the macro level, a combination of India Stack and JAM (Jan-Dhan Yojana, Aadhaar and Mobile Revolution) has been the backbone of the fintech revolution in India.
Experts, however, believe that in the lending industry in particular, there are various overlapping factors, such as missing credit records of people and missing tangible financial data from MSMEs, which have boosted the alternative lending space.
“New era digital lending companies are responding to this nation’s unmet credit requirement and have built a solid foundation for their growth by meeting existing demand and empowering an excluded but credit-hungry segment of the population.” said Rajat Gandhi, Founder and CEO of Faircent, a peer-to-peer lending platform.
He added that new technologies such as AI and big data are also helping the industry to replace traditional credit reports as a qualifier to determine loan risk.
However, it is important to note that growth is mainly based on the gap created by the traditional banking system.
Closing the gaps created by banks
âBanks have failed to completely change their processes and procedures to the point of reaching India’s SMEs, individuals or rural markets,â said Santosh Sangem, finance professor at XLRI, Jamshedpur.
He added that the focus by banks on collateral has also affected them significantly and opened up a multitude of opportunities for the alternative lending industry, especially online lending companies.
Satyam Kumar of LoanTap, a technology-driven loan provider that offers unsecured personal loans to salaried professionals, said banks and large NBFCs face distribution issues and therefore fail to contact businesses.
In addition, there are technological challenges in terms of process automation, such as KYC verification, converting offline documents to online documents, and developing new information through technology.
In consumer credit, banks have no new products to offer and their turnaround time is also very high, which pushes consumers towards online credit platforms that are fast, quite flexible and very varied.
At the click of a button
The fintech revolution has changed the entire interface for transactions in India. Whether it’s payments, insurance, mutual funds, or loan disbursements, the entire financial system is now tied to technology.
Emphasizing the role of technology, Gandhi of Faircent said that various channels such as websites, mobile apps and technology processes like eKYC have dramatically increased the skills of the online lending industry.
âWe are leveraging automation extensively to create exceptional value for users and drive an unprecedented lending experience on the platform. One such innovation is the automatic investing feature. It matches a lender’s investment criteria with the borrower’s requirements and sends proposals on behalf of the lender to the borrower, âhe said.
Manish Khera, Founder and CEO of Happy Loans, explained that determining the risk on each transaction is at the heart of any business model that pays credit; and technology has been the backbone of that system.
âTechnology is the engine of the online lending ecosystem. To what extent individual players rely on these technologies in the online lending ecosystem depends on their role in it, âhe said.
He added that Happy Loans uses proprietary AI not only to determine creditworthiness, but also helps decide how much to offer, to whom, and for how long.
âWe make these decisions by processing over 1,000 variables with our algorithm which draws on data from our partner merchant aggregators like Mswipe, Aditya Birla, Storeking and others. We use full data integration with these partners to assess everything – type of business, daily sales, variations on a daily, weekly, monthly and even seasonal basis, climate, region, market size, etc. than any bank in the country.
Online lenders are optimistic
According to a recent RBI fintech and digital banking report, P2P loans are expected to observe a CAGR of 60% and be worth Rs 60 lakh crore by 2025.
Building a robust digital infrastructure, supported by Aadhaar, eKYC and India Stack, has helped the online lending industry deliver convenient lending through digital channels.
âFinTech is developing at breakneck speed, driven by innovation stimulated in the market. While some companies may face market realities and perish, others will experience great success and validation of their business model over the next several years, âsaid Gandhi of Faircent.
He added that Faircent currently helps disburse over Rs 3 crore in loans each month, with over 20,000 lenders, to over 2 lakh borrowers registered on the platform.
However, while the entire ecosystem paints such a rosy picture for the online lending industry, XLRI’s Sangem doesn’t see much of a future for long-term online lending.
When the sleeping dragon rises
âOnline loan companies will not be able to compete with banks in terms of low cost loan financing. Banks have already broadened the category of personal loans and now offer income-based loans to a large extent. In addition, as banks turn to other types of unsecured loans for business loans, SME loans will experience similar growth, âSangem said.
He added that online loan companies are still not affected by RBI regulations. For example, the capital provisioning requirements for these platforms are extremely low, there is no asset quality monitoring and they are still not bound by a basic agreement, which mainly focuses on risks to banks and the financial system.
But the very favorable environment for the online lending industry can change overnight.
Another factor that can make things difficult for these online gamers is the high interest rate loans. Experts say if regulators find out that other lending platforms are resorting to usury, they will start a crackdown. It happened against the NBFC in the 60s and 90s.
Whenever there is an increase in fraudulent cases, abuse sales, complaints and defaults, such regulations will come into effect. Currently, LoanTap’s Kumar estimates that 3-5% of defaults in the online lending space, pertain to the MSME sector.
Experts say the regulatory environment is already becoming more favorable for banks and more difficult for NBFCs, including online lenders. Once regulations are applied uniformly for banks and alternative financial lending platforms, the latter with low incomes will not survive.
Sangam is also not optimistic about new age lending platforms as they have limited resources.
While technology may emerge as a new factor in the online lending space, online lending platforms will eventually merge with banks, and the latter will absorb their technology and monopolize the market, according to Sangam.