While traditional lenders have historically ignored small businesses, merchants and some customer segments, payment players have banked on the swaths of data they have access to improve access to credit. This data provides banks and non-banking financial companies (NBFCs) with a better understanding of the borrowers’ business incomes and appetite for credit.
The majority of small-medium-enterprises (SMEs), local shops and merchants and some customer segments have traditionally been ignored by banks and NBFCs either due to distribution challenges or issues with credit risk. But in the last few years, a large number of SME, small merchants and new to credit customers have have been able to access formal credit thanks to payments companies and fintech lenders.
According to payment company executives speaking at the Digital Lenders Association of India’s 2021 Conclave, while considerable progress has been made in recent years by fintech lenders and credit marketplaces, there is still a long way to go. In particular, structural changes would need to take place for small businesses and new customer segments to get access to a larger share of the formal credit system. These changes could involve regulations for digital lending players in addition to payment companies and fintechs increasingly taking a share of the credit risk alongside their lending partners, they said.
Rationale for entering lending
“Traditional banks and NBFCs have not been able to underwrite SMEs very well. In the last one and a half years we have worked with financial institutions with whom we can co-create a credit scoring model for our customers by using our proprietary data. Lending helps use build a relationship with the merchant,” says Harshil Mathur, chief executive officer, Razorpay. He added that for merchants the advantage of using payments platforms, like Razorpay, is that the lending experience, terms and services becomes better over time.
“In the online merchant segment, which we cater to, we have decent spread on the payments based on our alternative services. This creates a sizeable revenue for us, and lending adds a cherry on top,” Mathur said. The company plans to grow its lending business from disbursing an average of ₹200 crore worth of loans every month at present to around ₹400-500 crore by the end of the year, he added.
Bipin Singh, founder and CEO, MobiKwik says that the data the payments app has collected over the last few years is rich and relevant to under how customers spend, where they spend and what they want to spend on. “When you look at the debit payments market in India, between cards, UPI and internet banking, the rails are the same. The consumer payment experience doesn’t really matter. We believe the smartphone app can become a credit product, as it has a lot of data, where a credit line is attached to a wallet,” he said.
According to Singh the problem with lending today is not that businesses or customers need a better app to access credit, but how to expand the market. “We can do that with alternative data and risk-taking,” he said.
Ashneer Grover, co-founder and CEO, BharatPe says that their strategy is to target merchants through sachet-sized loans, which makes it easier for merchants to repay. “Our segment is not traditionally serviced by banks and NBFCs so there is no utility to create a marketplace there. In our segment we have to do the heavy lifting through a balance sheet strategy and not just lead generation,” he said. BharatPe plans to grow its loan book from ₹425 crore at present to ₹2,000 crore by the end of this year, he said.
On digital lending regulations
Recently, the Reserve Bank of India set up a working group to recommend regulations for digital lending apps and digital lending operations. In the last few weeks, there have been a spate of suicides among borrowers who took loans from rogue or predatory lending apps. While the RBI and the government has taken cognisance of the rise of these fake lending apps, the payments executives say that regulations for digital lending should not go overboard and kill the progress that has been achieved by genuine fintech companies.
“There needs to be some kind of oversight mechanism or framework. But the danger is over-regulation of NBFCs and their partners, which could prevent innovation or new ideas,” Singh said.
Grover says that the RBI should start thinking of fintech as the next big distribution opportunity for financial products. “Through a virtual or digital banking license, all of us can grow 10X, 50X from here,” he said. “We have to clearly differentiate between players. The RBI is going after players who do not have a NBFC license or do not have a NBFC partner. In all our models, the loans are actually held by regulated NBFCs in any case, so we are already regulated. If RBI wants to do a clean up of rogue apps and if it helps grow the market, why not? If a genuine clean up happens, then there is no problem,” Grover said.
“The challenge today is that there is boundary between tight regulation on NBFCs and no regulation on digital lending apps. It is important for the RBI working group to come out with some set of guidelines whether you are a regulated NBFC or just a lending app. One bad actor can damage the reputation of good lenders,” Mathur of Razorpay said.
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