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Pankaj Garg, 33, founded DailyObjects, a company that designs, manufactures and sells customised smartphone cases and laptop sleeves, in 2012 because he loved seeing people’s emotions captured in the graphic designs. Like most entrepreneurs, he too faced working capital needs in the initial stages and approached banks for loans. However, they weren’t convinced about the company’s business model. Back then, “we were a startup and growing fast but had not broken even,” he says. “Banks just didn’t understand us then.”
It was Bengaluru-based Capital Float that saw the startup’s potential. The new-age lender, aided by proprietary algorithms that scrutinise reams of data and measure a potential borrower’s creditworthiness, offered a small working capital loan to Garg in 2013. That helped him pay his freelance artists for their designs and also bear the expenses for the just-in-time manufacturing of cases and sleeves.
“They are just as tough as banks in their due diligence,” Garg says about Capital Float. The difference is, they are fast, automated and flexible. For the right customers, loans are disbursed in a day, and for durations as short as 60-90 days. Garg, a repeat customer, typically repays his debts within a year to 18 months through equated monthly installments (EMIs).
Gaurav Hinduja, 33, and Sashank Rishyasringa, 32, both MBAs from Stanford, who started Capital Float about three years ago, have by now disbursed loans worth Rs 400 crore to over 1,000 small businesses across 40 cities in India. Venture capital firms SAIF Partners, Sequoia Capital and Aspada recently returned to hand Capital Float another $25 million (around Rs 170 crore) in funding led by Creation Investments Capital Management. The startup had previously raised $17 million in two rounds from its existing investors.
Capital Float isn’t the only player to have grown in this space. Bengaluru-based Loanzen, Ahmedabad-based Lendingkart and Gurgaon-based Indifi Technologies are also in the game. They see opportunities on multiple fronts—lending to new economy ventures, where traditional banks fear to tread; and quicker, cheaper and hassle-free lending. The emphasis is on fast, internet-based processing. Applications are mostly online and some parts of the process can be done on smartphones too. Loanzen, for instance, will eventually go “app-only”, its founder Madhu Sudhan tells Forbes India. “Our goal is to make it [getting loans] convenient for an entrepreneur so that he or she won’t have to run from branch to branch,” he says. Like Capital Float, Loanzen is also building a proprietary platform to automate lending.
Unlike Capital Float and Loanzen, which are themselves lenders, Indifi operates as a marketplace, connecting banks and non-banking financial companies (NBFCs) with small and medium enterprises (SMEs). The company caters to businesses as diverse as travel agents and manufacturers, all of whom have the same underlying need—short-term capital.
These modern-day financiers are opening up credit to SMEs at roughly the same interest rates (16-18 percent) as banks. Demand for debt within India’s 29.8 million micro, small and medium enterprises (MSMEs) stood at $520 billion (around Rs 35 lakh crore at current exchange rates), the International Finance Corporation estimated in a November 2012 report. Formal sources of lending, however, cater to only $140 billion, of the total MSME debt financing, according to the report. That leaves a $380 billion opportunity—currently including everything from self-financing to loan sharks—for companies such as Capital Float to target.
A common thread running through these companies is the sophisticated technology they are employing, including big-data analytics and machine learning, to make lending practices more competitive, earning them the name ‘financial technology’, or fintech, companies. The numbers bear out the opportunity: The Indian fintech sector is projected to rise from an estimated $33 billion in 2016, by volume of transactions, to $73 billion in 2020, growing at a five-year CAGR of 22 percent, accounting firm KPMG and technology lobby Nasscom said in a report in June.
Lending apart, another class of fintech firms is employing technology to take over a task traditionally done by banks: Payments. Mobile wallets—digital repositories of money accessible through smartphones—like Paytm, MobiKwik and Freecharge are being used by millions of urban Indians today for a host of services from ordering food to hailing a cab.
“What is evident is that banks are not the only players who are going to operate in this space,” says Bipin Singh, co-founder and CEO of MobiKwik. “Technology has a role to play and technology companies, independent of banks, also have a significant role to play.” Mobile wallets have garnered the trust of millions of users, by offering convenience, superior user experience and trustworthiness. Ecommerce marketplace Snapdeal’s Freecharge mobile wallet, newer than rivals MobiKwik and Paytm, was processing a million transactions a day within the first six months following its September 2015 launch, says CEO Govind Rajan.
This high rate of adoption in turn gives fintech firms access to the real gold in their business—data. On that data will be built innovative money models never seen before in this country, envisions MobiKwik’s Singh. “The next logical step is, if people have money in their [mobile] wallets, they should be able to invest it. Or, if they’re short, they should be able to borrow. So basically, it is going to be a seamless movement of money from banks to wallets to lenders or multiple lenders.”
The Reserve Bank of India (RBI) has said it is watching peer-to-peer lending, which is not directly regulated in the country, says Singh. Lending to businesses through NBFCs is, on the other hand, well-established.
In May, SBI joined a group of banks that rolled out the mVisa smartphone app to merchants and customers in Bengaluru. mVisa is aimed at enlisting millions of small merchants and their customers on the digital payments ecosystem and uses a QR code-based solution developed by payments services provider Visa Inc. Unlike with point-of-sale machines, like the ones used to swipe credit or debit cards, mVisa places no upfront costs on merchants, but charges a commission on transactions. If the bank can bring on board the 30 million merchants in the country and its 280 million customers to mVisa, so that all their transactions are digital, it would be an important milestone, says Agarwal.
The RBI sets strong KYC requirements, which still need some manual processes. Barring those processes, “we are pretty much able to do everything else in an automated fashion,” says Rishyasringa. “With the whole India Stack going live, you will have Aadhaar to do KYC, e-sign to sign documents, and UPI for payments, so I think we are already heavily engaging with the India Stack. In the next one year, a lot of this will become paperless.”
Almost all the loans are for working capital, he adds. “We were the first ones to lend to merchants who sell on Snapdeal, based on their transactions. We do a lot of invoice lending to the more traditional segments. We interact with Uber as well, via a partnership, to finance car purchases for drivers—again a very interesting segment and very interesting data set,” points out Rishyasringa. They have also tied up with Alibaba to allow merchants in India to buy goods on credit from suppliers in China.
‘The Shift to a Digital Economy Will be Like a Tsunami’
Indian fintech companies are boldly going where no bank has dared to tread. Ravi Venkatesan, chairman of state-owned Bank of Baroda (BoB), says traditional banks must urgently find ways to shed their cultural rigidities and adapt to the evolving banking landscape.
On what beleaguers public sector banks:
The issue with most public sector banks, except the State Bank of India (SBI), is that they are focussed on the issue of non-performing assets and cleaning up their balance sheets. The process of recoveries tends to be a very time-consuming activity. This comes at a rather dangerous time, when you have the [digital] disruption happening. There is very little bandwidth or intellectual horsepower being focussed on this, which is seen as slightly long term. That’s the big issue. Financial technology doesn’t figure in the list of priorities for most state-owned banks. SBI is different because Arundhati Bhattacharya, to her credit, has focussed reasonably on the issue. At BoB, too, [Managing Director and CEO] PS Jayakumar and I are quite focussed on it. I don’t think this can wait till the current problems are resolved. This needs to be a vital board-level issue at all the major PSU banks.
The heart of the challenge:
It takes a completely different mindset to build a new-age digital bank. The challenge for all of us is: How do you bring in the kind of talent that is needed? How do you create an environment where such talent can innovate and be agile? In the new space, you have to take a lot of risk. At the end of the day, fundamentally, it is an organisational challenge for all of us.
At BoB, the vast majority of our business is corporate lending. So BoB must be a challenger and a disruptor, and not the disrupted. We have to see this as an opportunity and not a threat.
On the opportunity to leapfrog, just as in mobile:
[Former chairman of the Unique Identification Authority of India] Nandan Nilekani and his team, and networks such as Indian Software Products Industry Round Table (iSPIRT), are catalysing the fintech revolution in India. They are determined to build all the layers of the stack [a combination of four digital layers—biometric authentication, paperless records, cashless transactions and consent for data use—that India is building] and make it available to everyone; unlike in developed markets where commercial interests will build this one component at a time. It’s an open stack [anyone can offer services on it] that they call the India Stack.
The conditions for leapfrogging from a cash-based economy to a digital economy are far riper in India as a result. The shift won’t happen bit by bit; when it happens, it will be like a tsunami. We will likely see viral adoption like with WhatsApp.
On the new advisory council at BoB:
One of the challenges is how to tap expertise on a global basis, and it is hard for a public sector bank like ours to do so in traditional ways. At the end of the day, the board is nominated by the government and our ability to induct the expertise that we need is quite limited. We’re trying to bring advisors to the board in a few critical areas—fintech, risk management, HR and financial inclusion. For instance, we are working with a global leader in risk management in banking, with a seasoned venture capitalist who is making significant investments in fintech. It’s not a large number of people—it will be a handful of people, who will meet three or four times a year and make sure that our thinking and speed of execution are appropriate to these kinds of challenges.