New-age lenders enter markets that banks fear: What's their secret sauce?

Digital lending platforms are attracting new-to-credit borrowers and small businesses. Their loan books are running into hundreds of crores, but there are caveats

Lakshmi Iyer, who draws a salary of Rs 7,000 as salesperson at a smartphone showroom in Delhi, had been saving to buy a top-end model worth Rs 37,000, but it was difficult for her as she also shared family expenses. Also, the bank with which she has her savings account declined to give her a credit card. In a fix, she bought the phone on an e-commerce site with an instant loan provided by a digital lending firm.

Digital lending platforms have mushroomed over the past few years to cater for new-to-credit customers who traditional lenders deem too risky to lend. These platforms aren’t only lending to millennials, but also to small and medium businesses, which can’t avail credit from banks and NBFCs.

Fintech firms such as Zest Money, Freecharge, Mobiqwik, Shubh Loans, Capital Float, Lendingcart have attracted venture capital as they build lending businesses with new modes of risk assessment. 

Opportunity

A Boston Consulting Group report (BCG) last year suggested that the digital lending market in India provides a $1-trillion opportunity over the next five years. The fate of this huge market would, however, depend on the risk models that these new-age lenders are riding on. Shubh Loans Founder Monish Anand says banks follow a credit assessment model that would deem most salaried householders uncreditworthy for a small personal loan. He says CIBIL scores, which most banks use to decide whether to lend to an applicant or not, is outdated. The BCG report says that credit bureau coverage of MSMEs is below 10 per cent, which implies 90 per cent of the country’s businesses are outside the formal credit system.

Credit risk model

“Imagine a person working as a salesperson. What would it say about his income if his location data shows him to be not moving a lot from his office? This could be a factor in determining his credit score”, says Anurag Jain, CEO of KredX, which gives out credit to businesses on their invoices. 

Zest Money uses a proprietary model that uses artificial intelligence to determine risk. Founder Lizzie Chapman says there could be a thousand possible data points that go into the algorithm and the ‘secret sauce’ that evaluates a particular user is bound to be different for another.

Monish Anand says that his company considers factors like an applicant’s insurance coverage, the number of dependents on his income and shopping history and that some players claiming to be crawling social media footprint to analyse creditworthiness is bunkum. 

Disruptor or disrupted?

Most digital lenders can be broadly classified as two types: (1) Those which are credit assessment-cum-disbursement platforms but lend from the books of big banks and NBFCs; (2) Those which lend from their own books. With the Reserve Bank of India looking to tighten liquidity norms for NBFCs and audit norms of banks after the IL&FS crisis, these new-age lenders are bound to feel pinched on funding. 

Capital Float co-founder Sashank Rishyasringa says the liquidity crunch is a good reality check for the NBFC sector and that they would be pushed to improve their asset-liability mismatch now. However, he says there’s a $400-500 billion financing gap that small businesses in India are facing that these new-age lenders can solve.

Cleartrip founder Hrush Bhatt says lending is the only way of monetisation for businesses that can’t make money on their core products. As the cost of customer acquisition is high, deep-pocketed companies like Amazon, Flipkart, Ola and Paytm are racing towards lending their customers to buffer for low margin on sales.  

Cautionary tale

China is planning to shutter its $176-billion peer-to-peer lending market, a segment of digital lending, after a spate of defaults led to hundreds of companies going bust and brought thousands of protestors to the streets. Piyush Khaitan, founder and CEO of NeoGrowth, an NBFC that underwrites loans to SMEs, says: “Stringent regulation is a must for financial services. We do not want a burnout.” Institutions like SIDBI, LIC and NABARD should come up with lending Schemes unique to fintech, he adds.

Most of the digital lenders Business Standard spoke with have hundreds of crores of rupees in assets under management. Some have also tied up with big publicly listed banks. 

Ganesh Rengaswamy of Quona Capital, a venture capital firm that has invested in a couple of digital lenders, believes that funding in the sector has been relatively bullish recently and the momentum might even be dangerous. “This is driving a lot of bad practices in terms of people doing indiscriminate lending,” he says.

About digital lending 

Companies: Zest Money, Freecharge, Mobiqwik, CapitalFloat, LendingCart, Shubh Loans

Credit scoring mechanism: Unlike banks, which use credit bureau/CIBIL scores to decide creditworthiness, these new-age lenders have their own in-house algorithms.

Parameters: Income data, shopping history, point-of-sale machine data, insurance coverage, social media, GPS data