Small loans, big stakes: Why MSMEs are banking on fintech lenders

Speed and flexibility to cater to a wider segment of small borrowers are tilting market in their favour

A few weeks ago, Deepak Abbot, co-founder of Indiagold.in, related this story. It was Saturday night and certain payouts had to be made, but his bank was under maintenance that night for eight hours. The 24-hour restriction imposed by the bank to add beneficiary accounts didn’t permit him to use his personal funds to make the payout. That’s when Razorpay, a fintech-based lender, pitched in.

“I pinged @harshilmathur (the link to co-founder and CEO, Razorpay) at 10:30pm and asked for help. I requested him to add Rs 5 lakh to our account,” Abbot recalled, adding that he knew it would be a long shot. But to his surprise, he received Rs 10 lakh from Razorpay within minutes. Now, Abbot has become Razorpay’s customer for life.

Talk to more fintech lenders — those specialising in facilitating small business loans — and all have many stories to tell of helping out small businesses when the regular banking channels could not.

Ram Iyer, founder and CEO, Vayana Network, a supply chain trade financing platform, said despite not being in business from April to August 2020, disbursements from September are 70 per cent higher compared to the same period last year, that is from September 2020 to January 2021.

Loan disbursements and growth are back to pre-Covid levels for these new-age lenders (or neo-banks); quite a contrast to the picture depicted by banks which are increasingly lending under credit guarantee-backed schemes and remain averse to small business loans. For instance, with state-owned banks extending more loans under these scheme, their loan growth till September 30, 2020, increased over 50 per cent, while the private banks are a laggard on this front (see table).

System-level non-performing assets for small business loans or micro, small and medium enterprises (MSME), expected to breach 13 per cent in FY21, are also forcing banks to be cautious, allowing fintechs to pick up the slack. Though the segment was earlier catered to by non-banking finance companies (NBFCs), with most NBFCs continuing to battle high cost of funds and bad loans, fintechs have yet another advantage.

But there’s more to it.

Fintech-backed lenders offer convenience to their customers and attend to their needs with a sense of urgency often found missing with banks. “In general, fintechs are nimbler and more efficient and hence new-age technology driven lenders have an edge,” explained Samir Bhatia, CEO, SMECorner. Banks’ lack of interest or inefficiency to lend small-ticket loans is a major crowd puller for fintechs. “Banks won’t want to lend a Rs 5 lakh loan as the work involved in processing the loan is the same as the large-ticket loan,” he pointed out. Currently, fintechs have the bandwidth to lend even a Rs 5 lakh loan and go up to over Rs 50 crore, a range that banks may not find economical.

This is why Bhatia pointed out that his competition is the informal moneylender who lends within two or three hours, without any documentation and not really the banks. However, what’s helping new-age lenders replicate or outdo the informal model is the extensive use of technology that makes their product efficient in terms of underwriting and also yields to scalability. To that extent, adoption of goods and services tax and evolution of credit bureaus is helping them.

“Mainline lenders don’t differentiate between borrowers and underwrite them under the same framework, which doesn’t often work well in this space,” said Shachindra Nath, executive chairman and MD, U Gro Capital. Bhatia recalls the early days of SMECorner, when his team used to feed reams of paperwork into machine learning to make lending a digital and paperless process. “Lots of documents are still in paper in the MSME space,” he said.

For Ayush Bansal, senior director and head of strategy, Razorpay, the ability of neo banks to offer all solutions under one roof is a big advantage. “MSMEs don’t get a direct relationship manager from banks and have to approach different people for each requirement,” he said. RazorpayX, the lending unit of Razorpay, is aiming at bridging the gap. Also, Nath said fintechs turn around the loan request at less than a tenth of time taken by banks along with adequate checks and balances, which draw their strength from voluminous client-specific data. “Non-collateral-based lending is unknown to banks and is becoming a niche for fintech lenders,” said Nath.

But the question is whether fintechs can grow beyond the one per cent market share that they currently hold. For instance, in the US, nearly 15 per cent of loans to MSMEs are funded by fintechs and the share is nearly 20-25 per cent in the UK. Boston Consulting Group has predicted the Indian online lending market to touch $1 trillion (Rs 72 trillion) by 2023. The present market size at Rs 7 billion is just a speck in comparison to the estimates.

Nath surmises that as long as banks have the advantage of liquidity, competing with them is near to impossible. Iyer is a step ahead; in his view, fintechs have the advantage of a near zero-default sourcing thanks to the data and technology strength. So, the idea of “creating a loan book or building a balance sheet” is rather unwise. U Gro Capital and SMECorner, which operate as NBFC-registered fintechs, agree with Iyer. Fintechs will play an active role in sourcing loans, and the ultimate lending will be through the banks.

In fact, over time, U Gro, which currently retains 90 per cent of the loans sourced in its balance sheet, plans to maintain only a third of loans in its balance sheet, while securitising another third. For the remaining third, it plans to work with banks on a co-lending basis. “Banks are realising that it’s a beautiful relationship they are forging with fintechs. Both sides are making money, thanks to the co-lending model,” Bhatia said, adding that co-lending is the way to go for the industry.

Bansal though felt that there is merit to NBFC/bank licence as it gives the new-age lenders the flexibility to innovate. “When we want to introduce a 15-day or 45-day loan product, and we take this idea to banks, they don’t have the underwriting capabilities and that’s a constraint,” he explained. Therefore, operating as a regulated entity could open the space for experimentation.

For now, fintechs have the stage set for ample growth. But the central bank’s comfort with product experimentation, which traditional banks rarely venture into, would play a major role in deciding if they can go beyond the one per cent market share in the years ahead.