 "LoanZen website")
Bengaluru-based financial-technology company LoanZen, which started operations in January this year, has joined the likes of Lendingkart and CapitalFloat in offering credit to micro, small and medium enterprises (MSMEs). An online peer-to-peer marketplace for short-term unsecured loans aimed at meeting the needs of MSMEs, LoanZen allows small businesses to receive collateral-free loans of up to Rs 10 lakh for a period of 30-60 days.
The firm currently caters only to borrowers across south India and aims to tap into the underserviced financial needs of companies that might find it difficult to get credit from traditional banks and non-banking financial companies.
Asked about the financing gap in the MSME sector, Devendra Jain, managing director & chief executive of NPA Source, told Business Standard: “While nationalised banks have various schemes for MSMEs, private banks have certain concerns over lending to small companies. Before providing credit, private banks look at balance sheets and profitability in two-three years.”
According to the government’s annual report for 2014-15, there are 48.85 million MSMEs in the country. These employ 111.4 million people. Outstanding bank credit from all scheduled commercial banks to MSMEs stood at Rs 687,209 crore in 2013 and Rs 864,135 crore in 2014 – year-on-year growth of 23.13 per cent. However, there is still a considerable gap in credit demand and supply – according to a 2012 International Finance Corporation study, there was a total finance requirement of Rs 32.5 lakh crore in the MSME sector, including Rs 2,600,000 crore of debt demand.
Explaining the company’s focus, LoanZen co-founder Madhu Sudhan said: “The platform does all the legwork for lenders. We find the businesses in need of credit and help lenders evaluate borrowers. We are looking to help businesses with turnovers between Rs 1 crore and Rs 20 crore link up with lenders, and vice versa.”
“LoanZen only charges the processing fee on the loan; it does not partake of the interest yield or lend capital directly,” Madhu added.
To be eligible to apply, the borrower has to be a private limited company with at least a year of I-T returns filed, have MNCs or companies listed in India as clients, and use accounting solutions like Tally or QuickBooks.
Through this platform, a business can borrow to meet its working capital needs against its pending invoices to MNCs or listed companies. In essence, instead of requiring physical property as collateral, LoanZen allows these businesses to collaterise their receivables.
The company claims that a borrower can find if it is eligible for a loan within 15 minutes, if it has the required accounting and banking data. Additionally, the disbursement period for the loan after submission of application is said to be seven days.
Describing the benefit that MSMEs can avail of from such a platform, Jain said: “There is definitely a scope for such companies. For SMEs, options like 90-day credit are beneficial because that can help them develop their business cycle.”
In the absence of regular credit facilities, many MSMEs could lose out on business, despite having orders and the capacity to meet them, explained Jain.
At the heart of LoanZen’s operations is its own credit rating system. The company says its team of engineers, data scientists and bankers has built a robust algorithmic engine to approve loans and build prospective borrowers’ ‘business credit score’.
Unlike other organisations which take lead information about prospective borrowers and sell it to banks and NBFCs, LoanZen does not sell leads to any lending organisation, Madhu explained. Instead, it takes comprehensive information from the borrower — about its directors, income-tax returns, bank statements — and applies its proprietary algorithms on the data to create a credit profile of the borrower.
“There are various SME ratings agencies — CARE, CRISIL-SMERA, ONICRA and FITCH — that provide something akin to a person’s credit score. For example, their report will describe that a particular company has taken a certain number of term loans and so far they have made their payments on time,” said Madhu.
LoanZen claims that what they are doing is different. Describing the process, Madhu said, “We are not looking at a company’s current loans and whether they are making their payments on time. Such data hold little value for a lot of small businesses that are currently not getting bank loans. Instead, we look at multiple data points of the borrower, including their relationship with their customers and how disciplined they have been. From that information, we try to predict the probability of delay, probability of default and the risk of fraud. Our credit evaluation tries to calculate these three parameters.”
While unsecured loans are a good prospect for the borrower, there are risks involved. According to a 2015 study by a committee set up by the government to examine the financial architecture of the MSME sector, the share of the sector in gross non-performing assets of all scheduled commercial banks stood at Rs 42,428.79 crore as of March 2014.
According to Jain, even though a robust credit rating system might mitigate some risks, collateral-free loans pose a challenge for lenders. “In the present scenario even secured loans are stuck,” cautioned Jain.
The company, which was set up in September 2015, has seen staffing, equipment leasing, advertising and software-services companies sign up on its platform.
