How this Startup Convinced Banks to Give Unsecured Loans to SMEs
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The pages in the book of the India Small and Medium Entrepreneurs are turning fast as they write new chapters of change. With demonetization and GST, SMEs saw themselves turning to digitization which changed the way they work completely.
But there are a few inherent challenges that SMEs have faced over the years – the biggest one of them being funds. Until recently, banks were reluctant to give loans to SMEs which only made the latter’s problem bigger. This led to startups taking charge of the situation. With the advent of technology, startups looked at how they can solve the funding crisis of SMEs.
Dealing with SMEs, Rohit Lohia and Amit Sachdev realized that they had to take matters into their own hands. Leaving their cushioned jobs at Boston Consulting Group, they set out with one target in mind – creating a better financial service for SMEs. And in 2014 end, they started Cointribe.
Entrepreneur India caught up with Amit Sachdev, co-founder and CEO of Cointribe, as he spoke about why SMEs have been ignored by financial institutions for long and how they are changing that.
Coining Their Tribe
The Indian government has revised its focus on SMEs and has been working on introducing multiple schemes to benefit them. SMEs contribute to over 45 per cent of the Indian economic growth and Sachdeva believes that they can contribute a lot more only if they have the right amount of credit.
But there was a time when 90 per cent of the banking market didn’t agree to unsecured loans. Back then, the ecosystem was not ready for solutions as digitization happened fairly late. Sachdev and Lohia built a technology that could change things and one of their initial investors Puneet Dalmia (who had been running his own venture before joining the family business - Dalmia Bharat Group) too believed that technology can solve problems.
“Banks don’t understand how to assess risks of SMEs,” said Sachdev. They soon started looking for a third co-founder who understands the risk market. They wanted someone who had deep experience in risk management and that’s how they roped in Manish Chaudhari.
Crossing the SME Hurdles
When they started out, one of the biggest challenges they faced was trying to solve the entire risk assessment problem online. Sachdev explains that for most banks it was a novel way as they were used to looking at all documents physically and then deciding whom to give loans.
Cointribe today works as a marketplace for loans and Sachdev calls them the Uber for SME lendings. The banks and NBFCs are the supplier of capital and SMEs are the borrowers. “The whole model was built in a way that we do not have to have a lot of capital, we decide which bank or NBFC will give you the loan,” he said.
But there was a problem there too. The biggest block is that banks don’t want to give unsecured loans and that’s exactly what they were asking them to do. “We asked them to give loans based on the assessment we have done according to our algorithm. They were not comfortable initially. They used to ask us are you from BCG and then say are you out of your mind,” he said with a laugh.
The first time they spoke to a bank it took them seven months to convince them to even do a pilot. After over 20 meetings with 150 people in a single bank, by February 16 they had their first pilot up. “We then partnered with Axis Bank, ICICI Bank and RBL for the pilot run. Once the results were out, the banks were happy with our assessment,” said Sachdev.
The hunger for capital is too much and that all SMEs apply for loans but the issue is who all deserve those loans, a problem which their algorithm aims to solve. Sachdev explained that risk assessment has three parts – authenticity, business health and the intent of the borrower. “We take in their bank statement which is the mother-source of all information and determine their business health,” he said.
Only after having understood the true financial health of a business is a loan disbursed from their platform but there is another component that can’t be forgotten while dealing with SMEs – the cash component. “Depending on the location of the business, we study the pattern of each micromarket. We map out the profile of the business and are able to predict the cash behavior which brings us closer to their cash revenue,” said Sachdev.
In the recent times, the lending business has become a crowded one. There are a lot of fintech startups that are looking at making the lending market easier for SMEs. Capital Float is one of the biggest startup currently in the sector.
So, are they wary of the competition? Sachdev explains that the largest of new-age players are doing INR 100-150 crores of loan disbursement. “The amount of lending opportunity in the unsecured space is 500 billion dollars and the biggest player in the segment in India today is catering to 150 million dollars. China has 2500 of such startups, whereas in India we have 4-5 credible names. There’s space for at least 20 more,” he said.