Why Do Fintech Startups and Investors See a Huge Potential in Lending?

The market segment is today driving us towards what can be termed as lending 3.0, or the next-generation lending

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By Manish Khera


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Today, thanks to the ongoing digitization, borrowing has become as easy as it can get in India. For contrast, all it takes now is the touch of a few buttons, answers to a few verification-related questions, and anyone can receive a loan in a matter of hours or days, if not minutes. And all of this is without any collateral and while enjoying the comfort of your home. Now, compare this with taking a day off to go to the bank, doing extensive paperwork, visiting frequently to check the progress of your loan application, and ultimately, getting your application rejected because of the loan officer's misjudgement. All while wasting two months of time in the constant to and fro and taking multiple days off from your office.

It is beyond doubt that the advent of fintech startups has altered the game of lending in India. It has become both simpler and convenient to borrow using their revolutionary approaches driven by state-of-the-art technologies. Currently, more than 1,500 fintech startups (of all shapes and sizes) are catering to the Indian market, and more than half of these startups have been launched over the last 3 years. This gives us a clear picture of how lucrative the sector is becoming for our startup ecosystem. But what is essentially fuelling this trend? Let's find out.

Lending 3.0: Spotlight shifting towards Alternative Lending in India?

Data by VCCEdge reveals that a total of 65 fundraising deals were signed in 2018 vis-a-vis the fintech sector, out of which, the alternative lending segment enjoyed a lion's share of 43 deals. The segment also bagged about $565 million of the overall $683.3 million fintech investment. But why are more Indian startups and investors placing their bids on a still embryonic market segment? Precisely for the same reason.

At present, the national debt per citizen in India is $795. The same for Russia (with its GDP around 3/5th of India's) is $1,428, $3,803 for China, a staggering $65,848 for the US, and $75,943 for Japan. It is beyond doubt that there is a significant room for further enhancing the credit penetration within our country. However, the lending practices of traditional banks haven't been able to fill in this void and are gradually becoming redundant, ineffective, and inefficient for loan origination. This is reducing the credit availability within the market and since credit directly leads to market growth, it is also hampering our growth as a nation.

This is where alternative lending platforms, with their revolutionary approaches and state-of-the-art technologies, step into the picture. Today, alternative lending platforms have been very successful in modernizing the credit landscape of our country. And they have been able to do so within a matter of a few years, thereby completely eliminating the bottlenecks experienced for decades. The market segment is today also driving us towards what can be termed as lending 3.0, or the next-generation lending.

Currently, traditional lending is heavily dependent on conventional data sources such as demographic and credit bureau data. This approach is very limited and virtually ineffective for "thin-file' customers who do not have an adequate credit history. However, the majority of these applicants could be creditworthy. In fact, according to an estimate, about 90per cent of creditworthy borrowers are denied credit due to unavailable data. Simultaneously, such erroneous loan assessment techniques also extend credit to non-worthy applicants which ultimately translate into NPAs.

Easy to Get The Surplus Back

Nowadays, given the constantly generating data and snowballing digital transactions, it has become considerably easier to profile a credit application without relying on such techniques. The modern, non-traditional datasets include behavioral data (lifestyle consumption patterns, social media posts, browsing history, call logs, etc.), bill payment patterns (early/late payments, defaults, overall bill amounts, etc.), financial history (banking history, remittance data, other financial data, etc.), tax payments (e-verification of ITRs, GST filings, penalties, and so on), payment preference (payment history via different instruments, location-based activity, etc.). These datasets are facilitating in-depth credit profiling of customers with a non-intrusive, tech-driven solution.

By leveraging Machine Learning, a subset of the AI technology, fintech lenders are further able to make detailed associations of data with the end-results and, as a result, improve the efficiency of their credit rating model. Such associations are done for short-term and long-term outcomes that might be directly or indirectly related to the concerned person or a subclass of people.

For example, say a customer has a monthly prepaid mobile connection and makes timely payments sometimes while missing them a majority of times. This indicates that the person behaviorally has little concern for his/her liabilities. Another example can be of a particular market segment experiencing a slowdown and hence, a certain profile of applicants (including businesses) defaulting on their payments subsequently. Maintaining this approach ensures that the effectiveness of the credit rating model grows as more loans are processed and relevant data is captured by the lending entity.

The Innovation

The Indian alternate lending segment has already created pioneering products for the masses including POS advance, invoice discounting, and credit line for micro enterprises (which is itself a feat in India which was earlier only possible for large and medium enterprises). They have also been able to bring the average loan turnaround time down to a few seconds and minutes - as compared to multiple weeks and months in the earlier regime. This is while completely circumventing the NPA challenge that our banking sector faces at present. The best part perhaps is that new-age entrepreneurs are able to leverage this system and generate more jobs by launching their businesses and adding to the national growth.

Soon, the Indian economy will be gearing up to outpace Germany and then Japan in terms of GDP. Some believe it might have already surpassed France and the UK last year, jumping two ranks in the table and emerging as the fifth-largest nation. Considering India's low per capita debt, this growth is also unveiling a trillion-dollar opportunity for the Indian BFSI sector. And the alternative lending players, leveraging their unconventional approach, are already poised to get the biggest slice of the cake.

Manish Khera

Founder & CEO, Happy

A powerhouse of microfinance and micropayments knowledge, Manish Khera is the CEO and Founder of Happy, one of India’s most innovative loan facilitators. He spearheads operations at the organization and devises the overall strategy, ideates new products and offerings and leads the fund raising initiatives. With over 25 years of experience in the banking and financial sector, he has been an investor and advisor to several banking, technology and impact related ventures.

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