Digital Lending Startups Set To Lead The New Wave Of India’s Fintech Revolution

The traces of formal lending are widely evident in ancient texts of India such as in Kautilya’s Arthashastra, which dates back to 321 BC and mentions a network of merchant bankers and financiers. India was also the home to Adesha, a financial instrument comparable to the modern Bills of Exchange. Similarly, other financial instruments related to lending such as the Hundi scheme during the medieval period are mentioned throughout Indian literature and texts.

As times changed, lending went from the formal sector to the informal and unorganised lenders. The banking system in India was built to organise this unorganised lending through innovation and structure. But instead of being the disruptor, traditional banks have been disrupted by technology. The rise of electronic based payment system and the decrease in the paper-based clearing is evident when you look at the figures from last year. In FY 2019, the total transaction value of RTGS was 20.8x higher than paper-based clearing.

In the context of lending, the situation isn’t very different from the overall banking industry today. Lending has also turned digital, just like most aspects of retail banking.

As per a survey conducted by BCG and Google in 2018, 23% of consumers in India have availed of retail loans digitally. Another interesting fact presented in this report says SME loans and personal loans have the highest digital influence as well as purchase rate. These insights address an interesting trait of the consumer behaviour of the digital lending landscape in India i.e the high readiness of people with a digital footprint towards the adoption of digital lending in the country.

Increasing Credit Demand In India

As per DataLabs estimates, the credit demand in India is projected to be worth $1.41 Tn by 2022. The estimated growth rate in credit demand is 3.73% between FY17 and FY22.

In recent times with proliferation of high-value and high-profile non-performing assets in the Indian banking sector, the credit supply to both non-food credit sector and industry (MSME and Large) is showing signs of a slowdown. In 2018 the growth rate for total credit supply to the non-food sector fell by -6.8%, whereas the growth rate for industry-based loans plunged by -2.2%.

After taking the CAGR (2014 to 2018) of both non-food credit supply and industry credit supply into consideration, it can be concluded that the overall growth of the non-food credit sector is relatively higher than industry credit supply.

As per DataLabs estimates the total credit supply to non- food sector is estimated to be $1.25 Tn, whereas the same for the industrial sector is just $385 Bn. This indicates that the opportunity in personal loans and service sector loans is higher — together they contribute more than 50% share of total non-food credit supply.

Another reason for the high confidence in credit growth in the non-food sector is the higher degree of formalisation in comparison to the industrial sector loans in India. The formalisation of the personal loan and service sector makes risk assessment process easier and simpler in comparison due to the presence of authentic datasets which can be analysed as and when required.

Despite consumer preferences shifting towards digital lending, there are some fundamental hurdles in this sector such as lack of financial literacy, the digital divide between urban and rural audiences, and the lack of a robust banking infrastructure throughout the country. But so far digital lending startups have made a good start in India, and have earned plenty of investor attention in the past four years.

Lending Tech Startups In India

Between 2015 and Q1 2019, the total investment in Indian fintech startups was $7.62 Bn with a total deal count of 478. Out of the total funding, 50.13% or $3.82 Bn was in payments tech startups, followed by 25.49% ($1.94 Bn) in lending tech startups, while other fintech startups made up 16.35% of the total investments, and insurance tech contributed 8.03% ($612 Mn).

In Q1 2019, the total recorded funding in lending tech startups was $322 Mn which is 3.18x higher than the average quarterly funding in this sector which stands at $101 Mn. The upward movement of the EMA (4) line in the graph indicates the positive investor sentiment towards the industry after a slow down in capital inflow in Q3 and Q4 2018.

The prevalence of digital lending startups in India has opened new opportunities for synergies between fintech startups and established financial institutions and banks. For example, Indifi, a lending focussed startup, has formed an association with Edelweiss Retail Finance. In most such cases, traditional financial institutions have partnered with fintech startups to leverage their technology platforms and data or expand the addressable market by tapping users of fintech products.

The advent of digital lending has addressed some of the major customer onboarding hurdles faced by loan seekers in India. Kotak Mahindra Bank which launched its flagship fintech product Kotak 811 to offer instant credit card issuance states that there was an 85% customer opt-in for the free credit score assessment.

In addition to retail credit offerings to individuals, lending startups can play a vital role in formalising credit delivery to MSME, where 40% of the borrowing is still being carried out through informal channels and cash transactions.

In order to tap the $1.48 Tn estimated credit demand in India, lending tech startups need to address the fundamental problems in the Indian context — lack of financial literacy, urban-rural digital and banking divide.

While bridging the urban-rural digital divide is not feasible for startups alone, lending tech startups need to proactively work towards increasing financial literacy of the Indian public through educational and informative content. By working with banks and financial institutions, lending tech startups can also solve the access problem for many users, which is evident in the banking infrastructure.

Since 2014, the government has been quite proactive in improving the financial literacy of the public by initiatives such as RuPay Cards, Kisan Credit Cards, Jan Dhan bank accounts and establishment of common service centres to address digital infrastructure needs of the non-urban sector. Fintech startups can capitalise on these initiatives by forming synergies with public institutions in order to penetrate the informal economy. Whether the focus is on lending startups or payment platforms, the success of fintech in India is largely dependent on improving financial inclusion.