Suguresh Desai, 37, an executive with TVS Group, had been using his credit card to make payments. Recently, he decided to borrow Rs 1 lakh from a young company called MoneyTap to part pay for a new car. The interest rate was much lower than that demanded by credit card companies.
“I (re) pay Rs 1,000 per month while I would have had to shell out Rs 3,000 a month if I had paid with my credit card,” said Desai.
“Besides, it was a simple process.”
People like Desai form the key clientele for financial-technology startup MoneyTap, which has developed a lending product called Credit Line—essentially, it assigns Rs 25,000 to Rs 5 lakh to a borrower deemed eligible for a loan.
Customers have the liberty to borrow small or large sums as well as choose their payback period.
“We are trying to redefine the lending paradigm and the way customers interact with the banking system,” said cofounder Kunal Varma. MoneyTap, which employs a chatbotbased loan application system, focuses on ensuring real-time loan approvals for applicants and wiring money to their bank accounts within a fixed timeframe independent of bank holidays.
The startup has nearly 300,000 registered users in about six months of launch. Like MoneyTap, which recently raised about $9 million from Sequoia India and others, a dozen-odd startups have attracted a string of investors to back them in the past few months.
EarlySalary secured $4 million from IDG Ventures and Diwan Housing Finance, and PaySense recently raised $5.3 million from Jungle Ventures. Ezcred, founded by former Zephyr Peacock India managing director Sachin Maheshwari and Zipdial cofounder Amiya Pathak, and LoanTap are backed by wealthy individual investors. The rush among investors to grab the opportunity dangled by these fintech startups is explained by the fact that smallticket customer lending is a large white space in India.
“We have a large population, decent number of smartphones and bank accounts. However, while we have about 600 million debit cards, credit cards are only about 30 million in India,” said Sateesh Andra, managing director at early-stage venture capital firm Endiya Partners.
“That is a huge gap, underlining the opportunity for customer-lending companies.” Endiya and Ventureast together invested $2 million in Kissht, which provides collateral-free loans to customers to facilitate purchases such as mobiles, laptops, jewellery and electronics.
Though credit cards have been around for long, in India these are used more as payment instruments for purchases than for securing loans for myriad purposes as in the United States. Personal loans offered by banks, on the other hand, have enormous interest rates, making them unattractive for many. These factors further expand the size of the opportunity for alternative lending startups.
“Two things have happened. Suddenly, India is becoming data-rich with a deluge of digital data available. Second, there is a huge unbanked population with steadily growing incomes but are unserved by banks,” said V Balakrishnan, chairman of BillionLoans and former chief financial officer at Infosys. “With these two factors combined, there is good space for fin-tech companies to use the data available to come up with credit scores and share it with lending institutions to facilitate lending.” Balakrishnan along with Rangan Varadan, founder of peer-to-peer lending platform MicroGraam, launched their alternative-lending platform BillionLoans in March.
The startup caters to customers with home loans and education loans as well as small and medium businesses. It recently raised its first institutional funding of about Rs 7 crore from Reliance Corporate Advisory Services, a wholly owned subsidiary of Reliance CapitalBSE 0.74 %. Whereas banks traditionally rely on credit bureau data to assess the credit profiles of customers, startups are leveraging technology-based algorithms and software integrations with India Stack and Aadhaar.
This helps them arrive at credit scores that are more inclusive of myriad data points, which can greatly improve an applicant’s chances of securing a loan. While credit bureaus such as CIBIL rate customers based on about 30 parameters, alternative lending startups use 500-800 data points. These may include Facebook friends as well as data gleaned from smartphones on ecommerce purchases, bill payments and mobile recharges. The idea is to develop small-ticket lending products alongside banks, allowing customers to apply and receive credit in real-time as well as helping banks cater to a whole new customer base with new lending products.
“A combination of all alternative data can give deep insights that help build a 360-degree profile not only assessing a person’s ability to pay but also his intention to pay—something that banks still struggle to figure out,” said Varadan, chief executive at BillionLoans. The mobile app asks potential customers to enter Know Your Customer details such as Aadhaar, PAN and voter ID details for initial verification. Following this, customers will be required to fill up loan application forms providing details such as on bank statements, other loans, and assets and liabilities. The startup also pulls data from CIBIL, analyses social media behaviour and conducts psychometric analyses if permitted.
Post that, customers are assigned final credit scores that are shared with lending banks for approval. The entire process takes just 30-45 minutes. The sweet spot for most fin-tech startups is unsecured loans ranging from Rs 20,000 to Rs 5 lakh for youngsters with average salaries of Rs 20,000 to Rs 1 lakh a month. The lending models are diverse—to allow customers to buy online; to buy consumer durables from regular stores; providing salary advances; or helping cover unplanned requirements such as medical bills. The key promise these startups hold is helping customers secure loans quickly (provided the customer has all the information in place) and providing flexibility and convenience of repayment.
“Targetted at the upcoming Diwali season, we are building a loan management system that will offer flexibility on how to repay a loan… depending on criteria such as salary credit date, paying only interest for a couple of months, making a bullet payment, or paying off your loan in one go,” said Prashanth Ranganathan, CEO at PaySense.
The startup, which works with India Infoline as a lending partner, has to date disbursed more than 25,000 loans with average ticket sizes of about Rs 52,000. Although banks may be keen on trying new technologies, several startups believe that integration with banks’ systems is extremely complex. Often, there are glitches in getting the nod from banks even after a customer is deemed credit worthy by a startup.
“The final decision is with the lender (not the startup). While in the first month of operations, we faced 20 per cent rejections (by banks), it has now come down to 10 per cent,” said Varadan of BillionLoans. “We need a critical number of lenders on the platform so that there are enough lenders to find a fit with different borrowers, based on their criteria.”
BillionLoans has partnered with Yes Bank and ICICI Bank as well as nonbanking financial companies Incred Finance and Vistaar Finance. Kissht and EarlySalary are following the NBFC model, lending on their own instead of partnering with a bank in a bid to have control over the entire lending process so they can guarantee faster processing of loans. “Working with other lending partners is not scalable because every month they put in some clauses, and because of their processes issuing money to customers in real-time becomes a challenge,” said Akshay Mehrotra, CEO at EarlySalary.
At least 60 per cent of the startup’s customers are granted loans in under 10 minutes, he said. For young companies trying to go solo with the NBFC model, the biggest challenge is to continue raising a large quantum of debt. “You can leverage five times the equity raised, but it is difficult to get those multiples,” said Mehrotra, adding that EarlySalary has disbursed Rs 31 crore across 23,000 loans. The solution could be a combination of having enough cash on your books to lend while also tying up with banks and financial institutions, say experts.
“At least initially, a lot of growth will come from taking risks on your own balance sheet. When you are able to take risks on your own books, banks get more confidence in your ability to do the due diligence as compared to lead-generation platforms,” said Karan Mohla, executive director at IDG Ventures, an investor in EarlySalary.