In March 2017, Prateek Jha the owner of the Delhi-based horticulture and landscaping company, Lotus Plantations approached CoinTribe — a lending marketplace for small businesses for a Rs.15 lakh loan. The loans that Jha had already taken from eight NBFCs did not come easily, however CoinTribe was a pleasant surprise — the company got the loan within a week. “CoinTribe was the only one that fully understood what we actually did and they were quite insightful,” says Jha. CoinTribe focuses on facilitating unsecured loans and their main objective is to understand the applicant’s business. While there was already an algorithm to evaluate the applicant’s business, the start-up put extra effort by deploying an underwriter to assess customer risk profile better.
In India, Micro, Small and Medium Enterprises (MSME) avail 5% of the total institutional lending, according to estimates by the Federation of Indian Small and Medium Enterprises. Although it is a $300 billion-$500 billion market, access to credit and its high cost have been hindering the growth of SMEs.
It is this legacy that a bunch of start-ups, such as CoinTribe are trying to rewrite. The SME divisions of many banks, cater to medium-sized businesses, not small or micro. On the other hand, some put lot of other restrictions. “It would be unfair to evaluate a small business by simply checking the balance sheet. We look at cash flow and try to arrange for one-on-one interactions to understand the start-up,” says Rohit Lohia, co-founder, CoinTribe. The online lending platform provides all services (including loan application, documentation and credit disbursal) in the digital form, with minimum manual intervention. Currently, they have five lending partners, including, banks and NBFCs, to provide loans ranging from Rs.5 lakh to Rs.50 lakh, to businesses with a turnover between Rs.1 crore and Rs.50 crore.
The model was tested with three different banks and the outcome was impressive. The start-ups’ results based primarily on bank statements, profile of the person and bureau score was either equivalent or superior to what bank underwriters have been producing by assessing all financial and bank statements, interviews and other things. “Despite more than 80% convergence in decisions, we discussed each case where there was a divergence in the assessment and found certain issues in the way traditional banks were computing data. This indicated a better assessment by CoinTribe,” says Lohia.
A large part of traditional banks’ underwriting algorithms work on quality and value of the collateral, bureau scores and various ratios computed using balance sheet and profit and loss (P&L) statement. Small units operating in the steel or poultry sectors have been finding it difficult to get loans from banks due negative industry classification, unavailability of latest balance sheet and P&L. This reliance on cash flow and deeper understanding of the business and behaviour (focusing on bank statements), helped the start-up identify good profiles and lend to customers, treated unfavourably otherwise.
Launched in 2015, the company has disbursed loans of around Rs.275 crore to SMEs till date. With NPA of less than 0.2%, the start-up has been clocking revenue of Rs.30 lakh to Rs.40 lakh every month. CoinTribe follows two different customer acquisition models depending on the contract — directly reaching out to a customer as well as tying up with corporates, where SMEs become borrowers. “Either we share a part of the interest, which the lender gets or we get an upfront assessment fee depending on the arrangement with the lender,” says Lohia.
For Shailesh Jacob, co-founder of the Gurgaon-based Loan Frame, starting a lending marketplace for SMEs was more than a big opportunity — it was also about contributing to the overall economy. According to the Ministry of MSMEs, the sector contributes around 38% to the GDP and provides the largest share of employment, after agriculture. “In India you have over 50 million SMEs and credit penetration is less than 10%,” Jacob points out. In August 2015, he launched Loan Frame partnering with around 20 lenders.
“Many lending institutions have a policy to cater to SMEs with a certain turnover and credit score. However, we ask people to focus on the health of the business — positive cash flows and the willingness to repay,” says Jacob. Often, credit scores are low owing to some delayed credit card payments, all of which have no real bearing on the current health of the business. The team, hence, worked with lending partners to introduce products that cater to micro SMEs. “Take the case of SMEs in the hotel or in the restaurant business — they are viewed as high-mortality businesses by banks. We come up with innovative ways to analyse and assess customers mostly on transactional data, to come up with products for this segment,” adds Jacob. Loan Frame uses both manual and digital data for analysis and focuses on sectors such as manufacturing, services, healthcare, pharma and automobile among others. It uses sector-specific data points to strengthen a borrower’s assessment and through a cash-flow analysis arrives at a comprehensive comparative borrower risk profile. Social media data, online footprints and e-commerce data among others are used to supplement the assessment process. The start-up is also developing behavioural and psychometric scores that would help better assess thin file customers (customers who have little or no credit history).
The company makes its way through the entire lifecycle of a loan — from targeting customers through mobile or web channels (to make the process faster) to recommending them to the lender to monitoring the customer post disbursal. Using the technology available at its disposal, a process that would take three days, is be completed in a matter of seconds. “We help lending institutions with a number of data points to better equip them to take decisions,” he says.
Loan Frame has catered to around 20,000 customers across 175 locations in India. “Small businesses are credit starved, resulting in significant demand. But lenders today are not geared up to assess much of this demand as these businesses do not fit into their target segments owing to high cost of acquisition and assessment,” states Jacob. The start-up, which has over 10 lending partners, takes 1-2% cut on each successful financing, depending on the type and number of services availed by the lender. A fee is also charged each time a customer is brought in. The 40-member enterprise offers over 50 products presently and has raised $2.25 million in seed funding led by Vedanta Capital in 2017.
Investor interest in the segment has been quite high recently. The Mumbai-based Rubique recently raised $3 million from Kalaari Capital in June 2017. It was after 20 odd years of experience as a banker that Manav Jeet chose to start Rubique. “If you look at SMEs alone there is a $300 billion credit gap,” he says. But Jeet believes that for every borrower there is a lender somewhere and the problem lies in discovery and predictability. Each lender has a diffe=rent risk appetite and there is no guarantee that a SME would get a loan.
Jeet has tried to add predictability to Rubique, by building rule algorithms for its 68 lending partners. When an SME applies for loan, the algorithm picks it up, finds out data such as the type of profile and matches it with the right kind of institution. It has its platform integrated into the lending system of the partner and works with influencers for customer acquisition. Rubique has around 2,400 influencers who are paid based on successful disbursement where revenue sharing is between 0.5% and 0.8%. “When you are taking a home loan, the builder’s office is an influencer, if you are an SME the chartered accountant, is an influencer. Most of the business happens through these influencers whom we empower through the means of technology,” Jeet says.
The company, which focuses on disbursal and gets paid only once the loan is a success, has catered to around 1 lakh customers in one and a half years. Its revenue has gone up by over 4x from Rs.3.5 crore in 2015 to Rs.15.5 crore in FY17. Rubique, which has also built white label apps for a few banks, has developed its technology in-house. It is currently working on adding peer-to-peer lenders to its partner base. While the enterprise also looks at retail products, around 60% of its Rs.1,000 crore disbursal, across 26 cities in the past one year, has come from SMEs. The company which started with digitising 30-odd credit policies of financial institutions and used to see 15-20% success in approvals, today has created an algorithm for 139 policies and 295 products.
While Rubique is soaring with a 60% approval ratio, two-year-old Indifi Technologies has thus far disbursed loans above Rs.100 crore to around 2,000 SMEs across 150 cities in India. A marketplace with nine lending partners including five NBFCs and four banks, the company’s solution to the problem has been a segment-wise approach. “A one-size-fits-all approach won’t work for SMEs, since they are very diverse in terms of cash flow behaviour,” notes Alok Mittal, CEO and co-founder, Indifi.
The start-up identifies segments that are underserved by banks and NBFCs, talks to customers in those domains on what their working capital needs or other loan needs are and then designs products accordingly. These products are then taken to the banking partners by Indifi to explain how it would suit the segments and gives them a list of credit signals which help them mitigate the risk in the segment. “We participate entirely — from product design and credit approval to actually running the process for the banks on an ongoing basis. Lenders simply have to come in to sign the policy and price that application. All operations including customer acquisition, managing accounts and customer service, is managed by us,” says Mittal.
He tries throwing some light on how Indifi designs a product — taking the case of travel agencies, a blacklisted segment by banks due to extreme volatility of the business. The start-up looked for ways to understand and assess the segment in terms of strength, volatility and consistency of the business. They have partnered with large consolidators such as Via, Yatra, TSI and Uniglobe. Indifi can also access real-time data on how much the travel agencies are booking through consolidators. “Suppose someone took a loan when they were doing Rs.10 lakh of business and after three months it expanded to Rs.15 lakh, we know there is a need for higher working capital and, hence, we can upsell in time. If their business shrinks to Rs.5 lakh, we know we should reduce the credit line they have,” says Mittal. These triggers are surfaced automatically but there is due process and caution exercised, including discussions with customers, before effecting a line reduction. A product design is structured so that it is a working capital line, which they can draw anytime but they have to pay back in 30 to 60 days because we know that’s their reciprocation cycle and they can only use it for consolidated purchase of tickets. They can’t take that money and buy real estate; those controls are in place.
Indifi currently caters to five segments, including travel agencies, retailers, used-car dealerships, hotels and restaurants. It also has an invoice discounting product to help start-ups get access to debt financing. Start-ups with large clients can bring their invoices to Indifi to get prepaid on those invoices. According to Mittal, thanks to digitisation, the underwriting process has been reduced to a mere two to three hours. The stream of data from multiple sources, including partners such as FoodPanda, Swiggy and MakeMyTrip among others, websites, bank statements and tax returns. make it easier to underwrite applications from SMEs. The start-up correlates these information sources to develop confidence in the actual business being done by the borrower. Providing loans between Rs.1 lakh and Rs.50 lakh Indifi earns its revenue on a per transaction model and works at an operating cost which is around 50% of traditional lenders. The company, which raised an undisclosed amount from Accel Partners and Elevar Equity in October 2015, raised an additional $10 million from Omidyar Network and existing investors in a series-B round in December 2016.
For Sandeep Farias, founder and MD, Elevar Equity, Indifi’s sharp focus on MSME and its objective to add value to what he terms ‘the real India,’ was compelling. “They focus on the aggregator and vertical lending strategy — to define and build expertise in certain MSME segments so that they can really add value, instead of being a generalised lending platform,” says Farias.
While most marketplaces have adopted the traditional ECS model for repayment, the Mumbai-based ftCash, which provides mobile payment tools and a lending markeplace to SMEs, offers a different model to its customers. For people such as Wasim Durani, who runs Super Moto Outfits in Mumbai, this is convenient. He availed of two loans of Rs.1 lakh and Rs.5 lakh through the platform for running his off-road bike racing merchandise business and accessories. “The good part about repayment is that whenever the customer swipes his card for payment a percentage of the money gets automatically deducted for repayment and the balance amount gets credited to my bank account. I don’t need to pay an EMI every month,” he says. ftCash taps into the huge SME repository of India through its dual offerings — a one-stop shop for accepting all electronic payments and loans with zero upfront cost and no monthly rentals.
“If you look at the Indian landscape a large portion of SMEs do not have access to institutional finance primarily since their business is around cash and is not part of the banking channel. We have converted a lot of their customer transactions into digital transactions,” says Deepak Kothari, co-founder, ftCash. Hence, they have a treasure trove of data based on which they can provide lending or institutional financing through their network of NBFCs. According to Kothari, small scale lending hasn’t really picked up in India owing to the inefficient method of evaluating loans from Rs.5 lakh to Rs.500 crore using the same standard method. “A Rs.50,000 loan can never be viable if you have to do paperwork, risk assessment, repayment checks, because given the size of the loan the unit economics work very differently. ftCash on the other hand are completely digitised and paperless making it feasible,” he explains.
With customers being incentivised to make more digital transactions, there is more data available at a granular level, which gives them an edge over others. “We have data at far more granular level — reliance on the customer and geography, how frequent are the pay-ins — and this data is far more valuable,” Kothari notes.
With a base of around 25,000 merchants, the start-up levies a transaction fee of 2% on the payment side. Since the company is in a better position to assess the credit risk they are also able to get the merchant a loan by an NBFC at a lower rate than the money lenders. ftCash shares the profits with the NBFC while at the same time ensures that the merchant gets a better product and also builds up their credit history.
With a revenue growth of 20-30% month-on-month, ftCash has processed around Rs.390 crore in transaction volume. After raising a pre-series A round of around $148,000 from Ivycap Ventures in March 2016, the company raised an undisclosed amount from 500 start-ups and existing investors in June 2017. Vikram Gupta, founder and managing partner at Ivycap Ventures, had two reasons to place his bet on ftCash — a solid team and a huge market opportunity that was relatively untapped. “The entire SME space remained untapped since it required a feet-on-the-street kind of approach. You need to actually meet with these merchants and get them onboard and it requires a rigorous execution process. What we liked about ftCash is that they have figured out a cost-effective way of onboarding these merchants in a very short span of time, which reflects on their execution strength,” says Gupta. According to him, this comes from its ability to trust its merchants through a seamless, robust and integrated technology platform.
Gupta, however, admits that there are challenges to overcome. India still consists of a vast number of vendors who are not comfortable doing their transactions online. “They are historically used to not filing taxes, or even if they file they will show only certain portion of the income. The mindset shift will take some time,” says Gupta. Nevertheless, he feels that measures such as demonetisation and GST have helped in bringing more customer online benefitting start-ups like ftCash in the process.
Despite the odds, the lending marketplaces seem to be ironing out multiple hiccups such as high cost of acquisition and long turnaround time for traditional banks or NBFCs. Additionally, they have been providing them with increased risk assessment capabilities and exposure to newer segments. Digital is still only a small component of the much larger Indian economy. The challenge before the new age players is to get the ecosystem to match their pace and it might be only a matter of time. Meanwhile the young entrants are patiently laying the ground for a new lending economy.