The lendtechs oiling India’s SME-conomy

The Paytech Magazine’s Swati Sanyal Tarafdar explores how India’s New Age lenders are extending alternative finance to small and micro businesses

For a long time, Uma Maheswari wanted to start her own business. Instead, she worked at a beauty salon where she built up a book of loyal clients. When the COVID-19 pandemic hit, the salon was shut, and Maheswari found herself jobless.

So, in September 2020, while COVID was still raging and customers weren’t willing to venture outside, Maheswari summoned her courage and started her own ‘salon-in-your-home’ service.

“I needed a lot of supplies and personal protective equipment. My clients knew that I do my work well. Now I had to convince them that it was safe for them,” she says. But for that she needed a minimum of Rs 10,000 (around US$136) – not a fortune, but still too much to ask of friends and family when they were already struggling in lockdown.

“My sister recommended a lending app that I downloaded from Google Play Store. I spent some time understanding it. They

When she wanted to expand her online business to start delivering to the rest of the country, she started looking at alternative credit sources.

“This was no time for expansion but I have worked hard in building up my brand and business. I didn’t want a pandemic to force me into throwing everything away. Nobody needed new suits anymore but I marketed aggressively. I needed to keep the team motivated, find work, and keep their hearths warm. I needed financial support,” she explains.

Khan had seen commercials on the television for alternative lenders and started researching them.

“I understood that third-party entities, probably technology owners, are outsourcing banking roles to established financial organisations that have the required banking licences. I saw nothing wrong with it; they seemed valid, secure, and extremely easy – no physical paperwork was involved,” says Khan.

needed me to register on their platform and upload a few documents for verification. When I had made up my mind, the digital application process took me five minutes, and the money was in my bank the next day. It came like a blessing from above. I used the money to get what I needed. I have already repaid the amount, and have taken another loan now to expand my business. I have started selling wellness products,” she smiles.

Everyday entrepreneurs like Maheswari knew it was a waste of time approaching incumbent banks for support – they didn’t look favourably on loan applications for micro, small and medium-sized businesses (MSMEs), and, in any case, they were clumsy to use. Yet it took a pandemic – one that threatened to put many small Indian traders out of business – to persuade them to explore the emerging fintech market.

Nimisha Khan, Gurugram-based fashion designer and licensed e-commerce player, was another of them.

Back in 2018, most of the estimated US$600billion credit demand from Indian MSMEs like Maheswari’s and Khan’s was being met through informal sources, according to the authors of a joint study by Omidyar Network and Boston Consulting Group. That created a massive opportunity for new-generation lending platforms like Mintifi, which provides uncollateralised working capital credit to MSMEs.

It reckons existing finance channels haven’t been able to solve more than one per cent of the total demand. Not only is it a huge, untapped opportunity – but it’s a critical one, too. This sector employs around 124 million people and their activities generate at least 30 per cent, and as much as 38 per cent, of GDP, according to the government’s own figures and those of industry group SME Chamber of India, respectively. The pandemic has hit their cashflow hard just as digital transactions and SME services have come to the fore.

Home-grown lending apps that can be downloaded from the Google Store, such as Mintifi, MobiKwik, SmartCoins, MoneyTaps and a dozen others, have enabled users to avail themselves of instant, interest-free loans ranging from as little as Rs 1,500 (US$21) to Rs 100,000 (US$1,362), delivered directly into their wallets or bank accounts. These are mainly short-term loans, ranging from one to six months, and what is reassuring for an SME user is the fact that, on successful repayment, they can take out advances for higher amounts and for longer periods. The application process for these takes a matter of minutes because the platform is pre-populated with their customer identification and credit record.

The lendtech sector in India has been growing since the first providers emerged around 2015-16 but, like every other tech vertical, it’s been catalysed by the pandemic, especially for those serving the country’s resourceful MSMEs.

Those businesses that succeeded in reinventing themselves or diversified in the face of changing customer demand during the crisis survived and even thrived. There were numerous instances of mobile phone stores converting into manufacturing units for sanitizing and wellness products. They all needed small to medium-sized loans, usually for short durations of time.

In May 2020, the Government of India attempted to energise this community of MSMEs by injecting additional resources and credits through various welfare and subsidy schemes. A US$55billion spending scheme was announced, with a bucket of US$40billion collateral-free automatic loans. It sounds substantial, but in a country the size of India, as Ketki Bhagwati, senior advisor at Atlantic Council’s South Asia Center, observed: “A relief package of US$55billion for the country’s biggest employer, which is less than half the size of the balance sheet of a large Indian bank, appears little more than symbolic.”

And there was another issue: although the government updated its definition of MSMEs to broaden the number of businesses that qualify for official support, many were still too small to be included in the official classification and have missed out on support entirely.

According to the Government of India’s Ministry of Micro, Small and Medium Enterprises’ latest annual report, published in March, MSMEs are still nevertheless managing to contribute significantly to the country’s economic expansion by meeting demand from both domestic and global markets. The growth has to be fuelled from somewhere and lendtechs save them from having to rely on informal and often unregulated means of raising funds.

So how are lendtechs using technology to meet their needs?

According to Market Insights, the entire fintech market in India was valued at around US$26billion in 2019 and is expected to reach around US$85billion by 2025 – that’s a compound annual growth rate of nearly 23 per cent. A big chunk of that is being driven by payments – digital transactions in India over the last year have grown by around 42 per cent. And that works very much in favour of small businesses and the companies looking to finance them. Mintifi, for instance, which focusses on supply chain finance, uses underlying transaction data to unlock unsecured loans, its quick, hassle-free, flexible options marketed as way of turning business dreams into reality.

these new digital lenders. However, it is gradually opening up to the potential of challengers and has set off discussions around open banking. It has also now started allowing fintechs to test their innovations in a restricted ecosystem. Meanwhile, those neobanks that have emerged, while challenging traditional banks on one hand, are also offering lower-cost models and customised, customer-centric services to businesses through strategic partnerships with entities that own banking licences in India. Although the RBI remains implacable that banks should have a physical presence in the country and virtual banking licences cannot be granted otherwise – it believes bricks-and-mortar bank branches are necessary to serve customers and redress their disputes and grievances in person –there are instances of foreign national banks offering digital-only products through their Indian subsidiaries. In the past six months, several lendtechs have also raised angel funds to expand their operations there. Lendingkart, for example, an Ahmedabad-based fintech which lends to MSMEs across India, raised $42.1million as part of an Mintifi uses ongoing Series D funding underlying round last May at the transaction height of the pandemic. In November, Delhi-based data to unlock LivFin, one of the early unsecured loans entrants to the digital business loans market in 2017, raised US$24million of fresh capital to strengthen the supply chain finance segment as well as expand its reach to unbanked and underbanked areas of the SME ecosystem. That comes on top of a decade of strong investment in India’s fintech landscape. According to a report published in March by Credit Suisse, the country’s fintech sector has been the second-largest recipient of private equity/venture capital funding over the past decade. Payments were the leading sub-segment, attracting US$4.2billion followed by digital lenders, who raised US$2.5 billion. Between them, digital lenders have grown a US$10billion industry across retail and commercial credit. And all the forecasts CHANGING ATTITUDES are that is likely to carry on growing. The Reserve Bank of India (RBI), which is the Which is good news for the hundreds central banking regulatory authority in the of thousands of India’s hardworking country, is still somewhat skeptical about entrepreneurs – especially now.