Madan, who runs a small furniture shop in Kirtinagar, New Delhi, applied for a bank loan of Rs 4 lakh. He was disappointed when the said loan was not granted by the bank. Then, he applied for one on IndiaLends, a credit underwriting and analytics platform for unsecured consumer lending.They gave him an unsecured loan of Rs 4 lakh,at an interest rate of 16 per cent.
SME financing has traditionally been limited to businesses that have solid financial credentials or assets to back the loan. However, a flock of startups, who are leveraging technology and alternate data sources to underwrite, are able to help less established businesses. Online lending is making it easier for SMEs and entrepreneurs to receive loans.
Gaurav Chopra, Co-founder, IndiaLends says,
Banks are catering to established businesses with solid balance sheets and financial history. Smaller businesses that are still in their early stages, or require only limited amounts of funding (say, upto 5 lakh), are still a part of the underserved market. IndiaLends caters to such groups.
IndiaLends operates as a marketplace, and has tied up with multiple financial institutions that lend money via them. The startup caters to MSMEs and self-employed individuals.The size of loan varies from Rs 30,000 to Rs 25 lakh. It recently raised an undisclosed amount of pre-Series A funding, led by DSG Consumer Partners.
Addressing the unmet financial needs
It is observed that 92.77 per cent of SME beneficiaries have no finances, 5.18 per cent avail of finances from institutional sources and 2.05 per cent, through non-institutional sources.
Harsh Vardhan Lunia, CEO and Co-founder, LendingKart, says,
Out of the 700 towns and cities in India, barely 150 have direct access to credit. SMEs contribute 45 per cent to the national GDP as compared to 15 per cent contributed by the corporate sector.
Ahmedabad based Lendingkart is a credit revaluation platform that facilitates capital financing for startups, and small and medium business owners. It helps SMEs raise loans for amounts between one lakh and one crore. This Delhi-based startup has raised $10 million from Saama Capital, Mayfield Fund, and individual investors Ashvin Chadha and Shailesh Mehta.
Finance for SMEs in India is a widely discussed subject, but very little is being done about it. Most banks are happy to provide loans against collateral and to asset-heavy companies. India, however, is primarily a services economy; most SMEs here are in the services sector, which by nature are asset-light.
Gurgaon-based peer-to-peer lending pioneer Faircent.com offers collateral free loans of upto Rs15 lakhs to Micro and Small Medium Enterprises. The startup has raised a pre-Series A round of $250 thousand, from Singapore based M&S Partners.
The usage of technology has disrupted the Indian financial space by making it faster and more efficient and by reducing the multiple rounds of documentation that take place while interacting with a traditional player in the space.
Sashank Rishyasringa, Co-founder, Capital Floats, says,
Unlike traditional banks and NBFCs, we typically go through over 2000 data points about any given applicant to determine credit worthiness.We look into several factors, including social media, bureau records, and vendor relationships, etc.
Bengaluru-based Capital Floats offers loans from rupees two lakh to one crore. So far, it has disbursed close to Rs 150 crore of loans to businesses across India, including those in tier II & III cities.
In order to push crores of funds into the pockets of startups and MSMEs, Union Finance Minister Arun Jaitley has launched a new scheme, the SIDBI Make in India Loan for Small Enterprises (SMILE), to which he has allocated Rs 10,000 crore. The fund is likely to help small enterprises grow, by offering them soft loans in the nature of quasi-equity.
Overall, the government has created a favourable environment for the SME fraternity. The Rs. 20,000 crore MUDRA Bank is also one of the initiatives taken by PM Narendra Modi to address the shortfall in loans to small entrepreneurs.
However, Pavitra Walvekar, CEO, Kudos Finance & Investments, says that he really hoped to be a part of the MUDRA lender community for the MSME sector, but he has been deprived of that opportunity because the book size needs to be Rs 500 crore for one to become a lender under the MUDRA bank scheme.
Pune-based Kudos Finance has three products: business loans, machinery loans and short-term loans. Under business loans, it offers unsecured loans to retailers, traders, kirana stores, saree centres, and restaurants etc., with a ticket size of Rs one lakh to Rs 20 lakh (term: 24 months).
Machinery loans are meant for the manufacturing sector, with a ticket size starting from Rs one lakh, up to Rs 30 lakhs (term: 30 to 36 months).Under short-term loans, Kudos offers unsecured loans to existing customers who want to buy bulk goods at discounted rates, with a ticket size starting from Rs 2 lakh to Rs 10 lakhs (term: one to three months).
Currently, the startup has 40 clients, and monthly it disburses four to six loans worth Rs 40 lakh per month across all categories.
Globally, fintech has been a hot segment for investors. As per sources, investment in the segment grew by 176 percent from 2010 to 2014.
The financial services space in India saw remarkable disruption in the past couple of years, meeting the demand of borrowers. Therefore, investors are very bullish in this sector, and have started infusing capital with positive hopes in terms of RoI.
Deepak Shahdadpuri, MD, DSG Partners, who recently invested in IndiaLends, says,
Startups have a real opportunity to build a solid credit business in different parts of the value chain: credit sourcing, risk scoring, pricing, fulfillment, collections, compliance, risk management, better pricing, and NPAs, etc. The SME market in particular does not get anywhere close to the amount of debt that they require to fuel growth. There is a high degree of friction in the process today.
Harsh Vardhan says, "In India, this sector has caught the eye of major public and private banks, who are seeking to partner with such startups in order to gain a technological edge in their processes."
With innovations in the business model, technology, credit screening, credit scoring and better pricing, SMEs will have access to more capital in the near future.
The opportunity to provide finance to SMEs in India is beyond what banks and traditional NBFCs can address. And startups here are believed to be the early movers in the space, giving them an edge in terms of accessing data.
Although the financial service market in India is growing at a swift pace, it still needs to do a lot to elevate marginalised sections of society to the middle class, opening up the market for funding to the MSME sector.Technology will play a huge part in the near future, and will push companies to evolve.
Rajat Gandhi of Faircent says,
The Indian market is waiting to be disrupted by marketplace lenders who, with technology, are going to disintermediatebanks and NBFCs.