Why one of India’s biggest SME lending startups chose to diversify into consumer lending

A year ago, Capital Float began piloting its most ambitious project – diversifying into the consumer finance space.

The Bengaluru-based lending startup on Thursday announced its entry into consumer lending through its paperless in-app based consumer finance solution.

Capital Float’s Consumer Finance solution operates on a digital model, wherein the application process is completed in under three minutes. Consumers need not swipe their credit cards or pay upfront. Instead, they can opt for the convenience of paying via EMI by applying for the loan during purchase.

At present, the company is offering loans with no-cost EMI.

So, why did this startup which has disbursed close to Rs 5000 crore in loans, choose to go the B2C way?

Sashank Rishyasringa, Co-founder, Capital Float explained the reason behind the company's foray into consumer finance.

“A major segment of SMEs catered to by Capital Float have consumer facing businesses. And they ended up giving a feedback that they will benefit if Capital Float also gives EMI options for the consumers, apart from financing their business.”

Over the course of the pilot, the company claims that since the introduction of consumer credit, the partners have experienced an increase in sales up to 40 percent in certain cases.

Other reasons

While SME loans is a flourishing opportunity, it continues to be a challenging market in the country.

The founder of a Bengaluru-based finance startup, which is rolling its lending product in the next few months, said:

“What we understand from our partners is that it is difficult to sell a B2B lending product to SMEs considering the options of interest rates and players in the market.”

While commissions are much more in B2B lending (42.5 million SMEs), also considering bigger ticket sizes, B2C still proves to be a lucrative option, considering the wide user base.

Proving this are metrics, while Capital Float claims to be adding close to 10,000 -12,000 new B2B customers every month (as of April), it has already outperformed this run-rate adding close to 15,000 B2C customers on a monthly basis, in just one year of pilots.

Cost of acquisition is another reason that instilled confidence in Capital Float to look at this segment.

The Bengaluru-based founder quoted above says that the cost of acquisition for a B2C loan is much lesser than for a B2B one.

Capital Float is also looking to leverage its merchant network to reach out to more customers.

“We will look to leverage our SME base and reach out to their customers, as we see healthy margins and can underwrite the consumer segment at an equal level like we underwrite SMEs.”

Categories

But the digital lender which recently closed its Series C round of $67 million from Amazon, Ribbit Capital, and others, seems to be looking at segments with lesser penetration of credit.

Sashank highlights that the company is broadly looking at healthcare, education and home improvement and furnishing as the top three categories for its consumer finance.

In healthcare, the company plans to cover segments like dental, cataract procedures, IVF treatment, to name a few. When it comes to education, the company plans to be present in institutions which provide vocational training. In the area of home furnishing, it plans to partner with businesses which provide furniture to modular kitchens as well as heavy electricals like generators, among others.

Over the one year of pilot, the company states that it has established 1,300 outlets across India.

While purchasing, customers have to fill in their details on the Capital Float app registered on the merchant’s tablet.

Type of loans

The founders state that in the last 12 months, the company has been disbursing consumer loans with an average value of Rs 50,000 for a tenure of close to 6-12 months.

Sashank says its still early days to think of higher ticket size loans like car loans or ultra-short-term loans or credit line. However, its strength in this segment lies in short-term loans.

At present, Capital Float is offering consumer loans from its own books and might move to a co-lending model in the future.

However, the founder of an NBFC says that the co-lending model could be particularly difficult considering underwriting rules,

“When you lend from your own books, you decide on the underwriting model. However, in case of co-lending, you have to incorporate their underwriting methods too, which might create friction.”

The company plans to reach a customer base of 200,000 by the end of this year.

Metrics

During its last fund raise from Amazon in April, the company had stated that it had added Rs 1,200 crore ($185 million) in overall outstanding loan portfolio, over the last six months.

The NBFC had also stated that it disbursed close to Rs 4,500 crore in total loans through its platform, till date.

Adding close to 50,000 customers in the last fiscal alone, the platform lends close to Rs 250 crore in a month with its NPAs being around the two percent mark.

Over the course of the present fiscal, the company plans to generate close to Rs 5000 crore in loans and grow its customer base to close to 300,000 businesses and customers.