Credit and co-lending: How fintech startups can leverage a $500B opportunity

Sanjay Swamy and Shivani Kulkarni, who lead investments in the fintech sector at Prime Venture Partners, share the most important elements entrepreneurs need to build a fintech startup in India. 

Financial services—specifically, credit—form the key to fuelling the growth of an economy. The profit pool available here is also quite large. For instance, among the top 10 most valued companies in India, three are banks (HDFC, ICICI, SBI). HDFC Bank, after the merger with its parent, is counted among the top 10 banks globally.

Why is lending important for the Indian startup ecosystem?

- India is the third-largest fintech ecosystem in the world (behind the US and China).

- India has 10,000 fintech startups; out of this pure-play lending startups are 2,500 (25%).

The emergence of co-lending as a business model will be a game-changer in the near future.

- Digital public infrastructure like Aadhaar and UPI will help Indian entrepreneurs build large companies for the next 500 million Indians.

- AI will enable new verticals to create several lending unicorns targeting healthcare, travel, agriculture, and many more.

The ‘lending’ opportunity

Shivani notes that the credit gap in India presents a massive opportunity for entrepreneurs.

“Currently, there exists a $500+ billion of SME credit gap in India. This is how much you can actually lend to the SMEs (small and medium enterprises) but they are not getting access to that credit. On the contrary, from a consumer perspective, there are just 40 million people who have credit cards. Similarly, personal loans and other products also only scratch the top surface,” she explains.

She further elaborates that there are two broad categories in which entrepreneurs can build.

“One is on the consumer lending side, and the second broad category is on the SME side for the businesses. Both these categories can be serviced through secured and unsecured lending products. Secured lending is when a bank gives a loan against an asset as collateral. And then there is unsecured lending, where the primary medium is customer data that is used to underwrite.” 

Role of data in credit decisioning    

Sanjay states, “Data is the new currency in lending, the ability to analyse alternative data sources to assess creditworthiness opens up tremendous opportunities to serve underserved segments (around 500 million Indians).” 

He further explains that lending startups can leverage data from non-traditional sources —such as utility payments, social media activity, and transaction histories—to build more inclusive credit models. By doing so, these startups can tap into a broader customer base, including those who lack conventional credit histories.

He further shared how startups can build their USP using data.

“From a startup perspective, it's important to know if you just have access to the same data that everybody else has got it isn’t a competitive advantage, you’ve to identify and build your moat. It could be access to proprietary data that, when coupled with all the other data that exists, will help them underwrite better. It's perhaps better distribution that will allow them to access customers at a lower cost and access customers with not just a lower cost, but with proprietary information about customers that will be a game-changer.” 

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The co-lending model

Sanjay and Shivani excitedly talk about an area they are keenly investing in—co-lending. They discuss in detail how co-lending has emerged as a powerful strategy for startups to scale their operations and manage risk effectively. Essentially, the model allows traditional financial institutions and fintech startups to combine their strengths.

“Co-lending allows fintech startups to leverage the balance sheets and underwriting experience of established financial institutions, while banks can benefit from the technology and innovative customer acquisition strategies that startups bring to the table,” Sanjay explains.

“This symbiotic relationship not only enhances the reach of both parties but also improves access to credit for customers who might otherwise be underserved,” he adds. 

Sanjay further highlights that co-lending is particularly advantageous for startups as it helps them mitigate the risk associated with lending. By sharing the loan amount with a partner institution, startups can manage their capital more efficiently and reduce their exposure to potential defaults.

Shivani elaborates, “Banks lend out to NBFCs. NBFCs, in turn, may lend out to fintechs, and fintechs eventually reach the customer, unless the fintech itself is an NBFC.”

She explains that such a co-lending structure will end up benefitting NBFCs and fintech startups.

“There is a common misconception that NBFCs get valued on their books, and they have limited access to capital. The belief is that if they have raised Rs 100 crore in equity, they can probably raise, say, Rs 200 crore in debt and lend out a total of Rs 300 crore. But when they use co-lending, this entire constraint gets opened up. They can actually lend a lot more and build a lot bigger books. By virtue of that servicing a lot more customer segments without necessarily taking the risk on their own books,” says.

“You’ll have banks at the backend who become your partners; co-lending is essentially a risk-sharing model. So, you take 20% of the risk and the bank takes 80% of the risk. In this way, if you put in, say, 100 bucks, the bank will put in 400 bucks and overall you can create a pool of 500 and lend to the customer,” she adds.

The insights provide a roadmap for entrepreneurs to build resilient and innovative businesses that not only meet the needs of their customers but also stand the test of time. By focusing on these key areas, lending startups can position themselves for sustained growth and impact in the fintech ecosystem.

Timestamps:

0:00 - Opportunities and challenges in lending

7:43 - The digital infrastructure revolution in India

15:33 - Segmentation and opportunities in fintech

26:29 - The evolution of co-lending in India

34:16 - Opportunities in lending and finance

46:23 - Revolutionising fintech infrastructure and automation