As the Covid-19 crisis forces micro, small and medium-size enterprises (MSMEs) in India to stay afloat in the absence of incoming revenue and kick-start their business again, digital lenders have come of age as they have the advantage of speed and adaptability to assess and disburse loans faster, according to a new report.
The Reserve Bank of India (RBI) estimates the total addressable credit demand by the country's MSMEs at $490 billion and the overall supply from formal sources at $192 billion.
"This credit gap of up to $331 billion suggests that traditional lenders are either reluctant or unable to serve this segment of borrowers. In contrast, alternative lenders like FlexiLoans, Indifi, SMEcorner and ZipLoan see lending to MSMEs as a business opportunity," said a latest Forrester report.
These digital lenders offer a wide range of alternative lending options, such as working capital loans from Happy, lines of credit from Indifi, startup loans from Lendingkart, and merchant cash advances from FinBucket.
"They use technology such as digital applications, automated underwriting, digital verification, and digital disbursement to improve risk assessment, accelerate loan processing, reduce costs, and enhance experiences," said Arnav Gupta, Analyst at Forrester Research.
Digital business lenders use payment and accounting platforms to find borrowers.
BharatPe lets payment solution customers know that they can apply for a loan and repay it via a percentage of sales made on the payment platform. Lenders lacking their own payment or accounting platform partner with firms that do.
"FlexiLoans offers loans to small businesses based on their activity on Paytm's platform. Digital lenders such as Indifi and ZipLoan work with an ecosystem of companies and marketplaces to gather information on potential borrowers and assess risk before granting loans," Gupta elaborated.
Indifi is working with food delivery startups Zomato and Swiggy to assess a restaurant's credit risk by checking its borrowing history and customer feedback before issuing a loan.
So far, digital business lenders have proliferated thanks to little competition from incumbents. To compete with them, a few Indian banks and NBFCs have started to raise their game — reducing the time to lend, improving risk assessment models, and building end-to-end digital lending processes.
Digital lenders put more effort into fine-tuning credit risk assessments using data from alternative sources.
They also avoid the cumbersome paper-based application and approval processes that traditional lenders use.
Many MSMEs expect flexible loan repayment terms — which the Covid-19 crisis will make more important than ever.
Loan repayment flexibility is something that traditional lenders have always failed to offer to businesses. In contrast, many digital lenders offer repayment flexibility as a product feature.
"Lendingkart offers business loans that borrowers can repay in equal monthly or biweekly installments, allowing them to adjust their repayments to their sales and invoicing cycles," Gupta noted.
Many digital lenders are also extending credit for a cause.
"Capital Float offers educational institutions collateral-free loans to improve the quality of education by investing in educational infrastructure. Digital lenders such as FinBucket and Lendingkart offer preferential loans to women entrepreneurs," the report mentioned.
FinBucket matches MSME borrowers with lenders such as banks, offering loans under the national government's "Stand-Up India" scheme to help borrowers from different social strata and women entrepreneurs set up their own businesses.
Many startups have sought to disrupt India's business lending landscape, dominated by banks and NBFCs.
Firms such as BharatPe, FlexiLoans, Happy, and Paytm are offering credit to small businesses that already use their services and often tie loans to sales flowing through their platform.
FlexiLoans partnered with more than 100 merchant platforms to offer merchant POS-based loans; merchants repay these loans via automatic deductions from future sales.
To help MSMEs cope with the pandemic, Indifi partnered with PayU to offer lines of credit to merchants, which can borrow up to $66,000 in revolving credit; they can draw on it when needed, and interest is calculated on the outstanding amount on a given day, said the report.
"Digital disruptors threaten to make incumbents irrelevant by delivering more compelling products, services and experiences than traditional firms and at a lower cost. To avoid being disrupted, relentlessly focus on understanding your customers' needs so you can give them more of what they want faster," the report said..