Investors warm up to lending start-ups

Start-ups charge interest rates of 18-24% while banks set 15-18%

Bharat Rathore runs a small trading business at Taranagar in Churu district, Rajasthan. Each time he needs a loan, he has to go to a private bank in Jaipur. The bank sends a representative to assess his business and takes three to four weeks for the loan to be approved and disbursed. 

Last year, Rathore began using app-based lending start-ups such as Lendingkart and Capital Float, which are able to process and disburse a loan in three-four days, precluding the need to go to Jaipur. They use an app to evaluate the application, and approve and disburse the loan online. 

They are not alone. Investors have backed more than six start-ups in the lending space, pumping in more than $300 million in the last couple of years. These include players like Capital Float, Lendingkart, Neo Growth, Flexi Loans, Indifi Technologies and LoanFrame, which are targeting the SME financing business.

There are other start-ups like Faircent, Zest Money and Finomena, which are focused on personal loans, consumer durables financing, student loans, and online gold loans.

And investors like it because the opportunity is large, and the market, be that for SME financing or consumer loans, is severely under-penetrated. And there’s an opportunity to create a large profitable company, fairly quickly, says Gaurav Hinduja, founder and CEO, Capital Float, the largest of the new start-ups.‘’No lender gives loans at a negative gross margin (it’s always positive). You will see lending start-ups becoming profitable very quickly unlike start-ups in other segments,’’ says Hinduja.

‘’Investors like to invest in companies that can be potentially large and build scale very efficiently and quickly.’’ 

‘’There’s not much burn; it’s a supply-constrained industry, where you don’t burn much to generate demand. The market is huge and multiple players can coexist. It’s not a winners-take-all market like some segments of e-commerce,’’ said Harshvardhan Lunia, CEO, Lendingkart.

The SME financing business, for instance, is estimated to be a $150-billion-a-year opportunity; the withdrawal of high-currency notes will expand it further as lending in cash through informal channels dry up. Start-ups say they are targeting an addressable market of $5 billion in two-three years. 

Start-ups are banking on product innovation, convenience and speed to wean away customers from banks and NBFCs. These lenders lend mostly against collaterals while start-ups are doing unsecured lending. PSU banks take three-four weeks to disburse a loan while start-ups do it in three-four days, thanks to an online process involving origination, evaluation, approval and disbursing the loan.

Start-ups use a combination of tools like an SME’s cash flows and bank statements to do the credit assessment. ‘’That is the real value that new-age lending start-ups are bringing, because we have started to underwrite SMEs and do credit assessment in far more advanced ways by looking at a lot of new-age data,’’ Hinduja said. The data can be in the form of a vendor’s sales on e-commerce portals such as Amazon, obtained through psychometric testing, or what are generated on social media. ‘’We look at a combination of these factors along with traditional data like bank statements.”

Start-ups such as Lendingkart are focusing on micro enterprises, with a loan size of Rs 50,000 to Rs 15 lakh. They also give small-tenure loans. Banks typically give three- to five-year loans and there are very few lenders that give loans whose tenure is less than one year. 

‘’We are a debt-conservative society. Many want a loan with a tenure of three to six months. They want to pay it back and borrow again, if required,’’ Lunia said.

Start-ups are using technology (apps) to improve their reach. India has 5,000 towns but banks and NBFCs focus on larger ones. ICICI Bank, for instance, has branches in 250 towns and SME branches in 147. While the bigger towns may account for 65 per cent of all businesses, the smaller towns still account for the rest. Some start-ups such as Lendingkart service 450 towns.

Start-ups charge interest rates of 18-24 per cent while banks set 15-18 per cent. Start-ups say there’s more integrity in smaller towns, and their non-performing assets are 2-3 per cent against banks’ 4-5 per cent. Local moneylenders charge 2-3 per cent a month or 24-36 per cent per annum.