Start-ups are tapping the some of the youngest loan seekers in the country—college students and young graduates looking for pocket money. The segment largely remained out of the purview of both formal banking and shadow banking sector.
In the last three to four years, several start-ups have started offering instant micro loans ranging from Rs 200 to Rs 10,000, and sometimes even more, to students and recent graduates, who don’t have any stable flow of income.
Using technology and analysing spending patterns and demographic profile, these new-age financial firms are able to make the business model viable, keeping the delinquencies low and margins stable.
Some of the few instant loan companies that have come up the past 3-4 years include mPokket, KrazyBee, SlicePay and Udhaar to name a few. The lending takes place through an app, linked to a credit card.
SlicePay, a Bengaluru-based start-up focused on micro lending to students through its credit card, offers youngsters loans for purposes like ordering online food to booking flight tickets and buying clothes.
The ticket sizes vary from Rs 200 to Rs 30,000, says Rajan Bajaj, founder of the company. He had set-up the company three years ago, soon after graduating from Indian Institute of Technology, Kharagpur.
mPokket, a Kolkata-based start-up, started operations in December 2016, and in less than three years’ time, its annual lending is close to Rs 500 crore—similar to a mid-sized microfinance company.
According to Gaurav Jalan, founder and CEO of the company, one can take loan ranging from Rs 500 to Rs 10,000, but the average ticket size is around Rs 1,100-1,200.
Much of the success of these companies can be attributed to the technological innovations and use of smart phones, which has cut out multiple layers of manual verification, while keeping a tab on the spending habits of the customers.
“Banks and other financial institutions never invested in the technology. For example, automation helps in risk assessment and bypasses the cost involved in physical verification. The space is large, and there is not enough competition,” says Bajaj.
Notably, most customers on these platforms have no credit history as often they are first-time borrowers from an institution. Hence, some of the matrices that these companies consider while lending are spending habits, education background, demographic profile and social network group to name a few.
Also, to bypass the physical verification, the customers have to mandatory take selfies or make a short video of themselves to complete the registration process in the app.
“We use various automated risk assessment techniques. For example, if we see lot of requests for loans coming from one particular locality, immediately a red flag is raised,” says Bajaj.
Further, to incentivise the students, many companies offer cashbacks on referrals and also provide an interest-free period. The average annual interest rate charged by the companies varies between zero to 30 per cent, and most lenders have tie-ups with NBFCs for funding.
After tapping tier-I cities, most of these companies are now looking at tier-II and III cities.
“The market for this segment is close to a billion dollars. We are now not only tapping tier-I cities, but actively looking to expand in tier-II and III towns,” says Abhay Tamaria, founder, RedCarpet. The firm's average lending per month is now close to Rs 20 crore.