Lending start-ups grow consumer credit business amid caution by banks
Bengaluru: Online lending start-ups such as Faircent, Wishfin and Loantap as well as large e-commerce firms are helping expand consumer credit at a time when banks burdened by bad loans have become cautious about lending.
Because of demonetisation, announced in November, many consumers have become more comfortable with online services. That, along with the slowdown in bank credit, has given a boost to financial technology start-ups.
Personal loans advanced by banks grew 15.7% in August, slower than the 18.1% growth that the segment reported a year ago, according to the Reserve Bank of India (RBI) data.
Online lending start-ups offer loans for a variety of purposes such as paying medical expenses, salary overdraft, credit card refinancing, personal loans and purchases of high-value items such as smartphones, televisions and refrigerators.
Some start-ups stash their loan book by directly borrowing from banks or capital funds, while others use a peer-to-peer (P2P) lending format. P2P lending entails lending money to individuals or businesses through online services that match lenders with borrowers.
“Demonetisation had a greater impact on lenders who were worried about depleting their cash reserves. There was a considerable surge in the number of borrowers applying for loans during the demonetisation drive,” Faircent’s founder Rajat Gandhi said in an email interview. Faircent uses the peer-to-peer model for sourcing and disbursing loans.
Faircent (Fairassets Technologies Pvt. Ltd) is now processing around 300 loans per month, with an average loan size of Rs1.5 lakh on a monthly basis, compared with 130 loans given in November and December last year.
Wishfin (Mywish Marketplaces Pvt. Ltd), a company which aggregates loan and credit products from banks, has also experienced a huge increase in loans after demonetisation. The firm claims to get around 300,000 applications every month for various financial and credit products, up 2.75 times from a year ago.
Out of the 300,000 monthly incoming applications, around 40,000 are for personal loans and mortgages. Wishfin expects to more than triple that number to around 150,000 by March 2018.
Apart from online lending firms, e-commerce companies such as Flipkart and Amazon India have been pushing credit schemes aggressively to customers. Flipkart and Amazon offer no-cost equated monthly instalments (EMIs) and buy-now, pay-later schemes that are particularly useful for buying high-value products such as smartphones and large appliances.
An Amazon India spokesperson said “no-cost EMI has been a key enabler for many customers” on its platform. “We have expanded our ‘no cost’ offers from Bajaj Finserv currently to include up to 12-month credit card no cost EMI schemes as well across all major banks,” Amazon added.
LazyPay (owned by PayU) and Simpl (owned by Get Simpl Technologies Pvt. Ltd) also provide a buy-now, pay-later option to customers on their platforms by tying up with online vendors.
Traditional banks make use of a person’s CIBIL score and previous credit purchases of a customer to evaluate their credit worthiness.
Online lending firms use a more detailed data-driven underwriting process when it comes to disbursing personal loans. They use a mix of both credit scores and social scores by analysing a user’s social media data to determine credit worthiness of a potential lender.
Some online lending firms are also able to provide instant credit to users unlike banks. This means some borrowers with internet connectivity generally end up taking loans online because of the speed and convenience.
Loantap (LoanTap Financial Technologies Pvt. Ltd) is one such platform that provides instant finance to salaried consumers. It has categorized loans for specific-use cases including weddings, holidays, car/bike loans and credit card re-financing, among others. While banks take up to 3-5 days to approve loans, online firms are able to disburse loans within 24-35 hours, said Satyam Kumar, executive director of Loantap.
With better underwriting, chances of loans defaults also come down, start-ups claim. Kumar said that the mainstream MFI industry usually operates at less than 1% non-performing assets. “Loantap, on the other hand has an NPA share of just 0.5%. That is precisely because technology allows us to underwrite on 10-20 additional parameters, which (lenders) in the regular banking sector are not able to,” Kumar said.