Home / Companies / Digital credit—the next step towards a cash-lite economy

New Delhi: From clothes to selfie sticks, Brandroot sells a plethora of goods online through the Snapdeal marketplace. However, at times, the business faced funding issues when payments were due to come from the e-commerce firm and payments were to be made to suppliers.

For Vikash Diwan, a 35-year-old Meerut-based owner of the business, credit is now just a call away. He calls it his helpline. “Whenever I require funds, I just call IIFL," said Diwan.

Snapdeal has a tie-up with India Infoline Finance Ltd (IIFL) to offer credit to the vendors on the online marketplace based on their transaction history.

Of late, e-commerce companies, such as Flipkart and Snapdeal, and wallet providers, such as Paytm, are now aggressively looking to provide credit digitally to its vendors.

Lenders, such as State Bank of India, and e-commerce firms want to be part of vendor financing, Mint reported 18 September (mintne.ws/1Kk9877).

Paytm is planning to provide micro-loans to its sellers and consumers, similar to the model followed by China’s Alibaba Group Holding Ltd, The Economic Times reported 9 December (http://bit.ly/1Y19xSC).

Alibaba and its affiliate Ant Financial Services are investors in Paytm.

This could well be the next step towards a less-cash economy given that the government’s flagship Pradhan Mantri Jan Dhan Yojana (PMJDY) for financial inclusion has opened a bank account for almost every household in the country.

Till date, 195.2 million bank accounts have been opened under the programme.

Rajashree Nambiar, chief executive and executive director at IIFL, explains how supply chain finance works. “A supplier list is exchanged between the lender and the e-tailer. Based on their (suppliers’) past sales pattern and some other parameters, we run an instant credit decision engine and an AIP (approval in principle) is generated," Nambiar said.

Financing small businesses, such as the vendors on these e-commerce marketplaces, is the same objective of MUDRA, a central government initiative to lend 50,000- 10 lakh to small enterprises. MUDRA is short for Micro Units Development and Refinance Agency.

Incidentally, Reserve Bank of India (RBI) governor Raghuram Rajan was responding to a question on MUDRA when he spoke of out-of-the-box solutions. The finance model followed by the e-commerce firms also ties in with government’s push towards more cashless transactions.

Renu Satti, vice-president of business at Paytm, understands why small businesses are unable to find credit easily. “In India, a high percentage of SMEs (small and medium-sized enterprises) are still not able to get loans from traditional financial insinuations due to lack of past credit history since most of them transact in cash. India’s ratio of cash to gross domestic product is one of the highest in the world —12.42% in 2014, compared with 9.5% in China or 4% in Brazil," Satti said.

Paytm has partnered with eight financial institutions for providing business loans as per the merchants’ potential and requirement. It will also have its own corpus of 150 crore to finance SMEs otherwise unable to tap financial institutions.

IIFL finances vendors on Flipkart, Snapdeal and other e-commerce firms.

Under the arrangement, AIP is sent to suppliers on the e-tailers’ website, which is also integrated with IIFL. Interested suppliers can apply for loans directly from the e-commerce portal. All documents are exchanged digitally through a service portal. The seller’s history on number of transactions, sales, rating and customer feedback, among others, are then analysed to arrive at their credit-worthiness.

“We then complete the mandatory loan documentation and disbursal within 24-48 hours," said Nambiar.

After this, an escrow account is created between the supplier and the e-commerce firm and all payments to the supplier for the goods sold are directed into this account. “The loan recovery is against the sale proceeds of the supplier at the e-tailer’s marketplace," added Nambiar.

The aim is to bring ease of financial assistance to small enterprises and help create a digital, transparent and less-cash economy. “The whole process is completely online. By building the digital platform, we have been able to facilitate loans of 30 crore to 130 sellers in less than two months," said Satti.

This has also buoyed various online lenders. In fact, some of the lenders with which Paytm has tie-ups include Lendingkart, Capital Float and Mandii.com— start-ups providing online finance through the so-called Credit Sesame programme that uses online data and behaviour to gauge creditworthiness.

Many countries have introduced measures to provide incentives to merchants towards digital transactions. Brazil and South Korea provide tax breaks on the amount of payments accepted digitally; France, Italy and Spain, among a few other European nations, have set limits on cash transactions and introduced fines for crossing these limits.

It’s unclear whether such measures will work in India, but according to Sharad Sharma, co-founder of Bengaluru-based think-tank iSPIRT, real-time and low-cost credit is the optimal hook to incentivize merchants to adopt digital payments.

According to a document prepared by it, building a cash-lite economy will require a massive expansion in the number of merchants who accept digital payments as cash comes with tremendous cost.

According to estimates, the total cost of storing, transporting and processing cash is 22,000 crore annually.

The iSPIRT paper advocates that it is to the country’s advantage to digitize cash flows, saving the huge cost associated.

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