Startups target subprime customers, riding on India’s fintech boom

Photo credit: 123rf.

India is all set to be the world’s fastest growing economy, and like all rapidly developing countries, it is seeing its share of economic challenges. There’s stress on Indian public sector banks due to mounting bad debt, and that has resulted in cautious lending.

India’s largest state lender, the State Bank of India, piled up bad loans worth nearly US$15 billion for the year ending March 2016. Chairman Arundhati Bhattacharya had said that the lender will monitor risky loans.

Other bankers soon followed suit, saying a surge in bad loans will impact their ability to lend. This effectively means that private and public sector banks will make it difficult for small business owners and blue-collar borrowers to get their loans approved without proper documentation and credit history.

This has given rise to alternative money-lending platforms like Capital Float, Rubique, Faircent, and Artoo for small businesses and individuals, which let people secure short-term loans without collateral, and at interest rates 3-4 percent lower than those offered by banks. (Bank rates for personal loans hover around 20 percent).

Unlike banks, online lenders don’t evaluate potential borrowers on just their ability to pay back. They also take into account their willingness to pay by pulling in social data on family, friends, and reputation.

The default rate in subprime categories for startups is lower than banks.

“We are addressing this unmet need. Some of that need is met by unlicensed money lenders and chit funds, at high interest rates,” says Gaurav Hinduja, founder of Capital Float. “Banks have not explored the use of technology for SME lending. The sector is also difficult for banks to handle because it is unorganized, which pushes up cost of acquiring a new customer,” he says.

Capital Float helps small vendors get short-term credit. Its customer base typically consists of sellers on ecommerce websites such as Amazon and Flipkart. The startup has also starting disbursing credit to drivers attached with Uber and Ola.

They take into account the fragmented digital footprint of an individual – such as social media profile, blogs, and so on, to assess borrowers. Capital Float has over 10,000 borrowers on its platforms seeking average loan ticket size of US$18,000.

See: Skip the bank and get a small business loan from this Indian startup

Unbanked

The World Bank in a report noted that less than 1 in 10 people across the world’s low and mid-income population have a documented credit history. It recommends using non-financial data for judging creditworthiness.

Considering that several small-time businesses fail to get funds approved from banks and other financial institutions due to lack of collateral and poor management of finances, the World Bank’s recommendation may be useful in driving financial inclusion.

Startup research firm Tracxn says 64 alternative lending startups were founded in 2015, and about 34 in 2016. India is the third country after the US and China that has a significant number of startups facilitating personal loans online.

Black hole

Sub prime