Fintech burst and the democratisation of credit

Never before in India have so many innovative minds been focussed on making credit available to various categories of borrowers, especially to those lower down on the economic ladder. Digital technology is making this possible. With Unified Payments Interface (UPI) of the National Payments Corporation of India (NCPI), digital payments have become the preferred mode over cash, in metros. In the last financial year there were 2,233 cr UPI transactions worth Rs 41 lakh cr. The democratisation of credit will be the next big thing.

Burst of start-up activity

There are several reasons why this could happen within a year or two. First, is the sheer burst of start-up activity aided by venture capital funding and an enabling environment. A number of start-ups have emerged over the past two years, and some of them have acquired ‘unicorn’ status, that is valuation of $1 billion or more. Nalin Bansal, who deals with relationship management and key initiatives at NCPI said at a financial technology (fintech) summit earlier this week that the fintech industry, valued at $21 billion, is expected to grow annually by about 20 percent over the new few years. He said India has a higher fintech adoption rate than most other countries.

Finance without collateral

Second, is the market opportunity of making finance without collateral available to the unbanked and the poorly-banked. Transaction-backed lending promises to open up new market segments.

Third is the interest which the government is evincing. It has an alphabet soup of initiatives. The Reserve Bank has set up an innovation hub. Apart from guiding the innovators to areas that need addressing, this hub will coordinate with the banking, pension, insurance and capital market regulators.

One of the discussants at the summit, Vasant Sridhar of Ofbusiness.com, said he was trying to shift manufacturers, contractors and traders away from informal finance which they were borrowing from players in the supply chain like dealers, distributor and vendors. They take collateral-backed bank loans but also borrow informally at high rates of 24-36 percent because of flexibility in repayments as per their cash flow.

Ofbusiness has a novel way of acquiring borrowers. It approaches them tangentially, when they bid online for tenders. Online procurement has been around for about a decade and a half. To take the tedium out of trawling various websites for orders, Ofbusiness has created an app that aggregates the tenders. When someone bids, Ofbusiness contacts them and offers to supply the required material at a discount and also provide working capital loans up to Rs 2 crore without security, cheaper than what they would have otherwise paid. The app is the acquisition engine which throws up curated leads, says Sridhar.

Hrushkesh Mehta’s CredAll wants to give loans to “as many as possible” regardless of the size. He is building a platform based on Open Credit Enablement Network (OCEN) where 40-50 lenders have a choice of borrowers who could be small farmers, small businesses or even hawkers. Some of these borrowers may have thin or no credit histories. That does not deter him. GST returns would be a proxy for turnover and bank statements would indicate cash flows against which it should be possible to lend. Mehta said he has given a loan of as little as Rs 238 against a purchase order to a seller on the do-good website, Jan Sahay. Apart from OCEN, cash-flow lending will get a leg-up from the account aggregator system which the Reserve Bank unveiled in September. It allows a bank to share account statements with lender if account holders consent.

Bhavit Koladiya, co-founder of Bharat Pe says banks should regard fintech as their core business and not just a channel. He thinks branch banking is past its sell-by date because everything can be done on an app. Bharat Pe is perhaps the only fintech to get in-principle approval for a small finance bank. (Ofbusiness has a non-bank license).

Benefits of technology

The benefits of technology in improving reach and efficiency of the financial system call for systematic, non-disruptive adoption and encouragement of such technologies, T Rabi Shankar, Deputy Governor of the Reserve Bank said at the summit. Fintechs can improve the efficiency of intermediation (between savers and borrowers) by driving down costs and saving on time. This poses a challenge to incumbents and forces them to change or adapt to the way financial intermediation takes place. The ideal approach is to regard fintechs as enablers and partners, Rabi Shankar said. The competition, according to him, is not between banks and fintechs but between banks which can leverage fintech better and those that do not.

Regulations meant for customer convenience or safety, often face opposition in the name of customer convenience, Rabi Shankar said. There was a strong push back when RBI introduced two-factor authentication a decade back, though it is appreciated now. Tokenisation to limit storage points of card credentials and additional factor authentication for recurring transactions are opposed now. But the Reserve Bank can also act as an impediment in the name of customer protection as it may not want fintechs to violently rock the boat, especially of public sector banks. Non-disruptive change or managed change may not desirable. It’s best for regulations to catch up rather than for innovations to slow down.