The first wave of fintech in India (and pretty much globally) was dominated by disruption of the payments space. With payments being more volume/transactional heavy, it was the right candidate for disruption. Regulatory help like UPI infrastructure and payment bank license, helped a great extent. Tech in Asia notes that as of Dec 2018, 3 of the top 5 funded Fintech companies in India are in the payments and remittance space, followed by 4 of the top 10 in Lending.
With the disruption in payments, coupled with regulatory changes like GST and demonetization, the economy has been pushed towards formalization. However, the next wave in growth of payments and transactions will come from financial leverage and access to funds. This is what the lending businesses need to gear up for, and the Economic Times Cards & Payments Summit saw industry experts and veterans deliberate on the action points required to take this sector to the next level with discussions on the emergence of new sectors and technologies that will help to go cashless, security issues, products for millennials, sector-specific findings and more.
In the words of Manish Motwani, Senior Vice President – Business Development, Kuliza Technologies, “As of today, the Indian economy is grossly underleveraged - The International Monetary Fund reveals Corporate Debt is at 46% of the GDP and household debt at ~11% of GDP3. These are much lower than world averages. China, for example, has corporate debt at 157% of GDP and household debt at 49% of GDP. While such levels are unsustainable for a growing economy, there is enough room for increasing the leverage in India. The problem with the Indian economy is, the debt is concentrated. Concentrated at the corporate level to the large conglomerates and similarly at the household level, to the upper and lower middle class. Many SME and MSME businesses and also unbanked individuals still don’t have access to formal credit. This is where the opportunity exists.”
In recent years government & RBI has made many regulatory changes to make this possible. Regulations such as Co-Lending norms for lending to priority sector, P2P NBFC licenses, the formation of Public Credit Registry, Open Banking (Account Aggregation) standards, are all pushes in direction of ensuring access to formal credit for smaller businesses and individuals with no credit history and formalizing availability of financial data.
Manish sounds out a word of caution, stating, “While RBI is granting more and more NBFC licenses to increase the reach of credit, we can’t ignore that an NBFC liquidity crisis is looming over the financial sector in India (read Thanos). To successfully overcome this, NBFCs need to increase their customer reach and at the same time reduce the cost of borrowings and operations. That’s where the disruption is needed.”
This disruption, of course, has begun, there are more and more institutions experimenting with digital/technology led lending. The Boston Consulting Group projects that the digital lending opportunity in India is estimated to become around USD 1 Trillion over the next 5 years (2018-2023), which will be led by retail and MSME loans. With a sharp increase in mobile penetration leading to an increased digital footprint of the customers and with more supportive regulatory changes, the timing cannot be more perfect. Technology has increased the reach via digital channels, keeping operational costs lower. While traditional banking relied on mainstream data sources (like credit bureaus) and subjective decision making by credit officers, technology is helping make data-driven objective credit decisions, even in the absence of traditional creditworthiness data. Technology-led lending will keep a better check on its borrower’s behavior and reduce NPAs and provisions in the longer run.
While a lot of smaller NBFCs/Banks may not survive or get consolidated in near term, it is the ones embracing technology (just like Tony Stark) that are going to lead the lending disruption over the next 3-4 years. After success in the payment space, tech companies like Ola, Paytm, Amazon have already made a foray into the credit space via co-branded credit-cards in the last 2 months, signaling that we are now well and truly in the Lend-Game.