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SMEs: Technology-enabled lending in 2020: from data to diversity

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By Rajat Gandhi

As 2019 drew to a close, it was an opportune time to pause and reflect. For the technology enabled lending sector, it is even more significant since about a decade ago, around 2008-2009, is when this medium started gaining popularity. There was a general disenchantment about how the traditional sources of financing had worked out and people were craving for a change. Today, it has become a norm.

In India, the tech enabled lending space or fintech, is not as old, but has seen dramatic growth and scale. When we started Faircent, the early days were spent in educating people about the concept of peer to peer lending. When it came to banks, they were still in the early days of providing services through online banking. Even the hugely popular Paytm had started its operations, albeit in a completely different avatar of being a recharge platform for prepaid mobile and DTH recharge.

Today, fintech is so ubiquitous and that many solutions are an intrinsic part of our life. Even traditional laggards like the functioning of lending and borrowing has been swept by technology innovation. While new ways of lending and borrowing have become popular, even traditional lenders are leaning on technology to help decipher the plethora of data available today and help in making decisions.


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Data dilemma

We are in the midst of a data explosion and by one estimate, about 2.5 quintillion bytes of data created each day. In India what is more significant is the fact that a lot of new data being created about individuals largely without any digital footprint. Digital footprint is important because it provides a wide canvas about an individual, his or her habits and opens up limitless possibilities. However, the emphasis and exuberance about data has also skewed and distorted the playing field. Every new data set cannot have relevance in the financial lending space, unless it is relevant. There’s a new wave that has come in about lending as a feature. I do not believe in that because lending is not a feature, it is a specialization. A lot of people who are sitting on some data, whether from a wallet company or some transaction information think they can start lending, and to my mind that’s incorrect.

To repeat, lending is a specialization that should consider the interest of all stakeholders. A lot of data easily available nowadays can go for marketing activities, creating personas, etc., but to take credit decision based on some random data is not right. Unless somebody gives us all the data points across the board, which again should be hard data, then it starts making sense to make a full profile of a borrower.

We must understand that the reality of lending in India is that the whole ecosystem is still primarily offline where a borrower can come and say “I want a loan.” While fintech is popular and making inroads, in most cases a borrower can’t even write or spell words correctly. In all probability that person can’t send the data in the format you want it to be in. Another peculiarity is that many cannot even send an email and mostly resort to WhatsApp. If fintech has to become more inclusive and have a greater scale, in 2020 we as a sector will have to take these things into account. The initial set of adopters of fintech will be very different from the next and the sector needs to understand that.

There are a lot of challenges in terms of aggregating data within the Indian ecosystem. Some streams have started coming in, but to take a decision on that and lend money is unlikely. Most companies are unable to evaluate a borrower at 14-15% and give a decision on that. They’re all taking a decision at more than 36%, which basically means they do not have a credit model as it is based on probability. Aspects like integration with the GSTN and a public credit registry will strengthen the quality of data, but I see 2020 is a pivotal year in getting a more reliable and consistent data stream in place.

Another aspect of digitization is the anxiety around handling data. Who should have access to it, what to do with it and in fact who owns it are some of the areas of contention. What we understand is that as long as the consent has been taken from the customer while giving out a loan it should be good enough. Data sharing and collection is at its nascent stage in India and I clearly see regulations playing an important role here.

Nature and demographics

If we look at SMEs as borrowers, most of the new-age lenders seem to focus on that. Given the nature of the borrowers and the demographics involved here to a large extent everyone seems to be chasing the same set of customers. This set of borrowers would number 10-20 million people right now in the ecosystem. It would be fair to say that no one has gone really deep and the sector needs more diversity in terms of profile of borrowers.

What has, however, helped is the fact that most of the fintech players now come under the ambit of NBFC. This is a big positive as regulations have made things clearer. It is better to be regulated in financial services as you know your rights and duties. It also helps in scaling as it gives confidence to both the borrower and lender about the authenticity. Regulations are generally slow in catching up with technological innovations, but we have been lucky that a proactive RBI has provided the much needed clarity to ensure the country has different means of credit. Given the current flux in the NBFC sector in the country, it may seem a tad disadvantageous to be clubbed in the same group, but we frankly do not see an issue here. A borrower is primarily interested in getting a loan sanctioned at an attractive rate. Most fintech players are providing just that and in fact providing the much needed relief for the credit starved small businesses.

On the other hand, we also do not have a credit supply problem as the return on investment for lenders continue to be better than what other instruments offer. While the interest rate on a loan still continues to be very competitive for borrowers, the quality of borrowers is also getting much better. This should continue for another six to nine months or till the time rest of the economy takes off, after which we can see competition.

With the technology in place and the regulations to support it, I feel the next year will be spent on the debate around the data and privacy. With new privacy regulations kicking in, the fintech sector will not be immune to the changes. Rather than coming out with a new technology and using that to create major disruptions, I think 2020 will be mostly about fine-tuning our offering and tackling some of the issues around handling data.

(The writer is the cofounder and CEO of Faircent.com.)



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