by Upasana Taku
Securing small loans could be a tedious task, especially when the processes are cumbersome to get it from the formal banking system. And that is what Anil, a 27-year-young entrepreneur from Delhi realised when he wanted to buy a laptop recently. For Anil, getting a laptop was crucial for his business. He had set-up a cafe about two years ago at a commercial complex in the heart of Delhi. His outlet is frequented by hundreds of young students and professionals who come to unwind after a long day. So, he was looking to give its ambience a face-lift to suit the tastes of his young clientele; and using a laptop instead of a bulky desktop was one of the elements.
With little probability of getting a loan of Rs 50,000 from a bank without going through a long-drawn process that involved multiple visits to the bank, cumbersome paperwork and pledging collaterals, Anil started looking for alternatives. After lot of dilly-dallying, he approached a fintech company. He was impressed by the process that was simpler such that his loan got approved and disbursed within the matter of a few days!
Fintechs are also pioneering financial inclusion
Similarly, 50-year-old widow, Sulakshini, a resident of Mumbais slum area who earned her living by selling her handicrafts on e-commerce marketplace to support her three children. Her credit requirement was different from Anil’s. She traditionally depended on local money lenders for working capital requirements. She would inadvertently end up paying them a huge interest every time she borrowed money. This had always affected her income stream. Banks were not willing to fund her day-to-day small business and she remained at the mercies of private lenders, as she had no other option for availing a collateral-free loan. However, she came to know of a fintech company through another small business owner, who suggested that she try their services. To her surprise, the fintech company approved and disbursed her a loan almost-immediately even without the cumbersome paperwork.
Fintechs are disrupting the credit sector in India
There are many like Anil and Sulakshini who had been struggling to get funds for their businesses. The long-drawn processes and eligibility norms were hampering the overall growth of their small businesses. For credit, there lies the problem of rigorous process that is followed by banks and financial institutions that prevents short-term, small lending in India. Unfortunately, majority of Indians are excluded from access to formal credit, despite having sizeable number of banks and other financial institutions in the country. And at the core of it, despite having government policies that favour financial inclusion, over 40% of the people continue to lack access to basic financial services. In fact, less than 10% people have access to formal credit. To bridge this gap, fintech startups have started enabled a much-needed digital transformation to distribute financial products to the larger masses.
Conventionally, getting credits has largely favoured the big borrowers. If one needs to take a small loan or is new to taking loans, the options have been few and limited. There is a wide set of borrowers, who do not have access to credit, for a variety of reasons. This could be millions of workers in small and medium enterprises who may not have a credit history or those in lower income brackets like those working in security agencies/ delivery boys whose monthly take home could be very low. Another important category that is totally ignored are the young graduates who are entering top medical/engineering/other professional colleges and have a bright future ahead of them. However, they are unable to avail a loan as they are not earning and also wont have a credit history. Additionally, many youngsters who have recently started their professional careers, find it very difficult to convince bank officials, in case they want to a loan to buy a vehicle/ house or make a purchase.
The rules of lending by traditional banks have not evolved with the times and do not consider the requirements of a new age consumer. The age-old processes, combined with lethargic attitude and lack of technological innovations, have resulted in a huge credit gap and a very slow financial inclusion process in India.
Another bottlenecks coming with the operation of traditional lenders like banks or financial institutions is that to process a loan, they have a transaction cost that could range between Rs.3,000 to 6,000 especially in major cities. Additionally, they have a heavy cost structure and obligations to facilitate large branch network and also for their employee base. This is also one of the many reasons why it is not cost effective for borrowers to get a small size of personal loan like Rs. 25,000 or less.
The ray of hope is the new age fintech companies who are rolling innovative offerings to cater to this untapped market. These companies offer a fresh opportunity to these small/ new borrowers, helping them avail quick loans and meet their obligations, free from pledging any collaterals. They have also made the loan availing process more simplified. The borrower no longer needs to make multiple visits to the banks, in order to avail a small loan. Technology has been leveraged well by fintech companies so as to make the process seamless, convenient and reach out to the untapped.
Indians are getting wired in
Recently, the internet and smartphone adoption in India has grown exponentially. Indians are the second-largest mobile phone users in the world with their number totalling 650 million and rising steadily. The user deepens their digital footrpint every time they make a phone call, send a text or browse the internet, top-up their pre-paid cards, extract data from their mobile phone, pay bills on phone or download an app. All of these can be parameters to assess the risk and determine the creditworthiness of previously unqualified customers. The high-speed mobile internet with affordable data plans have pushed digital payments industry to the next phase and it is time for the un-banked and under-banked to make full use of the range of financial services, including various types of loans, insurance products and saving options. And all this is now accessible with a click of a button on your mobile phone.
Fintech companies can look at this opportunity. They can use these details to ascertain the credit scoring of their consumers to offer small unsecured and short-term credit at a much lower cost than as traditional lenders have largely shied away from giving access to small loans.
How Fintech services are expected to evolve in the coming years
The best part is that Fintech start-ups are now gearing up to increase their presence in consumer finance with better range of products available at competitive rates, lower cost, wider and effective reach across towns and cities, strong risk management capabilities to keep a check on and control bad debts and better understanding of their customers.
To conclude, empowering the masses economically is the primary goal of the financial inclusion campaign. It is imperative for a large and diverse country like India, as it is critical to ensure financial access that will fuel economic growth and entrepreneurship. Fintechs are the disruption that a fast-growing economy like India with 1.3 billion people has been waiting for. The day is not far when we will be able to considerably address the credit gap in the country.
Upasana Taku is the Co-Founder and Director of MobiKwik.