As of March 2021, India’s total lending market size stood at ₹156.9 lakh crore, recording around 100% growth between FY2017 and FY2021. Retail and commercial lending each contribute 49% to total lending in India while microfinance contributes about 2%. Over the recent years, there have been commendable focussed policy initiatives such as Jan Dhan Yojana, Mudra Yojana and National Strategy for Financial Inclusion (2019-2024), however, India has a long way to go in terms of financial inclusion. Availability of formal credit to low-income populations is a big challenge and rural areas are underserved. According to the World Bank’s Global Findex Database 2017, only 8% of the Indian population borrowed money through a formal channel like financial institutions. Rural India accounts for about half of GDP, but only about 9% of total credit and 11% of total deposits. While flow of credit at the bottom of the pyramid has improved over the last decade, there is a huge missing middle segment. MFIs (microfinance institutions) have been significant credit providers to micro-enterprises and individuals through JLGs (joint lending groups). MFI segment with average ticket size of less than ₹40,000 has been reasonably serviced by over 200 institutions with outstanding credit of ₹2.5 lakh crore as at March 2021 and growing at 23.8% CAGR (compounded annual growth rate) during FY17-21. Under the Mudra Yojana, the programme aimed at funding the unfunded micro enterprises and small businesses with loans up to ₹10 lakh, ₹15.52 lakh crore were disbursed to 29.55 crore loan accounts during its 6 years of its operations (FY16-FY21), however, average ticket size was still low at ₹52,500 in this period. Micro enterprises with higher credit need of ₹1-5 lakh is a severely underserved segment with only a handful of focussed players. Compared to MFI outstanding credit of ₹2.5 lakh crore, in loans of ₹50,000-10 lakh, which is a much larger market, outstanding credit stands at just ₹1 lakh crore. Micro enterprises faced a huge credit gap of ₹8 lakh crore in 2018 as per IFC. Key issues restricting the flow of credit to this segment include the lack of documents such as income tax returns (ITR), goods and services tax (GST) and adequate banking records. As a result, issues related to income assessment have emerged as major supply-side barriers. Pure Fintech model is not suitable since the above data points are lacking and borrowers need hand-holding in disbursements as well as collections as many upgrade from JLG borrowings. Nonetheless, the emergence of a handful of new age non-banking financial companies (NBFCs) is changing the lending landscape by introducing a model that captures the best of fintech and conventional credit features, transforming the protocols of lending for micro-enterprises and individual business loan requirements. Unlike legacy banks, new age NBFCs are analysing alternative data for income assessment, applying technology more effectively and have an agile and on-ground workforce. For micro-enterprises seeking business loans, lack of collateral is no longer a major constraint and a good credit score or credit history is good enough. Considering their more suitable lending norms for this segment, new-age NBFCs are gaining popularity when it comes to small ticket business loans. Besides, NBFCs approve loans far more quickly than banks and the entire end-to-end process from application to disbursal can be completed within a few days. Players in this space with less than 1% GNPA (gross non-performing asset) even after three COVID-19 waves have proven that backed by a strong underwriting, efficient collection model and leveraging technology, lending to this segment is scalable with a significant impact on growth in income of micro-entrepreneurs. Given the lakh of micro and small enterprises across India that fall outside the purview of formal financial systems, including self-employed individuals who remain ineligible for formal credit, new age NBFCs are playing a pivotal role in promoting the goal of inclusive development. Undoubtedly, such digital lending players can serve millions of unbanked sections across India, influencing their lives positively. The author is cofounder and co-chief executive officer of Moneyboxx, an NBFC. Disclaimer: The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. <meta content="cms.next" name="cmsei" />

Deepak Aggarwal

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OPINION: How new age NBFCs are changing the small ticket business loan landscape in India

Deepak Aggarwal