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Digital loans soar on faster adoption by millennials, low-salary customers

Fintech start-ups working in the unsecured consumer loan segment are gaining traction with rising adoption from millennials and hitherto ignored low-income salaried individuals.

Traditionally, banks and non-banking financial companies (NBFCs) disburse personal loans starting from Rs one lakh to individuals having salaries more than Rs 30,000 and a good credit score. They hardly venture into a segment where salaries are lower than this amount. Seeing an opportunity in this vast universe, most fintech firms are targeting consumers whose salaries are below Rs 30,000 and who have a less-than-desired credit score.

Also, these new age firms have tweaked their disbursals to low-ticket loans starting from as low as Rs 5,000 and going up to Rs two lakh. Many of them don't take scores of credit bureaus into account for choosing a borrower and depend on their own credit rating system instead.

"We are catering to a client base that is not serviced by banks and NBFCs. There is a whole segment of people, which is not considered as prime borrowers. But, we consider them as pre-prime customers as credit data on most of these people is not available," said V Raman Kumar, founder & chairman of digital lending platform, CASHe.

The Mumbai-based online lending start-up gives personal loans in the range of Rs 5,000-2,00,000 with an average tenure of 15-180 days. It relies on its own credit score without taking into account the scores given by various credit bureaus. CASHe, with a total loan book of Rs 500 crore as of now, also said that its disbursals are growing at a fast pace. "We are in the process of an equity round from which we plan to raise around Rs 200 crore. Once that happens, we will be able to increase our loan book to around Rs 2,000 crore by the end of 2019 on the back of robust demand," Kumar said.

Apart from CASHe, digital lending platforms providing small-ticket loans, such as EarlySalary, Loantap and NIRA Finance, are also part of this ecosystem, and are witnessing rapid growth. Analysts are of the opinion that higher yield and low delinquency ratios are the key factors that make this space attractive.

"If you see, average tenure of loans disbursed by these fintech firms stands at around 90 days. That means, they rotate the same capital four times a year. Also, stickiness of customers is high while default rates are very low," said a financial analyst tracking this sector closely. This trend is also reflected in numbers. For instance, CASHe's average yield on loans stands at more than 30 per cent with a delinquency ratio of around 2.8 per cent.

The default rate for Bengaluru-based fintech start-up NIRA Finance stands at less than one per cent. "We charge an interest rate of 1.5 to 2.5 per cent on our loans. But, how much interest rate will be paid by the customer depends on our risk model," said Rohit Sen, co-founder of fintech start-up NIRA Finance. Currently, NIRA's average loan size stands at around Rs 20,000 with an average tenure of 9-10 months.

Another app-based lending platform EarlySalary had crossed the Rs 550-crore loan disbursal mark in October last year, making it the country’s largest consumer lending application. According to the company, it is disbursing more than Rs 80 crore a month to a varied customer base spread across India.

With a solid risk-based approach, fuelled by new technological applications, digital lenders have actually seen higher credit from the banking system flowing to them at a time when funds have dried up for traditional NBFCs post the IL&FS crisis.

"We have seen in the last three months that many NBFCs and small finance banks have diverted more money to new-age lenders like us. That is one of the reasons that we were able to increase our loan book faster in this period," said Kumar of CASHe, which operates through its NBFC, Bhanix Finance and Investment Ltd.

While digital lenders are slowly but steadily creating a niche in the overall consumer loan segment, their absolute disbursals remain low. Though no specific data point is available on the total disbursals, industry experts say it will not be more than Rs 5,000 crore as of now.

Though the industry is growing at a faster pace, a recent Supreme Court verdict on Aadhaar has brought some pain points into the business. "Definitely, costs have gone up post the Aadhaar verdict. But, they are not prohibitive. I think the fintech world has now adjusted to the new reality," said Kumar of CASHe.

Given the growth prospects of these new-age lenders, many venture capital funds are taking active exposure to these entities. For instance, Mumbai-based Loantap had raised $8 million (Rs 57 crore) through a combination of debt and equity in its fifth round of fund raising led by 3one4 Capital in January this year. In this round, its existing investors such as Shunwei Capital, Kae Capital, India Quotient, Tuscan Venture and angel investor Ashish Goenka also participated. Similarly, Pune-based EarlySalary had raised $15.7 million in series B funding led by Eight Road Ventures India last year. CASHe had raised $3.8 million in series A round from an investor group led by Mathew Cyriac, the former India head of private equity firm Blackstone in April 2017.

According to Digital Lenders Association of India- the fintech lobby group- digital credit industry that includes MSME, consumer loans among others, contributes around $5 billion in annual disbursements and is growing around 15 per cent every month. Though unsecured personal loan disbursals by fintech players still constitutes less than one per cent of the total unsecured loan portfolio of around Rs 5 trillion in FY18, some analysts see it as a worthy rival to NBFCs given its scorching pace of growth in recent years.

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