If corporate lending was the flavour of the season at the turn of the decade, then retail lending has captured the attention of financiers over the last few years. Now, it is lending to the country’s small and medium enterprises, which is attracting increased focus from both traditional and new-age financial sector entities.
The existing gap in availability of funds to the country’s SMEs, and now the government’s focus on increasing credit flow to this segment, has put digital SME lenders in a sweet spot. Along with expanding their direct lending portfolios, these lenders are also looking at co-lending as a way to make a bigger dent in the SME lending segment.
Co-lending, as the name suggests, is when a fintech firm comes together with a traditional lender, to disburse loans. Typically, the fintech firm would source the client, do credit appraisals and give out a small part of the loan amount, while a bank or an NBFC would give out the larger chunk of funds.
Co-lending is core to our business model, said Gaurav Hinduja, co-founder of Capital Float, an online lender that provides working capital finance to SME borrowers.
Co-lending with banks and NBFCs helps us leverage off their voluminous balance sheets, while they benefit by addressing a wider set of MSMEs that they otherwise may not have financed.Gaurav Hinduja, Co-Founder, Capital Float
Capital Float, ranked among the country’s largest digital lending platforms, disbursed Rs 1,500 crore to MSMEs in 2017-18 out of a total portfolio of Rs 2,500 crore, according to information provided by the company. The ticket size of loans ranged from Rs 50,000 given to small local businesses to Rs 8-10 lakh loaned to larger SMEs.
ZipLoan, which started its business in 2015, is also banking on such co-lending tie-ups and has collaborated with IDFC Bank for starters.
ZipLoan typically sources and underwrites the loan which is then funded along with a bank, said Kshitij Puri, co-founder and chief executive officer of the platform. Out of the Rs 50 crore in loans disbursed by the platform in 2017-18, about half were under co-lending arrangements, Puri said. Typically, ZipLoan would contribute 20 percent of the loan amount while IDFC Bank would put in the rest. The ticket size for the loans ranged from Rs 1-5 lakh.
Others like InCred, which disbursed about Rs 1,000 crore to SMEs in 2017-18, prefer lending on their books but look to tie up with regional NBFCs to expand their presence.
“We co-lend with and incubate regional NBFCs and smaller fintech firms with specific geographic or product knowledge to strengthen our customer base,” said Saurabh Jhalaria, CEO of the SME business at InCred. The firm contributes about 80-90 percent of the advances with the co-lender contributing the difference.
The Credit Gap
The focus on co-lending to SMEs is not surprising given that both banks and fintech firms see this segment as a lending opportunity. According to a July 2017 report by Deloitte, SMEs with revenues of up to Rs 3 crore need credit of Rs 12 lakh crore. At under Rs 5 lakh crore, supply of credit by banks to this segment is barely 36 percent of total demand. For SMEs with a revenue between Rs 3-18 crore, 50 percent of the demand for credit is unmet.
However, historically, banks have ignored SME borrowers for a number of reasons. Prime among them is the relative difficulty in assessing credit quality. While the loans are far smaller in size compared to corporate loans, the effort involved in evaluating these accounts is far greater.
That’s where fintech firms can come in.
A number of these firms have developed technologies to analyse cash flows of small and medium enterprises and get a better sense of their credit quality.
“The MSME lending area is witnessing new fintech players addressing the structural issues of information asymmetry and reducing turnaround times for underwriting loans to small businesses,” said Deloitte in its report.
A Win-Win Proposition?
While some fintech firms are lending along with banks, others are more focused on providing services like risk assessment to banks. This, in turn, allows banks to lend more to the SME segment.
Rubique is an online market place that matches traditional lenders to borrowers. Manav Jeet, managing director of the platform told BloombergQuint that one of the reasons for the significant credit gap in the SME segment is because the risk appetite of traditional financial institutions doesn’t always match with the profile of small borrowers. By introducing higher predictability by creating a match between the right lender and borrower, the credit gap is reduced, he said.
“CIBIL scores, revenue, cash flow and past returns of the enterprise and the overall industry outlook are some of the factors Rubique banks on when evaluating the customer,” Manav Jeet said.
RBL Bank says that the co-lending model allows it to partner with fintech firms which may have alternate credit scoring models or greater digital reach. The bank works with a number of players like Capital Float, CoinTribe and Indifi, said Anshul Swami, head of retail inclusion and rural products at RBL Bank.
While we bring to the table understanding of credit, customer and product segments it is complemented by our partners through alternate data credit models or digital ways of reaching out to the customer. This arrangement enables us to create a win-win for both sides and we work with a number of players.Anshul Swami, Head - Retail Inclusion & Rural Products, RBL Bank
In most cases, the loan exposure is on the bank’s books and the account is managed by the bank, Swami explained. In cases where the bank gets into a co-lending arrangement, the loan exposure is shared to ensure that both parties have ‘skin in the game’, he added.
To be sure, the co-lending model is not new to banking.
Traditionally, smaller banks would co-lend with larger lenders as part of consortium loans. The same concept has been adopted in the case of SME lending arrangements between fintech firms and banks. “The recent flood of fintech firms in SME lending segment has led to the process of loan origination and underwriting being delegated to them,” said Vaibhav Anand, a sector expert who was formerly with Deloitte.
(Corrects earlier version to update names of Capital Float's lending partners.)