Payment Companies See Pick-Up In Merchant Loans Amid Covid-19 Crisis

Indian payments firms are pushing merchant loans via their applications, at a time when demand for small credit has risen. Payment firms, which have a wealth of data on cash flows of small businesses that transact via them, are using that to help lenders assess the creditworthiness of a merchant and facilitate loans.

Google Pay is the latest to push lending services via its app. In a release last week, Google Pay said it is working with financial partners to make loan offerings within the ‘Google Pay for Business app’. The company said it will make this offering  live soon.

Google Pay did not respond to an email seeking details.

Others, including Paytm Payments Bank, RazorPay, Instamojo and BharatPe, already have loans offering via their app, for which they have seen increased demand amid disruptions cause by the Covid-19 pandemic.

Loans offered via these platforms are through tie-ups with banks and non-bank lenders. These are short-term unsecured loans.

Lending During Covid Times

In May last year, BharatPe, a QR-code based payment app, began offering loans for merchants through its application. According to founder Ashneer Grover, demand has risen significantly since then.

“The opportunity and the market has become much bigger. In the current situation, merchants need capital to restart operations as their revenues have been frozen. So we prepared by reaching out to merchants directly and completed the KYC and documentation process in order to disburse loans as soon as their cash-flows normalise,” he said. Grover said close to 75,000 people have applied for loans via the platform, of which 30,000 loans worth more than Rs 175 crore have been disbursed till date. BloombergQuint could not independently verify the data.

Instamojo had also launched loan services for their merchants in January last year, backed by NBFCs. Last week, it expanded the product suite with an emergency credit facility for its merchants.

“We began disbursing small loans for three to four days backed by the merchants’ transactions to solve for short-term cash-flow issues last year. But now given the situation, we have expanded the offering providing merchants with a credit limit up to a 7 to 14 day loans,” said Akash Gehani, chief operating officer, Instamojo. "Demand for loans from merchants using the application has grown by about 20% during the past three months and on a monthly basis we are disbursing Rs 15 to Rs 20 crore worth of loans."

Razorpay, which has also been facilitating merchant loans, has also seen an increase in demand but points to more limited loan availability from lenders. “The platform was disbursing Rs 200 crore to Rs 300 crore worth of loans every month, but since the lockdown began disbursement has fallen by 30-40% because the credit supply is low,” said Harshil Mathur, co-founder and CEO, Razorpay.

"This is despite demand from merchants increasing to around Rs 500 crore to Rs 600 crore. We have seen a shift towards shorter-term and smaller loans from merchants compared to long-term large loans because businesses require funds to augment their cash-flows which are impacted,” he added.

Works For Merchants & Payment Apps

Disbursing small-ticket short-term loans for merchants via payment applications makes sense for payment companies, lenders and adds convenience for merchants.

The payment companies act as distributors on behalf of banks and non-banking finance companies. They provide the lender not only with transaction data for credit underwriting but also with documents such as the merchants’ Know-Your-Customer details.

Instead of running from one lender to another to avail a loan, merchants can apply through payment applications. The merchants’ financial information is shared by the payments company with lenders making the process quicker compared to physical paper-based loan applications.

“When we started the loans facility, it mainly catered to the highest credit quality but over time as we understood the merchants’ transaction history and business we were able to build our own credit score card and underwriting model that is tailored to the merchant,” Gehani of Instamojo said.

Mathur of Razorpay explained that lenders find that the cash-flow based underwriting and distribution model that payments companies offer safety from a credit risk perspective. The linkage via the platform can also help in recoveries.

“There is a preference for models like ours because the documentation and KYC is already done and lenders have visibility on how the business performed pre- and post-Covid,” Mathur said. Since around 70-90% of some merchants’ transactions move through our platform, we can assure the lender of the authenticity of the data, he added. Recovery is also aided by the fact that a merchant’s details are in the system and and we have tools to block funds, for instance, Mathur said.

Payment companies in turn gain from the fee income this lending generates.

“For the lenders these distribution models make sense as their origination, sales and loan evaluation cost reduces significantly. The payment companies in turn earn a fee, when distributing loans, for providing the data of the merchant which will be based on the credit risk standard of the lender,” said Manish Jain, a financial services industry expert.

Payment companies also get to improve the stickiness or loyalty of their customers by increasing the number of products on offer. To scale up the lending business they could further to enter bill discounting by leveraging Unified Payments Interface 2.0 as part of their strategy, Jain added.

“Companies who are digitising value chains, are looking at lending as another feature for customer engagement and a way to monetise new flow based data they are creating,” said Vivek Belgavi, partner and fintech leader at PwC India.

However, he added that lenders would need to be careful of compliance requirements, operational processes of the partners, and physical legs at multiple points including collections.