Digital Lending Companies – I: How Are They Showing Exceptional Growth?
“यावज्जीवेत्सुखं जीवेत् ऋणं कृत्वा घृतं पिबेत् |
भस्मीभूतस्य देहस्य पुनरागमनं कुतः ||”
 
The famous couplet is taken from Charvaka Darshana, the treatise of a well-established school of Indian materialistic philosophy. It broadly translates as: “One should live luxuriously, as long as one is alive, and to attain the same, one may even live on credit and in debt. Because once you are dead and cremated, it is foolish to think about afterlife and rebirth.”
 
The financial services industry is taking the above couplet a bit too seriously and is flooding the borrowers with opportunities and facilities to burden them with debt at the click of a mouse. 
 
Even the person who is unwilling to enter into a debt trap is somewhat lured by the 'instant loan' facilities given by numerous non-banking finance companies (NBFCs) these days. What is the implication?
 
While the Indian economy is facing a slowdown and banks in India are showing significant falls in their lending volumes, the NBFCs engaged in e-lending have been showing extravagant growth in their lending volumes. 
 
The reason behind this is the transition from secured lending to unsecured lending, from corporate finance to personal finance, from paperwork to digitisation. This transition is the reason behind such a drastic shift of lending volumes.
 
CURRENT STATE OF LENDING TRANSACTIONS
 
NBFCs are crossing milestones and creating new records every day. A leading NBFC reported disbursal of Rs550 crore in 350,000 loan transactions and has been consistently disbursing loans over Rs80 crore every month, says a report from The Economic Times
 
Another NBFC reported an existing customer base of 1.1 million. An app-based lender NBFC has 100 million downloads of its app and has disbursed around Rs700 crore in FY18-19 with an expectation of increasing the amount of disbursals to Rs2,000 crore in FY20, a report from CNBC TV18 says. 
 
On the contrary, banks are showing a completely opposite picture. Under the 59-minute loan scheme introduced by the prime minister (PM) for small entities (having a turnover of up to Rs25 crore) to avail loans of amounts up to Rs5 crore from banks within an hour, only 50,706 loans were given approval in the FY18-19. 
 
Growth rates in the banking sector are falling. Growth in retail loans fell to 15.7% in April 2019 compared to 19.1% in April 2018. The growth rate in credit card loans has also shown a decline of 8.8%, according to Business Standard.  
 
UNDERSTANDING THEIR BUSINESS MODEL
 
NBFCs practise unsecured lending of small-ticket loans, usually personal in nature. The market tends to be more inclined towards obtaining finance from such NBFCs. The basic features of loans provided by NBFCs are:
 
Unsecured: The borrower or the customer is not required to provide any security for obtaining such loans. Thus, even if borrowers have no assets at all, they can still obtain loans.
 
Instant: These NBFCs process the loans within a very short period (‘superfast processing’ as they call it) and the disbursement is made within a period ranging from five minutes to three days, depending on the size of the loan. There is no requirement of long procedures as required to be followed in case of bank loans.
 
Digital: Usually, these NBFCs have an app-based or website-based platform through which they provide such loans. The KYC (know your customer) process is also carried out through the app or website itself.
 
High Interest Rates: The interest rates on such loans are very high as compared to the interest rates on loans provided by banks. The rates usually range from 15% p.a. to 130% p.a.
 
Small-ticket Size: The loan size is generally small ranging from Rs500 to Rs5,00,000.
 
Short-term Loans: The term of loan is also short. Repayment is required on weekly, fortnightly or monthly basis.
 
Credit Score Based Decisions: The lending decisions made by NBFCs are largely dependent on the credit score of the borrower. A strong network of credit information companies (CICs) stores the credit information of the borrowers and the borrower making default of even a single day would be barred from accessing any other e-lending platform as well. However, for first time borrowers, the only way to check credit standing is their bank statement.
 
Source of Funds: NBFCs get their funds from banks as well as bigger size NBFCs and from private equity investors.
 
Purpose: These loans are provided mostly for personal purposes like marriage ceremonies, buying a car, medical issues, travel, etc.
 
Innovation: Each of the e-lending platforms has a different model. While some involve students in their marketing activities, some have tied up with sellers and buyers to finance transactions between them and some with different brands to finance their operations. 
 
Please also Read the article:
 
 
(Rahul Maharshi and Kanakprabha Jethani work at Vinod Kothari & Co)
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    COMMENTS

    Godavari Joshi

    3 months ago

    Consume till you cant digest any more...The lendee gets into habit of borrowing till he can no longer repay . The lender is no less than a Shylock who keeps getting his pound of flesh ( reporting profits and fat Advance book). All that 'strength' of profits and loan books dissipate as defaults start growing and all tricks available to report the rosy picture are exhausted.
    What happened with Corporates ( Over leveraged and Living beyond means and some degree of misgovernance) is now is happening with Individuals and small businesses.

    Rajiv Gupta

    3 months ago

    If Quick rich schemes in investments is a myth, this is just the reverse of it. No borrower can pay more than the earning in sustainable manner. In lowering interest rate scenario, the defaults get pushed down the line but then will show up as NPAs one fine day.

    Ramesh Poapt

    3 months ago

    its booming business worldwide. Foreign bnks have tought indian nbfcs and banks
    this business. delinquencies are factored in int.rates. net net it is very profitable
    than traditional lending for pvt/psu banks. win win for lenders and borrowers.
    it will only increase in due course.

    Ravindra Shetye

    3 months ago

    These are finally future NPAs of the Banks which provide loans to these NBFCs which loan the same money to unsecured creditors and I doubt whether the NBFCs also have any strong securities to offer against their Bank loans.
    A bubble waiting to burst.

    REPLY

    PRADEEP KUMAR M S

    In Reply to Ravindra Shetye 3 months ago

    Another scam in the Making indeed.
    Or another experiment being staged at the expense of the public money.

    NBFCs pulling back on loans to MSMEs: Moody's
    The liquidity crisis triggered after the default of IL&FS is causing the non-banking financial and housing finance companies to pull back on loans to micro, small and medium sized enterprises (MSMEs), Moody's said on Wednesday.
     
    "The value of loan against property (LAP), assets under management by HFCs and NBFCs increased by 8.3 per cent over the six months leading to December 2018, down from 15.4 per cent growth over the previous six months," Moody's said.
     
    Moreover, according to Moody's, it does not expect LAP lending by NBFCs and HFCs to pick-up significantly in the next few months too as the operating environment remains challenging for them as they continue to face issues with accessing funds.
     
    "Indian non-banking financial companies (NBFCs) and housing finance companies (HFCs) are pulling back on loan against property (LAP), lending to micro, small and medium sized enterprises (MSMEs) because of the funding squeeze caused by the liquidity crisis in the country's financial sector," Moody's said in a note.
     
    This situation is credit negative for asset-backed securities (ABS) backed by LAP to MSMEs, because it will reduce refinancing options for these small businesses, potentially leading to loan delinquencies and defaults, the brokerage firm added.
     
    Besides, it said that the declining real estate prices in some cities and a slower pace of price growth in others has curtailed refinancing of LAP and hurt recovery prospects for defaulted loans.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    Muniyandi

    3 months ago

    50000

    New NPCI guidelines bring bad news for UPI-only e-wallets PhonePe, Google Pay
    PhonePe's and Google Pay's success ride on the back of UPI will soon hit a road block as the National Payments Corporation of India (NPCI) is all set to introduce new guidelines for digital payment companies to minimise concentration and systemic risks in UPI.
     
    One of the important provisions initiated by NPCI is to put a cap on the UPI market share of digital payment companies. This move directly impacts UPI-only players such as Walmart's Phonepe, Google Pay and to be launched Whatsapp Pay. Interestingly, Paytm is the only major player which is still backing its wallet success and cards besides UPI.
     
    Starting April 2020, PhonePe and Google Pay will have to limit their marketshare to 33 per cent which eventually blocks their growth plans. Till now, they have been burning a lot of cash to gain the highest market share and this move comes as a major setback.
     
    Interestingly, Morgan Stanley had recently referred Phonepe emerging as a major factor for a handsome upstick in Walmart share-prices. However, this new capping may affect the company's valuation jump and fundraising plans as it seeks $1 billion from Tiger Global, Tencent, DST Global, Softbank and others.
     
    A senior banker said on anonymity, "This exhibits NPCI's raising concerns over the increasing security threats by non-banking payment companies. Phonepe will have to re-visit its business strategy for a possible fundraise at this stage."
     
    Other industry veterans and experts have applauded NPCI's move and are of the opinion that this will secure the digital payments infrastructure in India.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    Arumugaraja A

    3 months ago

    How can you control market share in percentage? Doesn\'t it keep changing?
    You can limit transaction count or amount through that app.

    Ramesh Poapt

    3 months ago

    right step!!

    Chandragupta Acharya

    3 months ago

    What is their current market share?

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