Credit Solutions

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April 2019

Read Time: 5 minutes

Much has been said about NBFCs taking a large slice of the traditional banks’ credit portfolio. Until about 10 years ago, borrowers had no option but to approach banks for loans, get entangled in time-consuming paperwork and try to prove their creditworthiness. Credit underwriting, which mostly relied on human judgment, took time and it could be weeks or even months before loans were sanctioned and processed. 

Most banks gave loans only to their own CASA (Current and Savings Account) holders and some only approved loans of applicants who held salary accounts in the bank. Consumption loans, where the lender pays a merchant directly and gets repaid in EMIs, were virtually unheard of. On the other hand, sixteen out of the twenty-six PSBs can’t lend to any company below triple A rating and the balance 10 do not have adequate capital to lend. In the backdrop of these challenges, the Non Banking Finance Companies (NBFCs) were presented a huge opportunity and their role become even more significant.  

Almost overnight, the consumer lending NBFC was born and the consumer finance revolution arrived in India. Teams of motivated and efficient employees of NBFCs created a menu-driven process for consumer lending, which cut down the lag between an application and a credit decision from weeks to days or even hours. However, the lending process remained human-intensive, an army of trained salespeople and credit officers honed a manual process until they squeezed all the productivity gains out of process innovation. Also, Micro, Small and Medium Enterprises (MSMEs) were neglected through this revolution creating a big void between large enterprises and consumer finance.

Today, something much more dramatic - led by digital - is happening, leading to a second revolution in consumer and SME finance. New buzzwords like eKYC, eSign, eNACH, India Stack, APIs and the all-encompassing “fintech” are ruling the MSMEs, consumer finance and microfinance loan market. Just like the first revolution freed borrowers from the shackles of bank lending, this second revolution is bringing fast and affordable credit to those who traditionally found the doors of finance closed to them, a category of borrowers who are New to Credit (NTC).

The rise of NPAs in the Indian banking system and the simultaneous technological revolution has paved the path wide open for NBFCs. We have almost 220 million credit worthy population. NBFCs can easily add 14-15 million new borrowers each year for the next five years. A decade ago, NBFCs had only 9% share of the credit; today it is 19%! Retail lending has now grown to over INR 30 trillion (INR 30 lakh crore). Led by data science, social media, artificial intelligence, biometrics and other technologies. NBFCs will account for one third of loans in the next five years. 

At Avendus we understood the needs of corporate India. Not the big-ticket corporates who are well served by the traditional banks or even large SMEs who have their affairs sorted out. We speak of the vendors, suppliers and distributors of the Mid-Market Enterprises (MMEs) whose turnover ranges from INR 100 crore to INR 2,000 crore. We have realized that the vendors / distributors to these MMEs are often in need of working capital to maintain their inventories and finance their receivables. It is these vendors and dealers of the MMEs who need prompt financing and revolving credit on a regular basis.  

We are financing the inventory of the dealers; providing working capital required by the vendors to produce goods and parts for the MMEs and ostensibly providing resources to the outsourced companies of these MMEs. Such requirement hardly exceeds INR 2 crore for the borrowers and the credit support is provided by the MMEs. All we need to do is to ensure that the participants of the ecosystem get the right financing at the right time, ensuring timely delivery to customers.

Technology has enabled us to execute this solution almost flawlessly. Roping in the MMEs and the borrowers (vendors, suppliers and distributors) together enables us to keep track of loans and delivery, and the repayment is achieved almost seamlessly. We act as the financial infrastructure support between the vendors / distributors and the MMEs through a robust digital technology. 

We see a great potential for vendors and dealers of MMEs in the following industries: agro-chemicals, plastic, branded consumer goods, wires and cables, kitchen appliances and footwear brands. Auto ancillaries, logistics, facility management and branded apparel companies also have great potential to loan-finance their vendors through our online management and disbursal. These nine sectors cover approximately 60% of the market in terms of trade financing. 

The aforesaid strategy for financing business enables Avendus to extend credit to large section of MSME borrowers in need of debt capital anchored to MMEs. This is a migration from the established marketing practice (followed by all major NBFCs) of setting up branches and serving clients in their vicinity on a standalone / parameterized underwriting process. The strategy also serves a dual purpose of improving cash conversion cycle / operating cycle of MMEs as well as ensures the supply chain (forward / backward) is well capitalized to deliver the budgeted growth.

For online digital lending, an estimated market size of 1 trillion dollar over the next 5 years is wide open. For fintech companies and programs like ours, customizing the right product as per the requirement of borrowers and reaching out to customers without being intrusive, will be the key drivers for growth. Insights from data that can be actioned going forward, will also be a deciding factor. 

Author: Sudarshan Chari, Director and Head, Small and Medium-Sized Enterprises Business, Avendus Finance

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