Loan Frame is a Fintech company focused on small and medium enterprise (SME) lending in the Indian subcontinent by building India’s largest technology enabled SME lending marketplace. Loan Frame is providing a technology solution to one of India’s long standing economic problems — availability of credit to Indian SME’s. Its Founder and Chief Executive Officer (CEO) Shailesh Jacob talks about the prevailing lending scenario and what his company is offering…
How is digital lending evolving in India, give us a brief background with some facts and figures? What role technology is playing in this sector?
There are 36 million MSMEs in India and adequate working capital plays a critical role in these businesses realizing their potential.The formal SME lending market in India is worth $200 billion today.The last five years has seen the emergence of new-age digital organisations and technology-enabled businesses like Loan Frame that are redefining the way SMEs avail loans.
Unlike traditional lenders, digital lending platforms use technology to make the financing process faster, more convenient and transparent. These platforms can leverage new sources of data and use big data analytics to make lending decisions thereby increasing one’s chances of getting a loan. The machine learning algorithms factor in a lot more than just CIBIL and other traditional credit variables to assess the real credit worthiness of the borrower.
The big banks like SBI are entering in the SME financing space. Do you think it will hurt other players in the SME lending space like Loan Frame?
A report by the International Finance Corporation (IFC) in Nov 2012 analyzed that the total financing demand in the SME sector is $558 billion. So, clearly there is a huge demand for credit that needs to be fulfilled across the country and it will need more than one company/ institution’s efforts to bridge the gap. Loan Frame has a collaborative approach with banks and we believe there is enough room to support a number of players. However, if you are a player whose sole aim is to disrupt banks then you are likely to get affected when large players such as SBI make a big push.
Digital Lending has begun to show signs of prominence in last couple of years. What is your take on SME lending space in India and how do you foresee the industry shaping up? How Indian lending market is different from other markets?
Before non-bank lending was available, many SMEs were not even touched by banks due to the high cost of reaching this fragmented segment through traditional channels. The number of SMEs that were declined loans by banks were high. These SMEs were often left with no choice but to either raise funds at exorbitant interest rates from informal lenders or experience static growth.
The emergence of the alternative lending market has provided small business owners with a new way to seek an array of solutions and models for funding. These lenders have enabled SMEs to get a customized loan in line with their requirements, at a much faster pace.Digital Lending firms are trying to alter the small business lending market by using technology to streamline the lending process, increase transparency as well as lower the cost of booking loans. The industry offers a lot of opportunity and fintech companies are here to stay. The industry however is likely to see some consolidation over the next 2-3 years and over time many players will identify their niche and focus on scaling within that. Lending is seldom a winner takes all market. The lack of reliable data to evaluate a business is a challenge in India as compared to western markets where record keeping and tax compliance is much better; this results in longer evaluation periods and at times less loan eligibility for a borrower.
After wallet cos, government has brought a positive change to digital lending firms. What is your opinion on the same. Do you think this can be further strengthened?
We laud the government for its digital India initiatives, GST, focus on tax compliance and for the India Stack. These go a long way in increasing the transparency around an SMEs business which ultimately helps digital lending firms make better credit decisions.
The changes to credit guarantee scheme for small, medium and micro enterprises (SMEs) is also a big boost. We believe demonetization is a positive move in the long run as it will ensure better tax compliance and increase digital transaction footprints which will ultimately better our ability to assess a borrower and help finance them.
In India, the government is unwinding legacy behavior built over decades and it cannot be changed overnight. This government is on the right track and is very serious about its initiatives. Demonetization single-handedly fast forwarded the clock by many years.
What are the key focus areas for future? What policy initiatives you want from Government for this sector? What changes you seek on technology front for this sector?
A key focus for us is our Corporate Partner program where we partner with corporates to meet the financing needs of their vendors, dealers, distributors, merchants and other ecosystem participants. Corporates will significantly benefit from our technology, credit assessment capabilities and lender partnerships enabling a lot more credit disbursal in their value chain than they get today.
Today, through various government and RBI led initiatives, financing for SMEs have progressed.The Pradhan Mantri Mudra Yojana target has been increased to Rs1.80 lakh crore for 2016-17 from Rs 1.22 lakh crore in 2015-16. This, along with credit growth of microfinance institutions (MFIs), and new small banks will improve flow of formal credit to SMEs.
It is important to focus on driving the Digital India campaign to take technology and internet to the cities, smaller towns and villages of India. We believe via the India Stack over time more records of an individual or business can be kept in a central repositoryand access can be given by the owner. One area where there can be more clarity is the legality of digitally signed documents as today the entire lending industry is focused on pushing physical paper.
Where do you see, maximum revenues coming for Loan Frame?
Digital lending firms are just touching the tip of the iceberg and the opportunity is immense. Over time we see tier 2 and tier 3 cities playing an important role in our business.
The article was authored on on April 28, 2017