Digital Lending FinTechs Are All Set To Solve SME/MSME Financing Problem

Oct 1,2017Written By Vaibav Ajay Mishra ,Co-founder & Managing Director

  • Micro, Small and medium-size business enterprises (MSMEs) are vital for the economic growth and competitiveness of any country; hence supporting the SMEs' financial needs is crucial. In USA, SMEs comprise 99% of all companies, employ 50%+ of country's private sector workforce and contribute 50%+ of the non-farm GDP, and for the past twenty years have created approximately 65% of the new jobs. Corresponding nos for Australia are approximately 2mn which make up for around 70% of all industry employment And In UK, SMEs employ almost 60% of the private sector workforce. And most of the innovations across all geographies happen through the MSMEs. India has over 36mn+ registered enterprises employing 81mn+ people of which about 92.
  • 8% enterprises don't have no access credit. The total MSME Funding Gap across the sector is about INR 19Tn. And Institutional demand-supply gap of INR 3.

    57Tn (debt gap is INR 2.93Tn). MSME has shown constant growth rate around 11% every year till 2010-11. The highest growth in recent time was recorded during 2011-12 (18.45%) whereas during year 2012-13 and 2013-14 growth rate was around 14% and 12%, respectively. But it jumped to 17% in 2014-15.

    Unit economics (in branch and spoke model) does not favor traditional institution penetration in this segment. Lack of distributor/ trade credit facilities further widens the demand for our services. One of the other main reasons is absence of reliable credit methodology to assess these unfunded or underfunded customers.

    Thankfully, things are becoming clearer now for the sector with rapidly increasing digital footprints in the country due to some sincere effort of the previous as well as current Indian governments towards digital India and pushing India towards single identity- AADHAR. GOI's ambitious projects like Public Procurement Policy, Pradhan Mantri MUDRA Yojana, Make in India, Startup India, and Skill India and the roll out of GST has given tremendous growth impetus to several industries. Aimed at increasing growth of manufacturing sector by 12-14% per annum and increase its share of GDP to 25% by 2025, the government plans to make financial and technical support more accessible.

    But unfortunately, despite such positive factors, in recent years MSME lending on the banks' balance sheets haven't seen much improvement. Some improvement is seen very very recently when they suddenly discovered large Corporates defaulting and they couldn't figure out any other corner to deploy money. But Bank's ignorance or poor understanding of MSMEs have benefitted smaller NBFCs and FinTech players.

    There are a few things which Indian Banks can learn from its counterparts globally. RBS refers its MSME clients, who have been turned down by it for loans, to P2P lenders. HSBC in UK waives off certain fees on the SME loans.

    Jack Henry and Associates had introduced “Commercial Lending Center” which enables financial institutions to compete with alternative lenders and also expand their relationships with businesses that do not generally qualify for the traditional loans. One big problem with Indian banks have been that they very possessive about their customers. Its time that regulator should suggest these banks to share APIs and turned-off SME customer details with P2P lenders, smaller NBFCs and Digital lending FinTech companies.

    Banks are already redrawing their strategies on funding MSMEs, expecting the transition to GST will improve their credit profiles and enhance their borrowing capacity. Now under GST; MSME are forced to disclose 100%, which means their balance sheet should become transparent, stronger and better. And therefore the ability to borrow should also improve.

    MSME loans have been de-growing for the past few months as the sector faced issues owing to demonetisation and later the transition to GST. However, the de-growth, which had peaked in the months following demonetisation, will soon start stabilising. Post demonetisation and digitisation getting accepted as a norm, MSME entrepreneurs are now exploring digital lending platforms more than ever before.

    • India is on the cusp of significant growth in data traffic driven by rising data users as well as growing data usage per user. Country's smartphone market will grow at 23% CAGR through 2018 and would account for 30% of the global growth during the period overtaking USA to become 2nd largest smartphone market.

    • India's internet penetration to reach 50% by 2018, up from 26% in 2016, driven by rising smartphone availability and affordability, online content and changing user behaviour.

    What many digital lenders do/ can do-

    • Their proprietary credit models have capability to assess SME/ MSME customers who otherwise don't have any credit history or poor credit history with not much fault of theirs.

    • Their credit methodology is capable of assessing such customer's willingness to pay or default intent.

    • Many of them do keep track of borrowers from the time loan is disbursed to the time loan tenure is finished.

    On best effort basis they ensure lender and borrowers remain keep their repayment honesty. • In many cases, they guide & help MSME customers in getting their working capital gap funded through their lending marketplace through single or multiple Banks/ NBFCs conveniently. With their understanding many also help borrowers to improve credit score by way of financial/ credit literacy education.

    • They combine the best in class technology experience with credit underwriting & data analytics capabilities. • Online eKYC (PAN & Aadhar), Digital footprints analysis, Mobile based underwriting, e-disbursement process and eNACH for repayments make the whole process almost paperless. There is already lot of momentum & innovation happening in these FinTech companies and new-age NBFCs.

    Scenario can change very fast if VC/ PE companies can start investing aggressively at early stage. Afterall, it's INR 19Tn funding-gap opportunity- it benefits everyone involved in the process!! Is there some other country on this planet with such huge opportunity?.

Is Banking Profession Losing Respect In India? Are Retail Branches Responsible?

June 22,2017Written By Vaibav Ajay Mishra ,Co-founder & Managing Director

  • While we were growing up, one profession which probably had lot of respect was that of a banker. But when we were almost ready to start our careers, private banks were around and now after so many years, I wonder, do customers still see bankers with the similar respect. Does the 'indian banker' (ref here is the staff in bank branches as that has been the face of indian banking) is still perceived the same way as it was in times of our fathers & grandfathers? Indian obsession with all the 'free' things or things at 'discount' or stuff on 'sale' is known to everybody on the earth and that's the reason why 'whatsapp' got instant popularity here.
  • What whatsapp also brought along was the huge inflow of unnecessary & poorly written jokes to individuals and on groups. One such joke which keeps getting circulated very often goes like this- “One man entered a XXXX bank branch with a gun and 2mn rupees. On entering he shot a bullet in the air and shouted.

    "If somebody tries to move from their seats and try to convince me for any Life Insurance Policy or SIP or General Insurance or Trading Account or mutual fund...

    I'll start firing...

    I have come here just to deposit money in my account, that's it...

    One more goes like this- “A bank branch manager went to a tailor and said, 'i want a suit to be made in 7 days as i have to attend a wedding'. The tailor said, 'yes. It will be done'.

    A week later when he came and enquired about the suit tailor handed him a salwar-kurta with dupatta. The bank manager got angry and shouted,'what did you do with my suit?' Tailor replied, 'This is yours only.' He barked back, 'Are you mad? This is ladies suit' and shouted with angry words at the tailor.

    Tailor retaliated, 'Shut-up!' Bank manager goes silent. 'Now you realize how it feels when a customer comes to your branch for FD/ RD and your staff sells insurance'. Other day a friend of mine went to a bank's branch for a banking transaction and after the transaction was done he was generally having a chat with the branch manager (was entertained with coffee in the cabin as he had 4mn rupees in his account) and during the conversation he was proposed a life insurance product (not solution).

    What manager said while proposing this minimum 10 year lock-in insurance product – “Sir, Sensex is down 245 points today hence it's a good time to buy units in a ULIP plan”. Since he is been a regular retail investor across asset classes left him puzzled. He (nor I) seriously couldn't digest this sales pitch- how on this earth can one propose a conservative ULIP with 10 years lock-in with 5 year regular annual payment with logic that Sensex is down by a few points today.

    Personally it really pains when I get such jokes. But idea here is not entertainment but to think why such jokes keep getting circulating on whatsapp or through many other similar mediums. Point which I'm trying to drive here is that something culturally has started getting wrong in the way in which retail banking branches of few private banks function now.

    Most of the junior staff are been given just one target/ goal, which is to 'somehow' sell some high-revenue earning mindless stuff whether the customer needs or not. Many a times one sees similar behavior across senior branch people. These retail banking branches are most of important asset for any bank as these are face of the banks (as digital banking, mobile banking, internet banking are still to catch up in the country.

    Most of the junior staff are been given just one target/ goal, which is to 'somehow' sell some high-revenue earning mindless stuff whether the customer needs or not. Many a times one sees similar behavior across senior branch people. These retail banking branches are most of important asset for any bank as these are face of the banks (as digital banking, mobile banking, internet banking are still to catch up in the country.hence Indian banks will never reach required bare minimum credibility level till the time efficiency levels of these staff actually improve

    While people/ staff in other departments do good job but keep getting pulled in their customer interactions outside branches for the conversations inside retail branches. There is lot still needs to be done in terms of hand-holding of these junior staff. A banker is expected to posses financial planning skills (which I think is basic)- isn't it? Today most of the time in the name of financial planning it's 'maximum insurance planning'

    Tell me- is FD/ RD should not be a part of financial planning? Should debt funds, G-secs, PPF, NPS, etc be part of financial planning process? Product on top of priority list while proposing such (fake?) financial planning is the one which earns highest commission for the bank (which is usually an insurance product). Tax benefits are only discussed and used to justify the sales pitch of investment proposition. Infact this is not any of the bank's Sr mgmt expects staff to do but probably they seem to have misunderstood or rather missed the whole point itself.

    There was definitely a good enough logic when our RBI governor Raghuram Rajan suggested banks to form a subsidiary to propose/ suggest much-needed financial planning to their customers. Idea was to bring in quality and some (at-least 'some') value in financial planning methods. Now this will be a forgotten suggestion once he goes in Sept'16.

    To eliminate or reduce the effect of these inefficiencies in retail bank branches probably more refined & customized rabo-advisory method can be adopted in some fashion. Robo-advisory is most common in the United States and the concept is been around for little more than a decade now. But there are drawbacks here too as most robo-advisors limit themselves to providing portfolio management with the help of standard "re-balancing software".

    i.e allocating investments among asset classes) without addressing issues such as estate and retirement planning and cash-flow management and loans/ credit cards/ other borrowings, which are also the domain of financial planning. Infact Independent personal financial planners will have to work very very hard to be in business the day our jr staff improves their efficiency levels by even 25%- i'm saying so because traditionally there is default trust which we Indians have in bankers community

    i.e allocating investments among asset classes) without addressing issues such as estate and retirement planning and cash-flow management and loans/ credit cards/ other borrowings, which are also the domain of financial planning. Infact Independent personal financial planners will have to work very very hard to be in business the day our jr staff improves their efficiency levels by even 25%- i'm saying so because traditionally there is default trust which we Indians have in bankers community (lot of it still remains) .. hoping for a better tomorrow.

    Disclaimer: The views and opinions expressed or implied herein are my own and do not reflect those of my employer, who shall not be liable for any action that may result as a consequence of my views and opinions.

Indian MSME Sector Lending Opportunity

May 17,2017Written By Vaibav Ajay Mishra ,Co-founder & Managing Director

  • The reality is that individual banks donate necessarily have to lend a lot of money or all the money, as there are other businesses where they can make money. They get to make their own decisions about what's right for them. But if we want our economy to grow and our country to be prosperous, we need to make sure great ideas receive the support they need to get off the ground.
  • The long-term decline in lending to our MSMEs will hold a thousand tales of missed opportunity. We have a generation of businesses that is being held back by not getting adequate access to finance to fuel growth. A reason for this is that the products and services offered by banks do not reflect the realities of modern day business.

    Waiting for weeks on end to hear back about a loan application doesn't suit businesses that work in much faster cycles, where six weeks can be make or break. A lot of businesses also find that banks don't understand what their business does. The standard model of bank lending is to take a big security to cover the risk of any losses.

    This doesn't work for asset-light businesses, which are increasingly prevalent in our economy. A graphic designer has no significant assets to secure a loan against, but that doesn't mean they're not a great business. Too often the bank is forced to say no because their model can't service today's economy.

    One study found that banks with low levels of customer satisfaction were growing their market share against those with higher levels of satisfaction. This is dangerous because it gives banks little incentive to treat their customers well. They don't have to worry about disappointing businesses by rejecting credit applications, because businesses are unlikely to go anywhere else.

    Indian economy is expected to grow by over 6.5% per annum until 2020. It can become the second largest in the world, ahead of the USA, by 2050, and the third largest after China and the United States by 2032.

    However Industry experts believe this target would be difficult to achieve without the active participation of the MSME sector. It's sad to see that almost 92% MSME still remains un-served or under-served by banks in a country where 40%+ of GDP is MSME sector. Out of the total exports in India, 43% is regards to exports from the SME sector.

    This figure expected to go up to at least 47%-48% by 2018. The government has already announced a National Manufacturing Policy (NMP) that aims at raising the share of manufacturing to 25% of GDP by 2022. Nearly 60% of the SMEs in India fall in the unorganized sector.

    Once this untapped potential becomes the source for growth of these units, the size of Indian GDP can surpass that of developed nations. A small entrepreneur faces several difficulties including access to finance to expand their operation. In addition, the loans that they get are not on preferential rates but are available around 16%-30%+ which adds to their cost of operation. In several Asian counties, loans are available on interest as low as 3% annually. India should take such steps. With digital india/ Aadhar push It will be interesting to see RBI prepared to approve the new wave of alternative financing.

Financial Planning with Robo Advisory- does it make sense?

August  2015Written By Vaibav Ajay Mishra ,Co-founder & Managing Director  

  • Financial planning is important. In a inflationary economy such as ours and with continuous changes to the tax structure it becomes even more so. Quite simply it is the critical starting point of any meaningful wealth management strategy.

    So what is financial planning? Well the first thing is not to think of it as a one off event. It is on going - a process of setting goals, evaluating where you stand against them, and then reviewing your progress towards them.

  • What do we mean by goals? Well it's more than just money. It's planning the children's futures. Making sure retirement is going to be the idyll you dream of. And, if things go horribly wrong, making sure your family are protected from the consequences.

    So what is it for you look for? Quite simply its peace of mind. That sense of calmness and confidence that comes from knowing you are in control.

    You're sure of two things – you want to protect the wealth you have, and you want it to grow. But there is a world's difference between knowing it and achieving it. Achieving it means ensuring that your wealth is working as hard for you as you are for it. And whilst you are hard at work, it is being protected at all times. You know that you need guidance. And you know that you need to start today. But you have to be able trust the advice you get. You need somebody who will take the time to understand you, not just your wealth. And they must be independent and fair, with your best interests at heart.

    It may be about the good things in life – planning for your children's education, an unexpected windfall, a dream retirement or helping others. It may be to shield you from some of the less good things – a tax bill, a sudden illness or loss of job or loss in business. It certainly means that wherever possible, you want to avoid wealth-related surprises. Your strategy may be simply to protect your wealth or it may be to grow it.

    Technology is all set to change the world of Financial Planning too in form of Robo Advisory as its already doing to many other professions. Robo Advisory are preferred models because of their unbiased approach. These are automated investment platforms that handle the construction and rebalancing/ maintenance of an investment portfolio. Concept is similar to the idea behind target-date retirement funds and other all-in-one funds. In both cases, the goal is to provide you one-stop-shopping for your entire investment portfolio.

    Benefits with Robo Advisor:

    1. High-Quality, Low-Cost Portfolios;

    2. Ease of Use & Always available;

    3. Hands Off Investing;

    4. Regular Rebalancing;

    5. Low Minimum Initial Investment Requirements;

    6. Unbiased Advice, No Mis-selling & Less conflicts of interest;

    7. Multitude of services;

    On the whole, I think that robo advisors are a fantastic option. They offer high-quality, evidence-based investment portfolios at a low cost, making it easy for you to invest well no matter where you're starting from.

    It's important to recognize that they are simply investment management tools, not comprehensive financial planners. They don't ensure your success and they might not help you navigate the complexity of your entire financial situation.

    One of the most valuable benefits may not be obvious at first. Robo Advisors can save investors from making serious mistakes. For some people, saving money isn't a problem. Instead, they struggle to decide what to do with their investments. Some people trade too frequently, trying to time the market, or otherwise reacting to changes. This can cause people to make one of the worst investing sins possible – buying high and selling low. Other people make the mistake of waiting to get into the market, instead playing things too conservatively. Perhaps they sit on too much cash, or they fail to rebalance their portfolio because they fear they may make a mistake. They rebalance at set intervals, based on your predetermined risk tolerance. They stick to the plan. And in the long run, this can save many investors from making costly mistakes. But if you're purely looking for a simple way to implement a high-quality investment portfolio, robo advisors are a good choice. Robo advisors can be the perfect investment alternative for people who are not interested in do-it-yourself investing.

    Robo advisors have stimulated more demand for artificial intelligence in the hopes that AI software will help personalize financial choices better. Due to their overall value proposition, robo advisors have grown very quickly.

Financial(?) Planning!!

September  2017Written By Vaibav Ajay Mishra ,Co-founder & Managing Director  

  • Financial or Retirement Planning in our country isn't easy job despite having one of the highest savings rate among the world's relevant economies. Unstable inflation numbers, not-so-great economic growth, Indian's sickening liking for Gold, too many financial products, untrained financial advisors, etc are the reasons to be blamed to for this. Mis-selling either ways adds to the problem list of already confused indian investor.

  • Gross domestic savings (% of GDP)
       Country Name

    Idea of writing this is to hep reducing the complexity in decisioning process.

    Following are the 5 investment propositions in accumulation phase:

    1.Mutual funds/ Equities: Nothing better than Equity Mutual funds for 5 years+ scenario,

    2.Employee's Provident Fund (EPF),

    3. Exchange traded funds (ETF): ETF can be done through Gold or Index,

    4.New Pension Scheme (NPS): Its an Sec 80C investment and has delivered appox 10% in last 4 years,

    Appropriate value of Term policy is also advisable during accumulation phase. Opting out of a term life policy is much easier than getting out of cash value policies. Further, many term life policies are "renewable" and "convertible". The premium for term insurance steeply increases with advancing age and hence insurance needs at higher ages cannot be economically met with term insurance.

    5 propositions during distribution or Post-Retirement phase:

    Pension Plans: Provided by insurance cos and AMCs/ Mutual Funds.

    Fixed deposit/ Liquid Funds:

    Monthly Income Schemes (MIS): Offered by various AMCs and Post-Office,

    Senior citizens saving scheme (SCSS): The account can be opened in post office or any nationalized banks.

    Reverse Mortgage: Pledge your house with a bank to receive tax-free income from the bank regularly for a set period of time.

    Suggested Ideal allocation:

    Equity or Equity related investments
    Fixed income instruments

PayDay Loans- Indian Scenario

Oct 20,2018Written By Vaibhav Ajay Mishra ,Co-Founder & Managing Director

  • PayDay lending industry has enjoyed meteoric growth in the past couple of decades. PayDay loan or PayDay Advance or Salary loan or Cash Advance loan is a Short-term Unsecured loan by nature. It is to be availed as Cash loans to meet emergency needs & had to be repaid, as soon as the next pay cheque arrives. The concept of PayDay loan is been quite popular in developed countries wherein the lender provides loans which are given in advance of the next pay cheque to blue-collar workers who lead their life from pay cheque to pay cheque. PayDay lending first entered the fray in the early 1990s, as banks reduced their small credit offerings and consumers looked elsewhere for quick-fix cash. 
    Market Size in India is estimated to be around $20bn which is growing at 14% per annual with around 100 FinTech Startups in the business. This is an area where Banks never lend money for 7-30 days and it is not cost-effective for them to offer small value loans of INR 5,000-50,000. The option of Credit Cards comes with a higher interest rate especially if one withdraw Cash from the card.


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