Unlocking New Opportunities for Growth with Digital Lending

Digital lending is lucrative and in every fintech founder’s mind! In fact, most fintechs are considering enabling credit in their ecosystem, if they haven’t done it already!

Most startups do not have lending as the key value proposition when they start a business. As time goes on, the large volume of non-traditional customer information they generate makes it a rich lending data set. For example, recurring invoice data, daily cash flow, expense data, etc. It becomes a no-brainer to embed credit as a Lending Service Provider/Digital Lending Applications/Banking Correspondent.

Hence, Cashfree Payments had another informative webinar a week ago on ‘all things lending’.

This is a sequel to our previous webinar on Digital Lending Guidelines by the RBI. It was an exclusive roundtable with industry experts.

Aditi Olemann, Director for New Initiatives at Cashfree Payments got into conversation with stalwarts of the lending industry. Our chief guests were Kunal Aggarwal, Founder of Credflow and Niraj Murarka, Founding Member and CRO of LiquiLoans.

If you missed the webinar, worry not! This blog is a round-up of the same with the key takeaways.

Evolution of Digital Lending: Unlocking New Opportunities for Growth

Before the webinar, we organised a poll regarding the topics we should cover. To top it all was embedded lending.

So, we got talking with the experts who are building “lending” for the long term.

Looking at embedded lending as a segment from an NBFC standpoint, Niraj Murarka highlighted the significant product evolution over the years. Previously, lending meant getting a personal loan from the bank. However, today there are several lending and credit products that offer more flexibility.

He pointed out some new credit products enabled in partnerships with fintechs and marketplaces:

• It was Bajaj Finance that pioneered checkout finance with its No Cost EMI. LiquiLoans started off to compete in a similar space. However, it evolved into a backend partner for many fintech players to support all sorts of new lending products.
• Although daily EMIs had existed before, it used to be a manual product that is now revolutionised. A lot of merchants or customers, depending on the use cases, can take a product at daily or weekly EMIs.
• What is prevalent in recent times are Credit Lines! It offers the flexibility to draw whenever the borrower wants, unlike loans. Borrowers need to draw loans within a certain timeframe after approval. Otherwise, it expires and then one needs to reapply.
• Revenue-based finance was more prevalent in the US but has started gaining popularity in India in the last 2 years. Herein, the lender lends even if the balance sheet is not very strong but there is good visibility into revenue. A lender can tap into revenue at the source itself to give loans without diluting the equities. Niraj said there are about 5-6 such players and they empower a few of them.
• In the Gold loans segment, which was previously catered by banks or limited NBFCs, new players have pitched in. They not only offer gold loans at your doorstep but also tie up with other offerings. For example, they offer personal loans/credit lines over & above gold loans to make it more lucrative for borrowers.
• BNPL has also evolved in due course of time. Many players, other than Bajaj Finance No Cost EMI, have come in and evolved into smaller ticket BNPL.

ALSO READ: Now, Enjoy Higher Revenue with Cashfree Payments’s BNPL Suite

Evolution of Digital Lending for B2B

While Niraj shared an overview of lending products, Kunal Aggarwal shared his POV on embedded lending for B2B. As Credflow serves MSMEs, he shared the fintech standpoint when it comes to partnerships, customer journeys, and credit plugins.

According to Kunal, the lending world is fast-moving and going to be flow-paced and end-usage control based. This essentially means that embedded lending has to be at the point of sale where customer interaction happens.

He suggested an example of an e-commerce platform where the customer can buy a product through embedded lending, be it transaction-based or BNPL. This not only has a higher propensity to grow the credit demand but also gives end-usage fund control.

This is in contrast to traditional loans, where the lender has no control or visibility on how the borrower uses the fund.

Kunal also added that there are mainly 3 players in embedded lending:

• First, the provider of the capital, that is, banks or NBFCs.
• Second, the infrastructure player like Cashfree Payments for collections and disbursements.
• Third, interfacing with the customer like CredFlow.

All of these 3 players are critical. Embedded lending requires the right amount of capital and partners who can be flexible in building these products. It also needs an interface with customers, as well as infra to power all of these seamlessly.

After giving a broader view of embedded lending, Kunal explained what they do at CredFlow. He explained how it is relevant in the larger context:

• CredFlow serves mid-market SMEs with a revenue flow of Rs 2-200 crores. They embed credit specifically on the flow wherein the user is paying the vendors using their platform or collecting money from customers. The user can get access to a BNPL sort of line for paying vendors. Otherwise, his customers can get access to invoice financing
• CredFlow partners with 3 NBFCs currently at the backend to power them. They have partnered with Cashfree Payments for payment collection and payouts.

Moving on to Co-Lending

Co-lending is a newfound interest among many existing & new NBFCs ever since DLG was announced by the RBI. So, we covered in our discussion – the setting up of co-lending and challenges in operations especially related to reconciliations and repayments.

LiquiLoans is already a regulated entity in the co-lending space as they began co-lending a couple of months ago. Niraj said that with co-lending, there is not much difference with partnerships with fintechs who were anyways their lending service providers.

Most of the stacks that NBFCs or REs (regulated entities) are using with LSPs (Lending Service Providers) remain similar except for a few differences. Co-lending flows like 80-20 or 90-10 are the same as that of 100-0 lending, except that the originator also has liability. This makes it a more compliant and sustainable model.

What is mandatory for digital lending is setting up escrow accounts where two entities can pool in funds where the customer is unimpacted in the form of disbursement. The customer who is borrowing doesn’t care if s/he is getting funds from one or more entities but needs funds in one shot.

It is important to do the right set of mapping upfront where both entities appropriately divide the loan and track it. New-age NBFCs have already solved these issues while there could be some challenges with large NBFCs in terms of operational set-up and operational flexibility.

Niraj said, “Co-lending is nothing but LSP fintech arrangement only.”

Aditi asked if a common protocol can give better access to co-lending capital. Also, whether it could be a solution to the reconciliation problems and challenges in small ticket size co-lending.

To this, Niraj replied that the co-lending platforms in partnerships with large banks and NBFCs may not be tech-first. Therefore, they need to connect with new-age Fintechs that are more flexible.

Additionally, it will be easy for co-lending facilitators if the accounts for dispersal and repayments are set in a standing instruction way.

As soon as the repayment comes, they have to be split into certain percentage life becomes very simple. He made a point that the recon aka reconciliation takes a hit owing to a complex arrangement between two entities. It is also because a lot of recon processes at the backend are still manual even if the customer-facing journey is digital and automated.

Kunal shared his views looking forward to lending stack 2.0. He notified some key opportunities as he envisions the lending infrastructure should be to solve these issues as discussed.

He believes that there should be one common infrastructure, that is, a couple of companies that empower the co-lending platforms. As a digital lender, CredFlow needs to interact with several platforms.

All the FIs (Financial Institutions) have their own LMS (Loan Management System) and no common understanding of lending under DLG. Moreover, many middle-layer companies act as intermediaries between traditional NBFCs/banks and fintechs.

Building a unified protocol and tech stack will prevent the co-lending platforms from interacting with each and every for how the money flow will work. All of this will enable more plug-and-play offerings and interoperability, just like payments have done it. A Lending OS is the need of the hour for seamless credit flow for the customer journey.

Q&As

Although the webinar had a limited time frame, Aditi ensured that the discussion resolved as many doubts as possible. Other than the pre-decided topics, experts answered the follow-up queries and also the questions by the audience.

Aditi: How to identify and choose which NBFC to partner with for lending services?

Kunal: Choosing the NBFC partner for your lending service depends on the stage at which the lending business is. At an early stage when they are yet to achieve a market-fit product, they need a partner who can work very flexibly. It may be a smaller NBFC in this case.

Once the lending platform is good enough to scale then they need partners that have the capacity to give that sort of capital support. Herein, they need to join hands with some large NBFCs that are fairly aggressive in the market. Also, if these NBFCs are ready to partner with fintechs to expand their business.

One thing to be cognizant of is not to allow concentration, that is, not to be dependent on one NBFC at any given time as all have their respective interest to protect. Having extra partners will be helpful as they can chip in when the lenders need extra and additional capital.

Audience Question: What complexities do we foresee in the co-lending model? Can one entity in the co-lending model bear the entire risk or will it be based on co-lending shares or as per the negotiation?

Niraj: Two questions and hence, two answers.

Sooner or later, the RBI does want to regulate all lending platforms, whether they be NBFCs, digital NBFCs or any LSPs. It wants to have some sort of supervision on entities that today or a few years down the line may pose a threat or become a systematic risk.

Co-lending will permit not only NBFC-LSP lending but also two NBFCs coming together if they are deemed fit and fine by the regulators. They can enter into a co-lending arrangement where the RBI can ask whatever questions to both of them.

So to that action, we don’t see any complexities in the model itself.

Answering the second question, the complexities will always be in terms of risk-sharing and revenue-sharing mechanisms. They can say they want to share the risks equally because revenue is being shared equally.

However, as per my understanding, co-lending entities should take risks up to the capital they are providing. If they get a disproportionate share of the revenue, then risk sharing as per the co-lending share should be the maximum cap. Above that, it is the grey area.

Aditi: What are the 3 Interesting Trends in Digital Lending according to both of you?

Kunal: First and foremost, the most important trend is that more people are getting accustomed to digital lending. As they are adopting digital payments, which is also powering digital lending.

Second, I think probably the entire ecosystem is coming together to uplift this lending infrastructure. To add to it, a lot of innovation is happenings and many new products are coming in.

Last but not least, the pace at which Fintech is progressing, I think it’s leaving the entire world behind. In that sense, India is actually leading the way.

Niraj: The first trend I see is that every company wants to become a fintech and every fintech wants to do lending. Perhaps, this is because it seems like fintech lending is where most of the money is.

A common trend is that many digital platforms did not start as lending companies but are introducing LSP or co-lending. Many such players already exist that did not begin as lenders but today almost 80% of their revenue comes from lending.

The second thing is also actually a derivative of the first, that these companies have got access to a lot of non-traditional data. While some are limited to a bank statement and or a bureau statement, some of these fintechs, e-commerce or other platforms have a quantum of data in terms of transactions.

This enables them to figure out what interest rates will they take.

Thirdly, it is all about the infrastructure side. If the market share of these fintechs/new-age NBFCs has to grow, the infrastructure has to evolve.

Parting Thoughts

The writing is clear on the wall – Fintechs have to move towards becoming regulated entities to scale Digital Lending in the long term.

All companies will not only eventually become fintechs, but also all fintechs will become regulated entities.

Although there is no known deadline for when the RBI will come up with DLG 2.0 on co-lending, it is expected sooner than later. Lending is going to be sort of driven through partnerships and hence, clarifications on regulations are a must.

Cashfree Payments provides a full-stack solution for NBFCs and fintechs in compliance with the RBI’s digital lending guidelines. Our tailored solution for NBFCs and their partner LSPs can help them scale their lending use cases.