Why NBFCs Are Funding E-commerce Sellers

<div>Newspapers carry stories on a daily basis of how India’s biggest e-commerce sites are entering into agreements with NBFCs (or Non-Banking Financial Companies) to provide easy working capital loans to its merchants. Using such access to finance, these small and medium business owners are able to conveniently meet their requirements for capital and are able to scale their businesses in the hot e-commerce market such as ours.&nbsp;</div><div>&nbsp;</div><div>As far as e-commerce sites are concerned, the big names have successfully made a place for themselves in the lives and on the credit card bills of a lot of consumers. They are now focusing on onboarding the maximum number of merchants possible on their platforms in order to offer greater choice and variety of merchandise. NBFC financing partnerships help these sites to attract more sellers. While the benefits of the recent trend for merchants and e-commerce companies are clear, the question that arises is this: Why are NBFCs funding e-commerce sellers with such speed and enthusiasm?</div><div>&nbsp;</div><div><strong>Real Creditworthiness&nbsp;</strong></div><div>About 9 months ago, there was a substantial surge in the market in the number of NBFCs providing loans to small sellers on e-commerce platforms. This spike occurred due to a variety of factors. The first amongst these is the fact that SME merchants who sell through online marketplaces may not always have the collateral required to satisfy the loan eligibility criteria of large banks and financial institutions. These institutions do not have the capabilities to analyse the actual creditworthiness of the businessman where credit history is limited or absent.</div><div>&nbsp;</div><div>NBFCs who are leading the way in e-commerce seller finance are, however, leveraging analytics and Big Data to evaluate the actual potential of the merchant’s business by analyzing cash flows and business growth. They study the sales and fulfillment records carefully to actually gauge the true credit value of merchants. Thanks to the large quantities of data that is available about the sellers, NBFCs are in a position to focus on the factors that are actually relevant in the current moment and lend collateral-free to those who actually deserve it. &nbsp;</div><div>&nbsp;</div><div>They are tapping on a huge opportunity, which other larger institutions are unable to tap due to small ticket sizes, lack of paperwork and collaterals along with complex and often cumbersome loan analysis and application processes.&nbsp;</div><div>&nbsp;</div><div><strong>Seizing Opportunity &nbsp;</strong></div><div>Another reason why e-commerce merchants have become the focus of NBFCs is the size of the opportunity at hand. According to estimates, the biggest e-commerce players have up to 1 lakh merchants enlisted on their platforms with about 30,000 to 50,000 new sellers being added each month. This enables the NBFCs to expand their coverage tremendously. As e-commerce blooms, so does the business of these NBFCs and going by the current growth rate of online retail in our current, the potential is huge. &nbsp;</div><div>&nbsp;&nbsp;</div><div>NBFCs charge an interest rate in the range of 18-24 per cent &nbsp;for collateral-free loans. Additionally, since the NBFCs have lean business models and low distribution and operational costs, they are able to maintain optimal unit economics and capital efficiency.&nbsp;</div><div>&nbsp;</div><div>The new ecosystem where working capital loans are easily available to e-commerce merchants, therefore, is beneficial to all stakeholders. The e-commerce sites are able to meet their goal of onboarding more sellers to attract greater traction. Small business owners can focus on their core competencies and not worry about payments to be made to suppliers, employees etc. Since the credit risk analysis is performed digitally, the loan disbursal is done earlier than ever before. NBFCs, on the other hand, are employing proprietary technology to accurately measure the risk profiles of borrowers and underwrite risks only on the basis of very rigorous analysis. They are able to empower SME merchants with working capital finance necessary for them to scale. Individual benefits apart, this trend is boosting the overall economy and the e-commerce landscape of the country in more ways than one! &nbsp;</div><div><br><strong><em>The author, HarshVardhan Lunia, is Co-Founder &amp; CEO, Lendingkart</em></strong></div>