The MSME Road To Recovery

By all accounts, 2019 was a golden year for fintech startups. It saw investors pump $2.6 billion into the Indian fintech ecosystem by way of 180 rounds of funding exercise. But things began to take a turn for the worse right from the onset of 2020. Investment in the sector dropped 22 per cent in the first quarter of 2020 (January-March period) compared to the year ago period. And then came the Covid pandemic and the resultant lockdown in March end. 

So what has changed for the sector since then? For fintech firms, the pandemic has severely impacted the ‘discretionary spending’ category. 

The lockdown brought in its wake announcements of layoffs and salary cuts, and an overall sense of financial insecurity for the salaried, selfemployed and those running small and medium enterprises. 

While demand for borrowing is not going to go away, customer requirements and profile have changed in the Covid-19 era. “Earlier people use to take loans for travel, mobile phone upgrade, home decoration, purchases and long-term oriented loans. But reasons for loans have changed during the Covid era. Purchases are either for expensive networking equipment, emergencies or longterm requirements”, says Prithvi Chandrasekhar, Head, Risk & Analytics at InCred, a new-age financial services platform that leverages technology and data science to make lending quick and easy. 

Digital Payments Growing 

The lockdown and the strict social distancing norms also pushed the digital payment services into the fast lane. Sample this: Unified Payment Interface (UPI) recorded over 1 billion transactions in March, although both volume and value of payments dipped as compared to the previous month. The reason was curbs on daily commerce and limited economic activity on account of restrictions. March saw 1.25 billion UPI transactions worth Rs 2.06 lakh crore.

T h e N a t i o n a l Pa y m e n t s Corporation of India (NPCI) said the UPI recorded 1.34 billion transactions worth Rs 2.61 lakh crore for June 2020, significantly up from the 1.23 billion transactions worth Rs 2.18 lakh crore in May 2020.  

According to Vivek Belgavi, Par tner, Financial Ser vices Technology and FinTech Leader at PwC India: “Various enabling-tech players have seen a rise in the demand for their offerings that use technology to assist with front, mid and backoffice work during the pandemic.” 

But not everything is worth celebrating. Various industry reports show the early phase of the lockdown (April and May) resulted in a 70 per cent fall in the loan recovery rate and a 50 per cent dip in new loan disbursements compared to pre-Covid times. This fall is witnessed by lenders with a ticket-size of Rs 2-2.5 lakh. The supply chain disruptions have led to a big decrease in demand. 

The problem has been compounded due to the moratorium imposed by Reserve Bank of India (RBI) for term, personal and various other loans. So what are the fintech firms doing to cope with these challenges? Despite the hurdles, why are investors continuing to pump money into fintech firms? And what is the way forward? We have the answers from the fintech honchos themselves. 

Green Shoots 

It’s proven beyond doubt today that the micro, small and medium enterprises (MSMEs), which are the backbone of the economy, have been worst hit due to Covid-19. The lockdown and the reverse migration of labourers compounded the problem. As per a report titled ‘Redefining the Fintech Experience: Impact of Covid-19’, MSME as an industry contributes 29 per cent of India’s GDP with a credit gap of $380 billion and roughly 40 per cent of this sector borrows from the informal sector. While it employs around 11 crore people in the country, the sector’s upliftment is crucial for the overall health of the economy. What are the fintech firms doing to help? As per the latest data, the loan disbursal volumes to the MSME sector rose to about half the levels of precovid times in June. But there is a catch. Around 80-85 per cent of new loans/top-ups were given to old customers with a proven history of making their repayments. 

“Credit flow to the MSME sector is going to help the industry recover,” says Anuj Kacker, Co-founder, MoneyTap. Around nine out of 10 loan disbursals from MoneyTap went to the existing customers. Kacker says, a quarter of its customers are opting for a moratorium but MoneyTap believes it will be back to 80 per cent of its disbursement volumes by September.

Catering to MSME, Aye Finance has raised $2.8 million in equity funding and $1.6 million in debt from a German-based microfinance impact investment firm. The company has been profitable for three years and has a portfolio of 3-lakh micro-enterprises and a loan book of Rs 3,000 crore. Sanjay Sharma, MD, Aye Finance says, “We have always diversified into different channels for raising money and not restricted to just banks or developmental financial institutions. We have a track record to repay our loans on time and have a good equation with our lenders. This has given us credibility.” 

Besides MSME, there are smaller businesses and workers engaged in the gig economy that too are looking for liquidity. Fintech firms are their best bet now. InCred recently raised $6.6 million debt funding from various public sector banks and public financial institutions. Specialised in personal loans, InCred has overall raised Rs 600 crore equity Series A funding. It has a loan book of Rs 2,000 crore. Largely serving low-risk customers for relatively long tenures, its average ticket size is Rs 2-2.5 lakh loans. InCred’s target audience primarily comprises of the middleincome salaried segment. 

So it’s not a surprise that InCred acquired Qbera for $15 million, another digital lending startup. Chandrasekhar from InCred says, “The opportunity of acquiring Qbera presented itself and we are committed to personal loan segment and so is Qbera. While both of us are serving the middle-income salaried class through personal loans, especially during the Covid-19 crisis, a lot of synergies happened during this acquisition.''

Newbies 

With the disruption in mobility and rise in contactless services, startups and government are diverting businesses to digitize and expand and capture new segments in the market. Instamojo, a payment gateway platform, in an attempt to smoothen the instant cash process introduced InstaCash feature over its existing sachet loans for merchants. While the startup has been working on different credit-based products for its users, the lockdown helped them understand the need of the merchants. 

Akash Gehani, Co-founder & COO, Instamojo says, “For businesses, we figured managing cash flow is a challenge with specific requirements during the Covid era. They need a small amount of conveniently available loans of upto Rs 1 lakh to curb the current crisis of reduced cash flow. This insight was fetched through our already available merchant data.” The startup is giving out small loans of average ticket size of Rs 20,000. While this service is yet to see its fruits, the founders are positive about its need due to its evergreen nature. 

Another new player in this segment is e-commerce giant Amazon which in April launched its ‘Pay Later’ service to offer a small ticket virtual credit line for its eligible customers on Amazon.in. In collaboration with Capital Float, a ‘buy now pay later’ lending startup, the service saw the highest customer sign-ups in June. 

“Fintechs that have followed predominantly digital customer acquisition and service delivery models are in a relatively advantageous position than their traditional counterparts. With a sudden need for last-mile delivery of benefits and relief, fintechs that are already catering to such underserved segments could be potential distribution channels,” says Belgavi. 

Demand quotient 

Due to Covid-19 and moratorium announced by the RBI, lenders have become more cautious in disbursing loans. Anuj Kacker, Co-founder, MoneyTap says: “Demand is pacing up its pre-Covid state but selectively and slowly.” As per Kacker, building a digital-only experience is critical in today’s time. “Due to data visualisations, we can make better judgments on disbursals despite updated CIBIL scores from official organisations,” Kacker adds. 

The digital lending market is witnessing a demand for smaller ticket loans. “While the digital lending market is vast and there still so much opportunity in South and West India and we will continue to grow in the foreseeable future,” Chandrasekhar adds. Now the startups are more focused on retaining the old customer’s rather fresh sales. InCred has a physical presence predominantly in Andhra Pradesh, Telangana, Karnataka, and Rajasthan among other places. 

What are investors asking? As per Kacker, investors have become more cautious now. “They are looking for right unit-economics business with proper regulatory filings and sound business models,” he adds. Agrees Belgav of PwC. “Investments are happening where business models are strong and risks are followed judiciously. But in the current challenging environment, business models are strong where you have an authentic supply chain and demand-based information,” he adds.

Investors are also looking for collateral which allows them to protect their investment. While startups are working in discovering new flowbased information by digitising SMEs, supply chain, distribution and agri-value chains, there is a renewed focus on collections and strengthening cash flow as fresh disbursements have slowed down, says Belgav. Today, the Covid-19 pandemic offers an opportunity for lenders to integrate with new initiatives, innovations and the new credit product line, in order to keep the business ticking.