Alternative Financing A Haven For India’s Unbanked

A trend of bad loans over recent years has tightened up the lending requirements of nationalized banks in India. Young Indians, those without good credit and the unbanked are increasingly turning to alternative lending startups to meet their financing needs, and India is now ranked third globally for the number of startups offering personal loans.

The many unbanked in India are turning to local startups, such as Cashe and SlicePay, to borrow money. The unbanked are often young employed workers that have not built up a credit history and do not own a credit card. According to Forbes, the past few years has seen an increase in bad loans that has caused traditional lenders to be more cautious in their lending, and that includes the nationalized banks. This has increased the demand for alternative financing from individuals and small businesses.

The research platform Tracxn finds that 64 alternate lending startups were founded in India in 2015 and, in 2016, there have been 34 new startups launched. India is now ranked third for the number of personal loan startups, after the U.S. and China, and fourth for business loans.

Indian startups are entering into partnerships with nonbanking financial corporations (NBFCs) or obtaining their own NBFC license. Existing regulations are not clear on these partnerships because while NBFCs can lend money, they are not allowed to take deposits.

The main issue for lending startups is sourcing funds, and most prefer to partner with banks that offer cheaper interest rates for those with good credit scores. But few in India have good credit, and many do not have a bank account.

Mobikwik, a leading mobile wallet company, will be partnering with NBFCs and will be the top wallet for personal loans. Competitors Paytm and Freecharge offer business loans to merchants, but they do not yet offer consumer loans.

Alternative lenders are exploring the various segments in the Indian market. ZestMoney and CashCare are prominent in personal loans. ZestMoney lets buyers shop on online marketplaces such as Overcart, Blue-Stone, ValueCart and Velvetcase without using a credit card. Capital Float and Lending Cart provide business loans to online sellers and small merchants. Capital float partnered with Alibaba in India and may link with Power2Sme and other B2Bs. Krazybee and Gyandhan extend students loans without collateral. Gyandhan has partnered with SBI and Axis Bank. EarlySalary gives out payday loans from $150 million to $100,000 (Rs 10,000-1,00,000). The loans are typically for a period of seven to 30 days and carry an interest rate of 24 to 30 percent.