In India, SME Lending Benefits From Innovation

In India, banks have been targeting lending to smaller businesses amid a slowdown in lending to larger corporations. Yet the slowdown has extended in the midst of a general waning of the economy and has snared “big” lending to small businesses. The Reserve Bank of India reported in July that between May 2014 and May 2015, lending to small industries (and the players in them) grew at 9.6 percent — not bad but a far cry from the 23.8 percent rate seen in the previous year.

Though traditional avenues of financing in India may be a bit sluggish, there are pockets of growth to be seen, particularly among tech-focused companies that bring buyers and sellers together. PYMNTS spoke with Rajeev Agrawal, CEO of Innoviti Payment Solutions — which just received $5 million in funding from a consortium of investors — to discuss SMB lending trends in the country, with an eye on both the current and long-term environments.

Under his company’s business model, Agrawal said, Innoviti has a platform upon which buyers, sellers and lenders enroll to encounter one another. And in the event of a transaction and whenever a buyer is purchasing from a seller, those opposite sides of the transaction can apply for a loan from any of what Agrawal termed “empaneled lenders” who have pre-qualified the buyer. The loan is approved for the buyer instantly but paid out to the seller. Repayment is collected from the buyer.

The company’s recent $5 million funding round, which was announced in July (with leaders including Catamaran Ventures and New India Investment Corp.), will be used “primarily for scaling up the small business owner” lending side of Innoviti’s operations, Agrawal said.

And at least some of those funds will be earmarked toward day-to-day and long-term-focused operations, ranging from marketing to platform improvement to product development.

The funding comes as a vote of confidence in Innoviti’s technology, said Agrawal, as the company has “shown how a credible credit distribution business can be built atop a payments platform that can originate and distribute loans to segments that were not profitable to distribute to [previously].” For investors, the attraction comes amid an “asset-light philosophy” that can create value.

Since the loan that facilitates the transaction, as mentioned above, comes from what Agrawal described as “nontraditional points” of technology, marketing and other costs are relatively low (which in turn implies better returns). In addition, costs are further reduced through a distribution model that ties together instant credit authorization and movement of money through payment channels. Lending risk is curtailed, as the loan is disbursed to the seller and repaid by the buyer.

Innoviti has said it distributes roughly $75 million in loans to as many as 10,000 SMES in 20 cities across India. The company has also positioned itself as the only platform in the nation through which payments can be processed across online and offline channels.

The company’s position is that a “merchant-centric approach” must be in place in order to solve payment problems.

“Payments innovation needs to add value to both the customer and the merchant, but we believe the scale is tilted a little more in favor of the merchant than the customer when it comes to sustainable innovation,” said Agrawal. “A customer very rarely changes their decision of which merchant to buy from based on innovation. The product is primary, and payment only facilitates the transaction.”

And in taking the “merchant-centric view,” Agrawal posits that there are two types of problems that payments innovation can address successfully. In the example, a customer desires to purchase a product but does not have enough on hand to pay for it.

In that instance, the executive noted, it may be possible to extend credit at the very point of purchase, which of course enables the transaction to be completed. In another scenario, which skews more to the merchant “side” of the transaction, there are incidents of waste and errors that are tied to the manual tasks that occur in payment acceptance. So, innovations in that area would be of interest and benefit to those processing the transaction itself.

The typical smaller business lending requirement comes within a range of $100 to $1,500, and the length of turnover trends between 15 days to 90 days.

Looking at the larger payments market itself, Agrawal stated that he and Innoviti have observed the “trends around lending to a small business when the business sells rather than when the business buys. We believe technology gives better returns and also it’s easy to change user behavior toward a new platform when one funds the buyer rather than the seller.”

“We believe more buyer-led models will emerge.”