Lending Businesses in India: A Path Ahead-Financial Analysis

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LENDING BUSINESSES IN INDIA: A PATH
AHEAD
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Acknowledgment
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PREFACE
This publication is intended to guide a layman about the lending businesses and also the
concept of modern and digitalized lending by providing detailed information about
technological jargon as well as in-depth information on both traditional and modern lending
services in India.
“Lending Businesses in India: A Path Ahead” is the book that will provide descriptive
information about all the new and innovative technological advancements in the field of
lending in India. Through this book, a layman can access all the information about lending
practices. This book explores different credit options that are available for the customers. The
author has distilled the information in a very simplified manner so that it can be accessed by all.
The purpose of this book is to provide people some basic information about the path of lending
in India and to assist customers to gain some knowledge before investing or borrowing from
these new technologically advanced fintech firms.
The author provides many advantages as well as risks involved in these lending practices in the
book and also provides in-depth information about the online credit market and how these new
fintech start-ups are shaping the lending industry of India. By better understanding the Indian
markets and about the borrowers and lenders, people can understand the lending businesses
and also this will help them to scrutinize their credit options as well as help in establishing new
paths for themselves in the lending businesses.
Lending has evolved and is not just a concept that is birthed today. This book brought you
consolidated information about lending from ancient Vedas and temples in Rome to
commercial banks and online credit markets.
Happy Reading!
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GLOSSARY
Moving forward in this book, to know more about lending and online credit markets in India, it
is very necessary to acquaint yourself with some key financial terminologies that are used
commonly by lenders that may seem like technical jargon to the common readers. So here are
some definitions and simple explanations of these terminologies.
Commercial Banks
Commercial banks are the type of financial institution that provides loans to the customers,
accepts deposits and offers services like a certificate of deposits, savings account, etc.
Commercial bank gathers capital for loans from the savings account of the people and earns
money from the interest charged on the loans. The rate of interest varies according to the type
and amount of loan.
Loan
The loan is the amount of money usually given by lenders to the borrower with interest rates
charged on the principal amount. The borrower is indebted to the lender for the loan and is
liable to pay the principal amount along with interest rate within a fixed period.
Collateral
Collateral is the valuable asset that is pledged as the security for a loan and the lender can seize
the collateral and can resell it to retrieve the amount if the borrower is unable to pay the loan.
Credit Score
The credit score is the statistical analysis of a person's trustworthiness and it varies from 300-
850. The higher the score, the higher the possibility of getting a loan from the banks.
Crowdfunding
Crowdfunding is the type of investment where a new business can borrow money from many
people through the social media platform and other websites.
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Angel Investors
Angel investors are those people who provide funding to start-ups and new businesses in
return for some equity shares. These are high net worth individuals often found in the families
of entrepreneurs. These are also called seed investors or angel funder.
Bank Overdrafts
Overdraft is the financial service provided by the bank where an account holder can withdraw
more amount than what is actually in his/her account. In simpler terms, it can be said that the
bank allows some of its customers to borrow money in the form of overdrafts. This enables
businessmen to maintain cash flow in the business.
Fintech
Fintech is an acronym for financial technology. Financial technology is a broader term can be
defined as technological advancements in financial services such as lending, borrowing and
other credit sources. Fintech players usually engage in disrupting the existing services by
providing more technologically innovative services. Many start-ups and big banks like Credit
Suisse are creating these technologies to a breakthrough in the lending market. These
companies use technologies ranging from payment applications to artificial intelligence and
automation as well as big data.
Peer-to-peer lending (P2P)
Peer-to-peer lending is the source of obtaining a loan directly from lenders or investors without
the assistance of financial institutions as the middleman. Many online platforms are using P2P
lending as their primary source of funding.
Cryptocurrency
A cryptocurrency is the form of digital currency that uses encrypted codes to create units of
currency and authorize transactions without the assistance of the government or central bank.
Bitcoin, ether, Litecoin, Ripple are some of the most common forms of digital currencies.
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Bitcoin
‘Bitcoin' is the first virtual currency that was designed by the person(s) under the pen name
Satoshi Nakamoto. It is the most prominent cryptocurrency and can also be heard commonly in
mainstream finance. Satoshi Nakamoto described it as a purely peer to peer mode of the
transaction without any interference of financial institutions and government.
Blockchain
Blockchain is an unchangeable digital ledger of commercial transaction that is encoded to
record financial transactions and everything else that contains any value. Blockchains can be
defined as a digital record holder for all the digital transactions through the use of digital and
cryptocurrencies but it does not have any centralized ledger and data is recorded in codes
called blocks.
Insurtech
Insurtech is the subset of fintech and also an acronym for insurance technology. Many start-ups
have entered the traditional insurance industry and disrupted the market by introducing
technological advancement in the insurance sector. These start-ups and businesses are called
insurtechs.
Regtech
Regtech is an acronym for regulatory technology. This technology assists the firms that provide
financial services to follow the rules of financial compliance. Regtech prioritizes computerizing
and automating the Anti-Money Laundering rules that are made to mitigate the illegal income
and KYC (Know Your Customers) processes to recognize and authenticate the clients of financial
companies to reduce frauds.
Initial coin offering
Initial coin offering is roughly similar to Initial public offering in the mainstream investment
where new start-ups that use blockchain networks sell the start-up's digital currency in return
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for fiat money. It can be said as a crowdfunding measure for the new start-ups to get
investments.
Robo-advice
Robo-advisor is the automated algorithm-driven online software that uses little or no human
interference to provide financial services to the people. A typical Robo-advisor collects
information from the clients using the survey method and provides relevant information that
can be useful for the people.
Chatbots
A chatbot is the type of software that uses Artificial intelligence to conduct a conversation
through either auditory or textual modes. These types of software are generally used for
customer services or the acquisition of information. The programs are designed to stimulate the
same conversational behavior as a human would have via the use of artificial intelligence.
Unbanked/underbanked
The “unbanked” or “underbanked” are those people who cannot reach to the mainstream
financial services. Many fintech players aim these people as their target markets to provide
direct digital solutions to their financial problems.
Financial inclusion
Financial inclusion is those fintech solutions that provide alternate and affordable finance to
underprivileged and low-income group people who have low or no access to conventional
financial services. This is among the important area where the new fintech start-ups operate in
the developing and emerging markets like India.
Neo bank
Neo bank as the name suggests is the type of new banks that provide their services on mobile
applications and other digital platforms and do not have any physical branches.
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CHAPTER 1: INTRODUCTION
Lending and borrowing have been a part of human history from the ancient Vedas to Greek
history to ancient temples to commercial banks to credit cards and now with the advanced
technology to online credit markets. It is imperative to think that lending of money started
parallel to the invention of money. It is rather amusing to think what the ancient people might
have done with borrowed money; bought cattle traded slaves or bought grains and livestock?
Whatever they did, it can be said that the concept of borrowing and lending is inherited from
our ancestors. The roots of lending can be traced back to the Mesopotamian and Indus Valley
civilization. Gradually the lending process evolved from the pre-technological era to the post-
technological era. In India, pre and post-colonization periods have a long history of lending.
Moneylenders were an important part of the Indian economy. Even today, there are
moneylenders, but the modes of lending and borrowing have become advanced and easy with
the growing technological assistance.
Gradually with the development of Banks, the lending of money became quite accessible to the
people in India. But the lending processes in banks are lengthy and time-consuming. This
created a need for fast credit services with the growing commercialization. The age of
innovation has opened new roads for lending businesses in India. Lending businesses are firms
that can provide easy and quick loans to people. Indian economy is developing at a fast pace.
With the fast growth rate, the new start-ups and SMEs are establishing. These small businesses
need finance and capital to grow and become stable. With the rise of SMEs and entrepreneurial
businesses, the demand for easy and quick loans is also increasing. This creates opportunities
for financial players to enter the market and create their places.
The average young population in India is more than many other developed nations. This gives
lending businesses, a chance to develop as many young Indians have new and innovative ideas.
But ideas alone cannot make a business or a start-up successful. The major requirement is the
availability of capital. With the era of frugal innovation in India and the need for capital, lending
businesses are the best choices. Although the lending industry waivered in the past years
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because of demonetization and changes in the tax policies but the new tax policies and liberal
lending rules, the lending businesses are becoming stable and new players are emerging in the
market. In the past years, several frauds and other activities have raised eyebrows of people
towards commercial banks but with the stability in the economy of India and a fall in the
inflation rate, the lending businesses are achieving growth and development.
There are various types of lending and it depends on the amount of loan and the cause of
borrowing to decide which lending segment to choose. New modes of lending businesses are
erupting in the market such as blockchains, peer to peer lenders, NBFC, commercial banks,
crowdfunding, etc. The financial companies provide loans to borrowers with fixed interest rates
and structured return policies. The requirement of funds is among the basic needs to establish
a business, to start housing, to develop infrastructure, to study further and to buy assets. These
activities require large capital that can be gathered by borrowing from the financial companies
and repaying at regular intervals with interests. The interest rates provided by financial
institutes are different and borrowers should evaluate all the options before borrowing money.
Commercial banks are large financial organizations that carry financial transactions and provide
loans with fixed interest rates. These are long-established lending institutes and many people in
India prefer traditional methods of borrowing loans. But with the advent of technology, it
became necessary for banks to modernize and use technologically advanced services to attract
customers. Banks have adopted mobile application and online services to cater to the needs of
customers. Commercial banks provide various credit options and offer both short-term and
long-term loans to customers. These credit facilities enable all types of people to fulfill their
needs. But some people need quick and easy access to loans without any collateral securities.
This gives opportunities to other financial businesses.
This gives an open market for fintech start-ups and businesses. Fintech is an acronym for
financial technology and fintech lenders are those firms that use new and advanced technology
to provide easy credit facilities to the people. What is important is that these start-ups use
innovation as the key model for growth. The size of India is large and this gives various lending
businesses and online credit marketers to establish themselves. Fintech players are planning to
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create a space for everyone. Lending to students and new employees whose credit base is not
strong are the most targeted customers of these lenders. The online credit market can also
transform informal lending and borrowing to formal using online and digital platforms. Many
leaders of fintech start-ups added that not just in tier II and tier III cities but even in tier I cities,
many people are using traditional borrowing methods. This creates huge opportunities for
fintech players to devise innovative methods to lure targeted customers and provide loans with
a few touches of the screen.
The fintech players have the caliber but need sustainable business models to run in the long run
in Indian markets. Fintech players are the financial technology players who use innovative and
new ideas to provide quick and easy credit to the people. These businesses target niche
segments such as loans to students, higher education loans, loans for studying abroad and all
sorts of small loans. These businesses either establish a partnership with NBFC or commercial
banks to get stability in the market. RBI has strict regulations and guidelines for peer to peer
lenders and this facilitated more secure lending and borrowing activities.
The digital credit market is growing at a fast pace. It is estimated that the turnover of these
fintech start-ups would reach up to $1 trillion by 2023. What is problematic is that it is
necessary to have more secure and risk-free transactions. Right now, their focus is only on the
income side, the focus needs to be shifted to the expense side to consider to whom loan should
be given and not. The online credit market has evolved a lot in the past 5 years and the
possibilities are that in the next 5 years, the online credit market can become a great
competitor for the commercial banks in terms of all forms of credits.
For these reasons, the commercial banks and other financial institutions must buckle up and
advance their games to maintain their position in the world of lending in India. But it is still
difficult for these traditional lending institutions to adopt all the technological changes with
their complex structure and rigid processes as well as issues of security. This provides fintech
players an opportunity to grow and develop in the Indian market and hold the market for good.
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CHAPTER 2: TRADITIONAL MODES OF LENDING
When looking for funds to start a small business, build a home or buy a car, the first source that
comes in mind is the bank. Bank loans are the most secure and tried and tested loans for small
businesses. Traditional financing is an affordable source of finance, if not the easiest as it
requires time and a rigid process. Traditional financing generally refers to means of securing a
loan from a financial institution under the scrutiny of your capital and capacity as well as
collateral. The process involved in such borrowing is standardized and rigid as lenders scrutinize
your business plan, credit history, assets, and liabilities before granting the loan.
The most common sources of getting loans are commercial banks. Commercial banks are the
type of banks that provide financial services to small businesses and the general public. The first
commercial bank was established in 1397, named Medici bank by Giovanni Medici. Banca
Monte Dei Paschi di Siena which has been functioning since 1472 is the oldest operating bank
headquartered in Siena, Italy. The first established bank in India was Bank of Hindustan that
was built in 1770 and the oldest bank that is still operating in India is the State Bank of India
which was established in 1806 with the name of Bank of Calcutta. Although the history of
lending and borrowing goes way back, these are the commercial bank that came into existence
first. Small and large banks are the most traditional source of borrowing. Borrowing from the
larger banks can be difficult because they follow a strict and rigid process and scrutinize your
credit score before granting loans but the interest rate is generally lesser in such banks and
they are very affordable. Small banks, although they have higher interest rates than large banks
can work with the borrowers by carefully considering the loan applications to find a way to
approve their loans.
There are different types of loans that are provided by the banks. These loans include home
loans, personal loans, business start-up loans, car loans, Gold loans, and loans against
insurance, PPF loans, business loans, and education loans. These loans have varying interest
rates and each bank has its different interest policies. But what is important to note is that
these banks are all regulated by RBI. For business loans and start-up loans, a bank used very
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rigid policies of scrutinizing the business plan, past credentials, assets and credit scores. But
with the advent of technology and the emergence of several different credit options, banks
have offered more lucrative policies for the start-up owners to secure loans. There are many
schemes introduced by banks in India to attract business holders to borrow money from the
banks. In India, there are many schemes introduced by the government to aid SMEs and to
encourage innovation and employment generation in India as SMEs contribute up to 40% to the
Gross Domestic Product (GDP) of India.
There are many schemes for loans that are provided by both the commercial banks as well as
the government to support small businesses as well as to encourage young entrepreneurs to
establish their businesses. The government has introduced Make in India campaign and started
many schemes like SIDBI Make in India Loan For Enterprises (SMILE), Pradhan Mantri Mudra
Yojana (PMMY) and many other such schemes. These schemes not only encourage young
people but also empower STs, SCs and women entrepreneurs by granting easy loans on low-
interest rates.
People who find it difficult to get loan approval from the banks because of the highly specialized
credit criteria can also find backing from Small Business Administrations. Small Business
Administrations was an independent agency that was created in 1953 to assist and counsel
small businesses and to maintain the economy of the country. The organization is aided by the
government to preserve the interest of small businesses. SBA backed loans provide assurance
to the lender and make it easy for the borrower to get the loan.
Credit Unions are another source of traditional financing and work similar to banks but credit
unions are the non-profit organizations and are owned by its members. There are restrictions
on joining Credit unions that are only open to local communities or educational institutions.
The interest rates provided by the credit unions are sometimes lower than the small banks as
these are not-for-profit organizations. But this is not the always case as larger banks have tax
advantages which are not the luxury for small credit unions.
There are many financial institutions and Credit Unions that provide traditional loans to the
people in India and their interest rates are also highly competitive. For smaller businesses,
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