NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, January 7, 2016

Has Financial Technology or FinTech finally come of age in India? While, FinTech accounted only for 13.3% of the total funding raised by Indian startups in 2015, the gross investment into it was up 8 times over the equivalent 2014 number of $145.1 million. While that looks amazing at first glance, it has to be noted that m-commerce platform One97 (Paytm) accounted for about 74% of the money raised by FinTech companies this year. Nonetheless, even if one were to exclude this number, Indian FinTech investment has doubled over the 2014 number. India’s FinTech sector has been a far cry from its global peers, accounting only for 6% of the total global FinTech space (by funding), but clearly as the numbers above show, that is changing fairly rapidly.

FinTech is more than just payment-technology

FinTech in India has been synonymous with payment-technology, a niche that has produced India’s only FinTech unicorn – One97 (valued at $2 billion). However, from a global perspective, FinTech is not limited to payments alone. Globally, there are 11 FinTech lending unicorns such as Affirm, Prospr, LendingClub & Wonga, 11 semi-unicorns (>$500 million valuation) such as Kreditech & Kabbage while the equivalent numbers for payment-tech startups are 11 and 6. The rest of the FinTech unicorns and semi-unicorns are from a variety of other sub-sectors such as investing, insurance, credit reporting, bitcoin-tech and others. Therefore, among sub-sectors in FinTech, lending is clearly the elephant in the room, followed closely by payments.

India is warming up to core-FinTech

India is warming up to core-FinTech as investors and entrepreneurs being to realize the scale and scope of the opportunity in these sub-spaces such as lending and to a much lesser extent-personal finance. It is not that the scope for payments-tech is saturated, it is just that there are far too many low-hanging fruits in the lending and personal finance space to ignore anymore.

The case for FinTech in lending

There are over 11,582 NBFCs and about hundred commercial banks in India, most of which make limited use of technology in their lending process. Lending decisions are made by credit managers, with limited standardization across applications & varying levels of credit risk management at each institution. $121 billion in individual credit and several times that number in credit to MSMEs is handled this way. The results are nothing to cheer about. Going by data published by the Reserve Bank of India, about 8-9% of the loans made to individuals go bad when measured in terms of the Impaired Assets Ratio (Gross Non-Performing assets + Restructured assets / Total Advances). This number worse when it comes to loans made to Micro and Small enterprises (MSMEs) at 10-14% depending on the stage in the credit-cycle.

The use of technology is typically confined to the use of a “credit-score” which is calculated based on the credit history of a borrower. The effectiveness of credit score-based lending is seriously undermined by the following:

1. Close to 80% of India does not have a credit score.
2. Credit scores are calculated in a semi-linear manner and are only a rudimentary predictor of the credit risk associated with a borrower.
3. A large number of potential borrowers have limited credit-history and therefore, are plagued by what is known as the “thin-file” problem.