Want a loan, but have no Credit history or Collateral

How did I get to this story?

Data and its visualization had always been of interest to me and given a choice between reading pages of analysis and data summary my eyes would always rover to discover the latter first. Because of the strong interest towards it, I picked up writing Python snippets that automated reading any kind of dataset from the web and display a visual representation of it. Having felt satisfied with the outcome I wanted to explore datasets from Domains that I had worked in viz Banking and Retail. While on a subconscious intent to search for Credit rating datasets my mind seem to have hooked upon a newspaper article on a leading Indian NBFC start-up having received another round of funding this Nov 2019 and I felt why not find how differently  they assess Credit worthiness of their Customers before hunting for public datasets

What is the traditional criteria of receiving a loan?

Traditionally individuals or businesses receive loan from Institutional lenders (Banks, NBFCs) based on a sound Credit score residing with Credit Bureaus (CIBIL,CRIF High Mark, Experian, Equifax). The score is arrived based on the entity’s loan repayment history.  However barely one-fifth of the Indian population has a valid credit score thereby constraining their access to credit and creating the vicious cycle – no score hence no credit and no credit hence no score³.

The additional factors which discourage this segment of credit-less borrowers from receiving a loan are the high Operational costs incurred for disbursing small sized loans by Institutional lenders. These Lenders also insist on Collateral to enforce willingness to pay by borrowers. High regulatory obligation by these Lenders mandate submission of elaborate documentation coupling it with increased loan processing time ². 

What is the Market overview?

The population size of these underserved entities is very huge launching the government to push forth a slew of policy changes and initiatives to drive up financial inclusion. The Retail front has close to 400mn customers in the banking sector with no credit history. Of them around 300mn customers have one account and the rest 100mn have no account¹.

On the Business front MSMEs remain largely underserved in comparison to large sectors. There are 55.8mn MSMEs with 15% (8.2mn) being registered and remainder 85% (47.6mn) unregistered. They together generate more than 124 mn jobs and contribute to 31% of nation’s GDP and 45% of country’s overall exports. Their source for credit requirement estimated at INR 87.7tn comes from Debt (INR 69.3tn) and Equity (INR 18.4tn). The below figure summarizes their overall Credit supply sources ².

Figure 1: Total debt supply to MSMEs

What challenges are being addressed to get the outcome?

This cohort of Borrowers seek Lenders to offer differentiated services in their loan products: Unsecured loans with Low regulatory obligations, Minimal operational requirements, comfort with higher risk profile and alternate Credit Assessment methods ².

Figure 2: Fintech Lenders service offering

How have these challenges been overcome?

An expanding Internet penetration (636.73 mn users, 47% as of March 2019) and increase in the number of smartphone users since 2010 (468 million as of 2017), has paved way to the growth of many digital Businesses and subsequent adoption by Consumers to a digital way of life. This technology disruption pressed the rise of many Fintech Lender firms who created Alternate lending models and drove majority of their processes online with automation.

Figure 3: Alternate lending models of Fintech lenders

These Alternate lending models operate on alternate data from external sources along with traditional data from Credit Bureaus, for Credit underwriting and approval. The merit in alternative data is access to behavioural patterns of individuals who may not have a loan account or collateral, but have a phone connection. Any behavioural pattern is predictive and can be analysed for decision making ¹.

Figure 4: Data source for alternate and traditional lending models

References

1. https://economictimes.indiatimes.com/markets/stocks/news/alternative-data-can-gauge-creditworthiness-if-law-permits/articleshow/68748552.cms?from=mdr
2. https://www.intellecap.com/wp-content/uploads/2019/04/Financing-Indias-MSMEs-Estimation-of-Debt-Requireme-nt-of-MSMEs-in_India.pdf
3. https://www.pwc.in/assets/pdfs/publications/2016/non-banking-finance-companies-the-changing-landscape.pdf

Retail eCommerce policy and it's implications

     

        When I was working on integrating one of our ERP products with Amazon's Sandbox environment sometime in Feb 2019 , I happened to come across news articles, introducing India's draft eCommerce policy. I wondered what it is all about and what would be its impact to the existing eCommerce players in India, Amazon and Flipkart and thereon their strategy to counter it.  So I went about reading associated articles and concluded the impact would be for the players like Amazon,Flipkart to divest their Equity stake in Companies who were directly selling on their Platform ( Amazon's Sellers Cloudtail and Appario) and thereby also lose control over the Sellers inventory and their ability to control Product prices. [1],[12]

      However a month later an older article that caught my attention made me believe that there was more to an eCommerce policy posturing as government's strategy to maintain fair competition for India's small and medium retailers.[2]. For a company as big as Reliance to roll out a plan to enter into the eCommerce space there definitely would have to be some background and substantial statistics.So I decided to pull out some data and this is what I obtained.

1. As per IBEF eCommerce Report May 2019 [3], India's eCommerce Industry is worth 50 bn USD as of 2018 and overall Retail industry is worth 672 USD bn as of 2017.The IBEF Retail report May 2019 [4], conveys that a significant opportunity for expansion in the segment exists owing to Traditional/ Unorganized Retail, Organized Retail and eCommerce segments that account to an estimated 88%, 9% and 4% market share. The 88% is what caught my attention and I realized that's a huge market for potential stakeholders - Business,Government and Policy formulators.

2. A summary of the Top ten Indian Retail companies [5] based on their Annual turnover for 2018 are predominantly brick and mortar entities with a small eCommerce presence compared to the larger players (Amazon,Flipkart and Paytm). It is very likely then the next strategy for these Companies would be to expand their presence in the unorganized and organized retail space.

3. Walmart's entry into Indian retail in 2007 and it's subsequent acquisition of a 77% stake into Flipkart in May 2018 to enter the eCommerce space ushers Amazon's acquisition of Aditya Birla's More in India. [6] A year earlier Amazon USA had acquired the grocery brick and mortar chain, Wholesale foods.

4. A summary of top 10 US retailers by Revenue and eCommerce market share shows [7],[8], Walmart leads in revenue and holds a 3rd position in eCommerce at 4% market share. Whereas Amazon is positioned at 3rd in revenue with a top position in eCommerce at 48% market share. Both definitely then would want a firm share in the Asian market

5. A summary of the FDI Retail and eCommerce policy [9] since Jan 2018, stating what is allowed

• An automatic Funds routing and 100% FDI in Single brand retail trading with a 30% local sourcing of goods for FDI >51% if local sourcing is feasible . eCommerce trading and holding inventory in this scenario is allowed.
• A government approval for Multi brand retail trading with maximum 51% FDI only.
• eCommerce Business models that can be run in India are Marketplace, Inventory and Hybrid (combination of former two). FDI in eCommerce is only allowed in the Marketplace model. [10],[1]

In retrospect and in summary Reliance's entry into eCommerce is well positioned for the country to promote business and create livelihoods by keeping competition alive and protecting small retailers.[12] I am yet to determine the implications of the Policy on food tech firms ike Swiggy,Zomato or on Travel firms like MakemyTrip, Ola etc however that is for a later time.

References:-

1. https://www.livemint.com/Companies/ydACAnoRhf9dYZCOklb3jN/India-ecommerce-norms-Amazon-may-have-sell-Cloudtail-Appa.html

2. https://www.bloomberg.com/opinion/articles/2018-08-16/amazon-has-a-new-rival-in-india-and-it-isn-t-walmart

3. https://www.ibef.org/industry/ecommerce.aspx

4. https://www.ibef.org/industry/retail-india.aspx

5. https://www.bizvibe.com/blog/food-beverages/list-of-retail-companies-in-india/

6. https://www.bloombergquint.com/business/why-amazon-wants-to-acquire-the-more-supermarket-chain

7. https://www.investopedia.com/articles/markets/122415/worlds-top-10-retailers-wmt-cost.asp

8. https://techcrunch.com/2018/11/16/walmart-passes-apple-to-become-no-3-online-retailer-in-u-s/

9. https://www.vantageasia.com/retail-fdi-india-restrictions-solutions/

10. https://factordaily.com/how-reliance-shaped-the-india-first-agenda-in-the-draft-ecommerce-policy/

11. https://dipp.gov.in/sites/default/files/pn3_2016_0.pdf

12. https://www.businesstoday.in/current/economy-politics/new-fdi-policy-on-e-commerce-how-marketplaces-are-to-be-affected/story/305098.html