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Growth &
Challenges
By Siddharth Misra
Dec, 19
Siddharth Misra
01
Consumer Lending in
India Siddhart.misra@gmail.com
India’s Macro Story
Demographics Urbanization
78% of the population is in
working age group of below 45 69% of India’s population which
years. The median age in India is lives in tier 2 and tier 3 cities
expected to rise from 27 years in contributes 54% to the total retail
2015 to 30 years in 2025, which consumption, which indicates
makes it attractive from significant purchasing power
consumption point of view
Consumer credit excluding agriculture is INR 13.9 trillion, or 17.63% of total bank credit, and is growing
rapidly at 15.8% per year. Within the retail segment, the top three products were credit cards, housing
loans and personal loans.
Consumer Credit Demand Interest Rate Interest Rate
10-18% 25-60%
Top 8 cities has 35% , followed by 14% from the next 20 cities. Top 50 cities has 56% demand (FY19E)
Lending products as part of a bigger package.
Indian digital-lending space has two kinds of players
Fintech journey with lending Forayed into lending
They tied up with Lenders to lend to
Digital-lending players follow two their customers (wallets) and
types of business models — business merchant base; point-of-sale (PoS)
to consumer (B2C) and business to companies such as Pine Labs and
business (B2B). They are trying to Mswipe that went for PoS
create a niche, with some targeting transaction-based lending for their
working-capital needs of SMEs or merchant partners; and online-
enabling EMI financing of gadgets for payment gateway companies that
millennials. partnered with financial institutions
to facilitate loans to their merchant
network.
Added-value lending is a convergence trend, which means that we stop regarding lending as a product and start
thinking of it as an ongoing service
Consumer Lending Value Chain
Dedupe
Branch
Customer Docs Credit Processing Credit Decision
Credit
Bureau
On-line
CPV
Contact
Point
§ Kyc DSA Agents Verification
§ Income Proof
§ Bank Statement RCU
§ Form 16 Risk
SALES CREDIT OPS Containment RISK
Unit
Better screening at the front end prevents the problem at the back end, collections, defaults
Siddharth Misra
A DIGITAL PLATFORM
FOR
FRICTIONLESS
LENDING
02
Digital Consumer
Lending Siddhart.misra@gmail.com
Who is Addressing the Digital Lending Market?
Examples Revenue Economics
Model Key Features
& Scalability
Lending Online aggregators of 1%-3% on success or Generate leads for Cost of digital acquisition is
Aggregators/ Financial Products and fee per lead financial institutions. And normally 4%-5%. It’s tough
Infomediary Services act as a loan comparison to become unit positive
platform
P2P Connecting individual 3% from borrower and Risk taken by the With P2P regulations in
Lending borrowers with ~2% from lenders investors/lenders India, they are
individual lenders struggling to achieve
scale
Marketplace Connecting Borrowers to ~3% on loan origination, Lender takes on the Cost of acquisition could
Lending with Institutional Lenders + additional 1-2% on loan credit risk, after be high but is made up by
Own Credit credit scoring + fulfilment completion FLDG (if any) the ability to cross-sell
Policy
Direct or Balance ~3-9% (NIM) Focus on digital interface Scale is related with the
Direct
Sheet Lending + 1.5-2% & alternative underwriting funding. Hence, raising debt
Lenders
processing fee models regularly and at low costs is
critical
Offer advance credit scoring Fee per ping Offers real-time Under constant
Fintech-tech credit automation, NPL decisioning, and credit pressure to innovate
management and regulatory underwriting solutions while cutting down
monitoring/ reporting time to market
Marketplace Lending with Own Credit Policy
Loan
Disbursal
Challenges: (a) Getting the Loan policy & Risk-based pricing approved, (b) pool of lenders to match their expansion
03 plans with the pre-defined risk and cost, and (c) how to ensure that it’s their customers not of lender
How Checkout Financing work?
abc@gmail.com Rs.9999
Steps to activate:
1. Share your Aadhar, PAN 9 6
2. Use Netbanking
3. Setup repayment to use
03 Challenges: (a) dependency with the Merchant partner (b) balancing act of No Document Lending
Digital Lending: Business Models
Digital Consumer
Business Model Key Players
Lending Model
• loan to purchase items online and offline
• Bajaj Finance has historically served this purpose in the offline space
Point of Sale • Players such as Zest Money addressing this market on the online front by tying
Financing / Checkout up with eCommerce players like Flipkart, Amazon, PayTM etc.
Financing • Disburse loans leveraging consumer history on the platform to offer ultra-small
ticket loan and thereby intend to increase the usage
• Flexible loan products: personal loans, advance salary loans, rental deposit
loans, EMI-free loans to young salaried professionals
Salary Finance • Target segment is typically underserved by banks / NBFC as they are NTC
customers with no to little prior credit history
• Leverages technology to deliver fast and flexible loan solutions to tech-savvy
millennial population
• Personal loan, home loan, auto loan etc. to unorganized workforce or segments
underserved by traditional formal lending institutions
Consumer Lending • These players leverage alternative-data based underwriting methods and use
digital methods throughout the lending chain starting from sourcing,
authentication to loan disbursal
Advancements in risk decisioning, account acquisition and relationship management are transforming the credit growth
Siddharth Misra
03
Digital Lending: How
and for Whom? Siddhart.misra@gmail.com
What ‘Most of the New Age Digital lenders are doing’? (1)
1 GTM STRATEGY 2 Customer Profile 3 Use cases
‘Credit line’ is often a clear winner among borrowers with one time approval and seamless subsequent drawls
What ‘Most of the New Age Digital lenders are doing’? (2)
4 The BlackBox
Input
Maker = Machine
Checker = Hybrid of
Credit Data Human and Machine
BaseLine Data Output
1. Demographic – pincode, gender, age,
city, work email, employment etc Pre-Qualifications Score: Eligibility
2. Credit Account Information (CIBIL) check (Intent)
3. Bank statements, transactions,
Lending is a BET, i.e lots of decision-making under conditions of uncertainty over time, probability and risk
Lifecycle of the ‘Most of the Digital Lenders’?
A. Insightful decision
oriented reports on
A. Reminder & follow-ups past performance
Loan
B. Repayment reconciliation
Repayment 9 B. Real time monitoring
of portfolio
C. Delinquency follow-ups
C. Predictive analysis
D. Registration of repayment instrument of future trends
Lea
r n 8 Education
B. Product awareness
e C. Program benefits
A. Establish identity
c hin
B. Establish Borrower
3 Ma
financial Risk A. Study market trends
parameters On-boarding 6 Pricing B. Establish risk based pricing
C. Complete
documentation
A. Identify relevant parameters
Credit B. Create model based on machine
Borrower 4 Scoring learning and statistical techniques
Origination 1 C. Formulate risk policy
04
Challenges for Digital
Lenders Siddhart.misra@gmail.com
Risks / Challenges with Digital Lending
RBI lending
regulations such as
P2P lending limits
Collections
Digital is costly, Overestimating the ability of data
Traditional (DSA/Connector) is science leading to concentration and
manpower intensive & Digital lenders are not into collecting adverse selection. Naming
B2B play takes time to mature + money. Micro size consumer lending is a 'Hypothesis' as 'Algo'
dependency risk gr8 idea.
Success in lending = (LOW) cost of Acquisition, Fund & Operation and Delinquency
Siddharth Misra
05
Risk Management
Siddhart.misra@gmail.com
Risk as a Process
Risk Appetite Framework Debt Recovery Plan
Reporting/Hind sighting
Risk
Mitigation
Audience
Segmentati
on
Risk
tolerances
Risk Management in lending is an evolving process of these activity in a loop: (a) Identify the potential risks at the start
(b) Analyze & Monitor the performance, (c) Action based on the performances
Siddharth Misra
06
Fraud Preventions &
Collections Play Siddhart.misra@gmail.com
Lending Approval & Fraud Preventions
Document
Verification &
Email & Mobile is FaceMatch & Dedeup is done
Physical Loan Disbursed
Verified via OTP Dedupe checks
BS (PDF) is Verified Documents collected
Underwritin Pre
Pre-
g Disbursment
approve
Approval
d
Sign-up
Loan Offer is sent
1) Mobile No., Email & Address Signature (NACH/CHQ)
2) Negative Area Verification
KYC and Bank Statements
3) Device is checked with TrustDB Geo-location Verification
Creation of the customer cohorts: Good (Performing asset), Bad (Underperforming) & Ugly – (Nonperforming)
Siddharth Misra
07
The way Ahead
Siddhart.misra@gmail.com
Global Lending Industry Trends.
1 2 3 4
New Lending Models = understand my situation + tailor my offers + help keep track = keep me out of trouble
The way Ahead
Share of digital lending 5 key Focus Areas
Access to a variety of
sources of funds at Focus on analytics,
competitive costs customer segmentation
and geographical
diversification
Engagement with
customers through
multiple channels
Strong Collection Play
Reasonable share of
relatively higher-
margin retail loans
Customer on-boarding
Within unsecured loans segment consumer
durables has highest share of digital
Credit assessment
lending followed by credit cards and
Risk Monitoring
personal loans
design
Collection
“We're in the business of risk. Lending is not an issue, but until the
customer has paid the last instalment, the company is not making money.
My margin lies in the last instalment” - Rajeev Jain, Bajaj Finance