As sourcing partners for these NBFCs, fintechs receive a commission on each of these loans, which have low default rates due to the practice of daily partial repayments. “About Rs 1,000-1,500 crore of monthly payouts come from these payment applications, and the non-performing assets (NPA) are very low,” said the founder of a digital payments startup, on condition of anonymity.One97 Communications-owned Paytm has announced around Rs 4,500 crore in quarterly payout volumes. Other fintech apps could fetch around Rs 3,000 to 4,000 crore in monthly payouts, said the founder quoted above.
These small loans to merchants have become lenders for fintechs struggling with restrictions on unsecured consumer lending and a payments platform that remains free.
Also read: Paytm revenues up 24%; to focus on salespeople, AI and loyalty: CEO Vijay Shekar Sharma
Linked to cash flowsNBFCs too are taking solace in cash flow-based underwriting and daily repayments processed by these fintech applications.
In theory, these are unsecured and risky loans. But daily repayments make it easier for the payments companies to predict defaults, said a partner at a venture capital firm, giving these NBFCs more comfort.
“If a merchant has taken out a loan and does not use the QR code to process payments for three to four days, collection agencies can be deployed to guarantee repayments,” the investor added.
A top executive at an NBFC pointed out that there is a gap in the market that is not being addressed by the banks – at least for now.
“Banks have to adhere to strict regulations; so they are more cautious in lending to risky customers, focusing on better organized borrowers and the retail sector,” said the executive quoted above. “But they will enter this space very soon given their focus on merchant payments using QR codes,” he added.
Rakesh Singh, CEO of ABFL, told stock market analysts after the September quarter results that more than 55% of ABFL’s portfolio consists of corporate loans to MSMEs, up 23% year-on-year. Of these, 82% are secured and 18% unsecured. ABFL’s current MSME portfolio stands at Rs 77,532 crore.
“Unsecured corporate loan disbursements rose 37% sequentially,” he had said at the time.
Poonawala Fincorp said it has launched a new vertical – retailer lending – where lending takes place at the point of sale.
The NBFC issues Rs 1 lakh to Rs 15 lakh of credit for a tenure of six months to four years. Products such as gold loans, education loans and merchant loans comprise about 17% of total disbursements, the company said.
Acquiring these merchants is cheaper as the loan offers are displayed on the merchant applications of all these payment platforms. These payment companies also deploy field staff to service these merchants, who also offer the loans during their visits.
Low cost to serve
“Most merchants are pre-approved for a specific loan amount, which makes disbursement fast and repayments happening daily, which is helpful,” says Raman Khanduja, co-founder of Mintoak, a fintech startup that powers QR code-based payments for banks.
Khanduja explained that monthly EMI repayments work well for salaried customers but are not ideal for these small traders. Daily payments ensure that repaying such loans is easier and payment requests deduct the EMI from their end-of-day settlement cycles.
Payment apps also want more merchants to take loans through them, which will help build a steady customer base and also generate strong revenue.
Paytm said it had opened financial services to 650,000 merchants at the end of the September quarter, up from 600,000 a year ago. But the company is also slowly expanding these businesses to ensure asset quality remains strong.
“We could do a lot more in the next six months if we get a little bit aggressive. But the idea is, let’s reap all the benefits that come with the partner seeing fantastic credit quality and existing and new partners wanting to do more business with us,” Paytm Group CFO Madhur Deora said on the September analyst call.
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