A loan in 24-48 hours! Possible? Yes, you heard it right. It is in the realm of realty today.
Fintech companies are shaking-up the lending business, by redesigning how loans are made. Every step of the process, from lender-customer interaction to loan processing, to loan application evaluation process have been re-written.
From the borrower’s perspective, the attraction of fintech is their ability to disburse a loan within a few days, even a few hours in some cases. While the entire process may take 24 hours, small amounts can be borrowed using a smartphone app in 10 minutes! This has been made possible by proliferation of electronic footprints and the use of algorithms which run in the background.
Each fintech company has its own unique algorithm for assessing creditworthiness of potential borrowers, analyzing the borrowers banking habit, loan repayment record, financial discipline and CIBIL data. The algorithms use artificial intelligence and big data for crunching the data.
Fintech companies cater to two broad segments: a.) Small Enterprise or MSME loans and b.) Consumer or Personal loans.
Fintech institutions provides loans to MSME segment primarily for their working capital requirements. Such MSMEs are traditionally undeserved by financial institutions due to issues like lack of collateral, insufficient financial history and nature of business.
Whereas fintech institutions providing the consumer or personal loans segment cater to a wide variety of personal credit needs from purchase of consumer goods, to cash flow smoothening, to healthcare finance.
At Caspian Impact Investments (CII), we consider the MSME segment as a direct impact sector and have been actively engaging with MSME lending fintech companies to meet their debt requirements. We do not understand the personal finance segment well enough as yet and haven’t considered a company focusing on the personal/consumer loans space exclusively. Hopefully, we will be able to consider this segment in future.
Assessing debt requirement of fintech companies
CII has provided debt to a few fintech companies. We analyse various aspects of the company, including origination process, underwriting methodology, loan monitoring, collection efficiency, financial performance, etc.
There are various types of risks involved in lending to fintech companies, like credit risk due to the algorithm’s focus only on certain data points of the customer, concentration risk by way of lending only to a similar set of customers, geographical risk because of limited branch presence, etc. We have developed an understanding of these risks and examine the following aspects to mitigate the same.
Capitalization available to absorb losses during the learning phase, while the distribution model and algorithm is under evolution. Ability of the team to raise further equity is also key. This becomes critical because of the aspects discussed in a previous post.
Expertise to build the appropriate technology
Having sufficient feedback loop to continuously improve the underwriting algorithm.
Thought-out delinquency management framework.
Having adequate skin in the game – on balance sheet lending or co-lending, as against pure BC or platform approach.
Having worked with some fintech companies, we at CII have a fair understanding of the intricacies of various business models in the fintech lending space and their need to leverage. CII will continue to actively engage with many more fintech companies.