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Demonetisation Is A Much-Needed Boost For Alternative Lending Platforms

27/01/2017 2:22 PM IST | Updated 28/01/2017 10:17 AM IST
Rupak De Chowdhuri / Reuters

Plenty has been said about the Honourable Prime Minister's aggressive move of making ₹500 and ₹1000 notes redundant. While some called it a "surgical strike" on black money and corruption, others called it "carpet bombing", accelerating the government's endeavours towards a cashless economy. But the most characteristic change that the demonetisation move has had has been in creating and spreading awareness on digital money and transactions.

The phenomenal growth and expansion seen by digital payment solutions like Paytm, Ola Money and MobiKwik across diverse industries—from daily commutes to buying necessities from the local kirana shops to paying for utilities like electricity and fuel—says a lot about how quickly India is adopting these new age digital transaction mechanisms. The success is not only limited to payment wallets, the fintech industry on the whole has been put on an accelerated growth path. India is today witnessing its very own "fintech moment". From a situation earlier this year where companies in the fintech space were competing with traditional banks and NBFCs, today we are looking at a more collaborative effort across all spheres—remittances, consumer acquisition, credit creation and Unified Payments Interface platforms among others.

Alternative lending solutions, such as peer to peer and online lending, will be the growth drivers, especially in the small and medium enterprise (SME) segment in 2017.

While on the surface it may seem that the biggest winners from the drive have been e-wallets and payment solutions, if one actually digs deeper, in the long-run credit creation using digital mechanisms will have had a more significant impact for both consumers and businesses alike. Alternative lending solutions, such as peer to peer and online lending, will be the growth drivers, especially in the small and medium enterprise (SME) segment in the year 2017.

If we look purely at the SME sector, some segments that have been affected adversely in the short run have mostly been in the space of luxury goods, including jewellery, real estate and automobiles. While traders, manufacturers and businesses dealing with goods such as food, stationery, confectionery and clothing have not been that drastically affected, the combination of payment dealing with suppliers has definitely changed. If they were initially operating with a 50-50 margin of formal payment mechanisms and cash, it is now skewed towards formal and digital payment mechanisms from both the consumer and supplier perspective. In a country where previously a majority of transactions were conducted in cash, the demonetisation move has helped create a financial footprint for both individuals and small businesses.

Consequently, as the existing sources of credit from trade channels, money lenders and friends and family become limited because of the liquidity crunch, SMEs are now looking towards formal borrowing channels such as banks, NBFCs and digital lenders to meet their credit needs. However, banks and NBFCs today are only accessible in the top 250 or 300 cities. While 65% of India's business comes through these 300 cities there are also close to 4300-4700 other smaller cities and trade hubs across the country which are contributing to close to 35% of India's GDP but do not have access to formal credit options. With more than ₹64,000 crores been deposited into Jan Dhan Yojana and more than ₹12 lakh crores deposited in banks, the demonetisation move has given a big challenge to the unorganised and unbanked SME space. The biggest characteristic of the online lending industry has been the supply constraint; with demonetisation pushing the envelope, platforms offering alternative and digital lending solutions are now uniquely positioned to play a significant role in aiding growth of the SME sector.

The growth in awareness of digital lending platforms, thanks to demonetisation, has opened doors for online lenders in a major way, with entry paths visible across diverse industries.

As the majority embraces the move from informal to formal modes of borrowing, alternative and online lending platforms get access to richer data from borrowers, strengthening their credit systems. The demonetisation move, therefore, offers a brilliant solution for an economy like India where information asymmetry and thin file issues are pervasive. Consequently, the growth in awareness of digital lending platforms, thanks to demonetisation, has opened doors for online lenders in a major way, with entry paths visible across diverse industries.

Having said that, the growth path is not as easy as it has been made out to be. The foremost focus for alternative lending platforms will be to create credibility for themselves. With banks and NBFCs also venturing in the space, it would be critical for alternative lending platforms to ramp up their operations and create a sense of trust among borrowers. Apart from reach across smaller markets, technology will also play a key role in the growth of alternative lending platforms. Faster and easier credit disbursal with minimum document requirements will aid with widespread adoption.

The demonetisation of high currency notes has provided the much necessary push to the existing financial inclusion movement. It is effectively addressing the three key pillars around financial inclusion: financial literacy, accessibility, and product availability for the unbanked. In the long run, this move will significantly bolster the growth for both—the SME sector and the digital lending industry.

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