As fintech revolution takes root, banks keen to work with startups developing disruptive solutions
Prominent startups in this space say increased efficiency of their credit models, proven track records along with more accessibility among consumers are the main reasons banks and NBFCs are more eager to lend to them now.
"When we had first started the business, debt funding from banks used to come in only around 16% as the rate of interest. Now these rates have gone down to almost 12% or 13% in most of the cases," said Harshvardhan Lunia, founder of Lendingkart.
The company recently raised almost Rs 500 crore in an equity round led by Fullerton. Lunia said he expects the cost of funds to go down to as low as 11% after this.
Debt funding means that platforms borrow from banks or NBFCs and then use the funds to lend out to their own consumers.
A higher cost of funds implies that the rate at which they can lend to end users also goes up. Bengaluru-based Capital Float has noted a fall in cost of capital.
Though the company did not divulge the rates at which they source funds, Sashank Rishyasringa, its cofounder, said: "There has been a year-onyear significant decrease in the cost of capital. This also happens as we have built a track record giving more comfort to banks."
Even while seeking guarantees against securitising the loan books, banks would typically ask for a higher margin from the platforms which now is also going down.
"Whenever we securitised our portfolio, banks would always ask for a margin on our receivables, which could go up to as high as 10-15%. Banks are now lowering that margin. It has now come down to as low as 10%, and eventually to around nil or 5%," said Sanjay Sharma, cofounder of Aye Finance.
Highlighting the reasons for this move from the lending partners, executives said that with time banks are opening up to the business model of online lending in a major way. Sharma said banks are sitting on excessive liquidity, but without aggressive pick up in the corporate loan demand, these platforms are opening up lending possibilities for them.
"We have received debt funding to the tune of $60 million from multiple lenders across State Bank of India, Kotak Mahindra Bank, Axis Bank and NBFCs like Muthoot and Manappuram," said Lendingkart’s Lunia. He said that with big investors backing these platforms, banks get more comfortable lending to them.
While on the one hand their access to money is improving, bankers point out that the biggest challenge for these platforms is to keep the rate of interest low. Further, with most of the platforms using equity investments to lend, it is a huge challenge for them to keep churning their book and find new borrowers, so that the process remains sustainable.
"Most of the funds are usually for short terms, hence they have to repeatedly source customers to keep their loan books growing, else the business will become stagnated," said a senior banker who works closely with these startup platforms.
Sharma said that though equity as a source of funds might look cheaper, there is a cost associated with it in the long run and debt is a more sustainable source of funds.
"I have only raised around Rs 100 crore as of now and have built a book of Rs450 crore. I believe this is a more stable form of creating business," said Sharma. "However, large equity rounds help create brands and help open up purse strings of banks as well."