Financial Inclusion in the Digital Age – Global Report

An eminent panel of experts from International Financial Corporation, Stanford GSB and CreditEase curated a report and highlighted Capital Float as one of the 100 companies in the world facilitating Financial Inclusion. Our co-founder, Gaurav Hinduja spoke with Anju Patwardhan, MD of CreditEase China on Capital Float’s business model, strategic direction and technological breakthroughs. Read the full interview below.

1. What inspired you to start your business?

The fact that India had more than 50 million SMEs with no access to formal credit who, despite contributing a staggering 15% to the country’s GDP with a high market share of 40% towards employment, had an unmet credit demand of $ 400 billion. Traditional lending institutions are limited by the constraints of their conventional underwriting models that restrict financing due to the volatility of this sector. This, in turn, pushed SMEs to the informal sector where the high interest rates charged by moneylenders fettered borrowers to a chronic cycle of debt. Capital Float was established with the objective to bridge this gap in the market with innovative and flexible credit products for SMEs, delivered in an efficient and customer-friendly manner.

2. Who is your target user base and what is your mission for this group?

Capital Float aims to service high potential, under-served, SMEs with an annual business turnover ranging from Rs 10 lakhs to Rs 100 crore. Our mission is to provide a seamless borrowing experience using customized finance products that cater to the specific needs of different SME segments. Here, technology plays a crucial role in reducing turnaround times, implementing paperless processes and pioneering predictive lending.

Also, we drive our products and processes to realize the national objective of financial inclusion. A recent example of this is the introduction of the Proprietor Loans product that facilitates business growth for micro-entrepreneurs in India. The product targets the small retailer segment such as mom-n-pop stores, salons, medical stores, mobile phone retailers, small restaurants, etc. who face challenges in obtaining loans for business expansion from traditional lenders owing to a lack of formal credit history and sufficient collateral. Capital Float is the first company in India to introduce a product that finances this segment. Moreover, we’ve disbursed the quickest SME loan in India, for this loan, in under 90 seconds.

We designed the Proprietor Loan app in collaboration with IndiaStack. This simple loan app enables small retail store owners to apply for a loan ranging from Rs. 25,000 to Rs. 5 lakhs without having to leave their store. Benefited by the merits of a completely paperless process, the applicant has to merely provide their AADHAAR number to apply for the loan. The app fetches the relevant data using the number and underwrites the customer in real time. We disburse funds to the applicant’s account within minutes of the application. We achieve scale by partnering with ecosystem leaders, such as Metro Cash and Carry, PayTM, Amazon Business, Payworld, etc. and serving storeowners operating on these platforms.

3. What is the central “friction” that your company is striving to overcome/mitigate, and what is distinctive about your strategy for enhancing financial capacity your user base?

Predominantly, traditional banks and non-banks have employed a conventional approach to underwriting. They have constantly shied away from utilizing data points from public sources such as social media, and those that are available from the Government in the form of Aadhaar and GST information. Capital Float has designed its credit underwriting with the fundamental understanding that every SME is different. Leveraging data points from partners in each industry sector along with conventional data, our rigorous credit underwriting engine processes loan applications and disburses funds in real time.

In terms of enhancing the financial capacity of SMEs, we lead a partner-driven approach. The company has partnered with ecosystems across various verticals such as e-commerce (Amazon, Flipkart, PayTM, eBay, Alibaba, Amazon, etc.), retailers (Storeking, Metro Cash & Carry), PoS payment enablers (Mswipe, Pine Labs, Bijlipay, ICICI Merchant Services), digital remittances (Wirecard, Payworld, Eko) etc. By taking an ecosystem led approach, we are able to maintain a low OPEX and cater to a wide range of SMEs without increasing our sales headcount.

We have the widest portfolio of working capital finance products, ranging from Merchant Cash Advance (loans against card swipes) and Supply Chain Finance (loans against bills receivables) to Unsecured Business Loans (traditional business instalments loans) and Proprietor Finance. We designed a unique credit solution called ‘Pay Later’. By using this product, borrowers can make multiple drawdowns from a predefined credit capacity. Interest is charged on the utilized amount and not the entire credit capacity, and the balance gets restored upon repayment. ‘Pay Later’ can be used to make supplier payments within 24 hours.

A collaboration of partnerships with industry leaders and niche products ensure that we can expand our outreach to a majority of our target base and enhance their financial capacity.

4. How does your business model balance the objectives of (a) providing benefits to your user base and (b) meeting the financial targets of your investors?

The SME sector in India is restricted by technical as well as functional limitations that inhibit their access to formal sources of finance. Most small enterprises simply cannot afford to expend time for the lengthy processes and immense documentation requirements that are mandatory to avail a loan from banks or traditional NBFCs. Presenting sufficiently valuable collateral for the loan amount they require is another barrier that most SMEs can’t overcome. Capital Float has a completely digital loan application process that eliminates the need for borrowers to be physically present at a lending institution’s premises to apply for a loan. The use of unconventional data points further reduces the need for a multitude of documentation for credit underwriting. All our SME-oriented credit products are unsecured in nature, which facilitates easy access to finance for a previously ineligible majority of business owners.

Customer satisfaction is immensely significant to us, which drives our efforts to ensure that we offer the best-in-class user experience to our borrowers. This is made possible through continuous innovation that enables us to adapt quickly to the ever-increasing demands of our core target base. Apart from these, we are willing to venture into unexplored SME avenues that face a significant credit deficit. We have recently launched credit products such as Proprietor Loans, Franchise Finance and School Loans for niche customer segments that have previously received little financial backing from lending entities in India. Our constant product & process innovation to reach out to new audience ensures that we never fall short in fulfilling the financial expectations and reinforcing the continual faith of our investors.

5. To what extent, if at all, are traditional deposit-taking financial institutions potential collaborators for fulfilling your mission?

Being an upcoming technology driven lender, we view traditional banks and non-banks as collaborators, not competitors. Capital Float operates India’s largest digital co-lending model, wherein we co-lend with banks, NBFCs and others. We currently have several banks and NBFCs such as RBL, IDFC, IFMR and Tata Capital participating on the platform. Loans are presented on the platform and offered on a first-come- first serve basis. We co-lend up to 30% of each loan to ensure that we have our skin-in- the-game and risks are mitigated. This model works emphatically well, as participating entities are able to leverage the strengths of the other. Banks and large NBFCs possess immense balance sheets, which when made available on the platform lowers our cost of capital. Meanwhile, banks are able to meet their priority sector lending targets by lending to SMEs via the platform. Our data-driven assessment and speed of processes, backed by a robust digital infrastructure significantly lowers the cost of acquisition for participating entities.

The co-lending model currently contributes to 40% of our AUM. We expect this figure to reach 50% of our AUM by end of this financial year.

6. Stepping away (perhaps) from your own company’s mission, what do you see as the major regulatory or technological breakthroughs needed to take a major next step forward in building global financial capacity?

Digital lending companies have evolved as disruptors in traditional financial markets, with an estimated one third of consumers worldwide using FinTech services. To sustain the efforts of this upcoming sector and extend their outreach to the majority of their target group, opening public sources of funding is a necessity that requires government intervention. In India, public funding initiatives such as MUDRA and SIDBI refinances institutions that lend to MSMEs, but within regulations of their own. As a result, refinancing support fails to cover the high operating cost of the small-ticket, short duration unsecured loans that are provided by FinTech lending institutions.

Creating a sustainable digital infrastructure that facilitates easy transfer and recovery of finance offered by FinTech lenders is the need of the hour. This, when implemented via eNACH, will help the digital ecosystem in achieving faster adoption.

Also, enhanced access to government data is yet another factor that will be a game changer for building global financial capacity. With the introduction of a new indirect taxation regime in the form of GST, India has acquired a verified database of tax compliant businesses that offers significant information to determine the credit worthiness of business loan applicants. If this data can be shared with FinTech lenders and credit rating agencies through a secure API, this will result in increasing lending opportunities to myriad SMEs across the country.

Download the full report here.

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Old May Not Always Be Gold

Like most college friends, Ankit, Murthy and Kumanan lost touch with each other soon after graduating. Unlike most friends who lose touch with each other, they ran into each other while vacationing in the same resort at the same time to celebrate new years’ eve. While their career paths had diverged 15 years out of college, they were soon reminiscing the good old days with an equally old bottle of scotch. After rewinding and replaying the past a few times, the conversation caught up with time and they started talking about work.

After several years of working in a traditional bank, Ankit got bored and joined a new age digital lending company as the head of credit. Kumanan worked at large garment manufacturing units in India, Bangladesh and China. Watching the industry disappear around him, he sensed opportunity and had recently started his own T-shirt design and manufacturing company where he was riding the e-commerce boom and sold most of his inventory online. He had ambitions of starting his own brand soon. Murthy had joined his father’s business and expanded a single department store into a chain across the entire city. He also supplied snacks, beverages, toiletries, cleaning equipment to the largest software company of his city and they were constantly demanding that he supply paper, ink and most other consumables as they grew and expanded.

With the scotch taking care of any and all inhibitions, Murthy and Kumanan’s frustrations surfaced and they started talking about how they love their work, the sense of independence, the sense of control over their destiny but how they absolutely hated dealing with lenders and banks. In their mind, Ankit personified this opaque, insensitive, slow lender and they wanted him to explain why all their past loan and credit card applications had been declined. The barrage of questions targeted at Ankit reached a point where Kumanan even wanted Ankit to explain why his voter ID had the wrong address! Ankit smiled and surprised them by saying he shared their frustration of being unable to provide the right loan to the right person at the right time in his old bank and that he also moved to a new age digital company with the intent to redefine lending in India.

Ankit then asked Kumanan and Murthy to explain how they went about getting a loan and got the answer he expected. Like most business owners, they did not have the time to deal with multiple banks and they used an agent to help them get loans. While they did not particularly like their agents, they did send a guy over to their office to fill forms, collect documents, organize bank discussions and get them their funding without them having to figure out every bank, product and process. In addition, Murthy and Kumanan both had multiple suppliers who they had worked out individual credit terms with. They also admitted that whenever they needed urgent money or large sums that banks would not provide, they got it from local moneylenders at exorbitant terms. It was quite beyond them as to why a bank would think they cannot repay a larger loan when they were clearly taking multiple loans and successfully paying them off.

Ankit explained that traditional banks and lenders had very limited scope for loan officers to think out of the box and act beyond established policies.  Banks did not have significantly different products or processes and ended up providing 2-3 year lump sum loans that were not large enough for Kumanan or Murthy.  They always ended up spending time allocating money across various activities such as expansion, payroll, supplier payments, seasonal demands, online vs offline sales where payment cycles were vastly different. The advantage of Ankit’s new age company was three fold: custom products designed to address specific financial needs of businesses, high speed customer experience with minimal documentation, and low pricing due to product features that enable non-conservative underwriting. Kumanan and Murthy’s curiosity was piqued and they wanted to know more.

Ankit asked Kumanan to imagine a world in which he downloaded a mobile app, added all his suppliers and had a line of credit with standard terms available that he could use to pay any supplier any time. He could pick his repayment period and the payment goes through immediately! No need to haggle with each supplier and the credit line grew with usage and regularity of payments. Since he sold online, he also had the option of picking a tailor made e-commerce loan where repayments were mapped to the payment cycle and a transparent cash flow control mechanism ensured that many more people qualified for affordable large loans. These loans even adjusted themselves for seasonality of his business and he could request top-ups as and when he needed them. Kumanan was very impressed that these products were not restricted to his imagination but were actual products that Ankit was able to provide via his new age digital lending company.

Murthy wanted to know if there was something for folks like him who did not sell online. Ankit told him that instead of taking long term loans that may not be utilized all the time but keep accruing interest, Murthy should opt for an invoice financing loan wherein all his supplies to the large software company could be funded as and when they make a purchase from him. That way, he does not have to plan for their expansion and is confident of the right amount of money at the right time and the right rate. Murthy agreed that while this product did sound interesting, he preferred if somebody came to his office to explain the product and handle the paperwork. Ankit mentioned that his company did not have any “paperwork” since most customer information was collected digitally but he is happy to send over a person to Murthy’s office to help guide him through the product and process. Murthy then wanted to know why he could not get a larger loan and Ankit explained that lenders and banks are happy to lend when they have some visibility into the cash flow of a business. As an example, Ankit’s company had recently launched a merchant cash advance product that collected daily payments directly from the credit card machines that Murthy had in all his stores. Typically, it was a lot easier to qualify for such a loan, there was minimal documentation and there was no need to think about payment due dates!

Having given up hope of ever hitting the gym, Kumanan and Murthy were happy with their new year resolution of trying out custom financial products from new age digital companies and keeping in mind that old may not always be gold!

Tushar Garimalla

Tushar has deep expertise in credit, risk management, portfolio management and analytics gained during his 10-year career with HSBC and Capital One in India and the US. Most recently, he worked on a small business credit card portfolio purchase for Capital One including business development valuations, due diligence, system integration and credit policy development. Tushar graduated from IIT Madras with a B.Tech in Electrical Engineering.

Tushar heads Decision Sciences at Capital Float. 

Oct 24, 2018

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Cashflow Management Tutorial for School Owners

Cashflow is the lifeblood of any organisation, including schools. Unlike most small and medium enterprises that have unstable revenue because of variations in customer purchases and seasonal cycles, schools are usually assured of a running income from the fees paid by the students each quarter. However, cashflow management is as serious a task for educational institutions as it is for any other business.

With the fee they receive, schools have to pay their teaching and administrative staff, maintain the campus, periodically purchase lab equipment, sports supplies, furniture and other items, and keep some reserves for unforeseen expenses. When money falls short of requirements, they may have to apply for loans from a school finance company. In addition to banks, FinTech organisations have stepped forward as significant providers of school finance in India.

Whether a school manages its operations with its earnings or takes the support of school finance, it is essential to handle the fund prudently. The following tips for cashflow management in schools can help the owners avoid severe financial constraints:

Anticipate future requirements: Will some students be leaving the school to change their board (CBSE, State Board, ISC, IGCSE) from the next academic year? Will you be hiring any new staff members? Does the school need to replace any furniture or teaching equipment? It is good to have a basic idea of such needs as they have an impact on your earnings and expenses. If you feel that the outflow of cash could be more than the inflow and reserve funds, it may be necessary to apply for school finance.

Make arrangements with vendors: If you have developed long-term relationships with the vendors who regularly supply lab materials, sports gear, canteen groceries and other provisions to your school, you can make occasional arrangements on payment terms. As an example, if your regular pay cycle from the receipt of invoice is 30 days, it can be extended to 45 days in a period when you are spending funds on additional works in the school.

Work to maximise cash inflows: With constant improvements in your education services, you can attract new students, which will have a positive impact on your earnings. Schools that have classes till Standard VIII but have a reasonably high strength of students can work with an education board to upgrade to Standard X or XII. To facilitate the construction of a new building and for additional campus amenities, you can apply for school finance by sending a quick digital application to a FinTech company. The revenue generated from fees paid by students in new upper classes will help you to pay off the borrowed amount and interest in small EMIs.

Stay connected to lenders: If despite your best efforts on cashflow management, money falls short of requirements, remember that funding for schools in India is available on easy terms from a FinTech school finance company. You can get a collateral-free loan, and you need to submit only the soft copies of eligibility proving documents when you choose a FinTech company as your lender.

Apply for Unsecured school loan

Capital Float is a friendly FinTech organisation providing school finance to recognised educational institutions that have functional classes till Grade VIII or above and collect a yearly fee of minimum Rs 75 lakh.

Oct 24, 2018

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Why Fintech Lenders are the Best Option to Avail Business Finance

Many start-ups are launched, propelled by a brilliant idea, but often face tough times due to inadequate funds. The first impulse is to turn to banks, which, however, usually refuse requests for a loan for business without security. They also ask for plenty of documents to corroborate the need for the grant and the purpose that it will be used for.

A parallel source of finance for small businesses come in the form of non-banking financial companies (NBFCs). Traditional NBFCs offer loans on terms similar to banks, but they do not hold a banking license. In addition, unlike banks, they cannot accept deposits from public. Other than loans and credit facilities, they can offer retirement planning schemes, money market instruments and underwriting activities.

While small and medium enterprises (SMEs) have been turning to banks and NBFCs to get loans, the long-drawn process from application submission to disbursal of funds is still a deterrent for many. After the financial crisis of 2008, there was an even greater need for reliable sources of business finance. Interestingly, the digital technology that gave rise to online banking and e-commerce was also progressing at a fast pace in the same period. This helped to create a new segment of NBFCs in the form of financial technology, known as FinTech companies.

With the aid of complex analytic tools, FinTech companies evaluate credit risk by using an array of customer data, including their digital footprint on social media, e-commerce platforms, smartphone usage and geo-location.

How are business loans by FinTech lenders more convenient than traditional loans for borrowers?

Conventional NBFCs do not usually have a human-centric approach to lending. The lengthy and cumbersome process of applying for business finance that requires piles of physical documents tires out borrowers. Young entrepreneurs who are eager to expand their operations and are confident about returns on their investment cannot afford to wait for long. Also, delays in work can also harm their long-term business interests. They need an alternative source of funds that can cater to their needs more actively.

What draws the digitally perceptive entrepreneurs to a FinTech company is its ability to offer quick loans at competitive rates of interest. Such companies have a holistic approach towards risk assessment and do not ask for heaps of paper-based documents before they start considering an approval for the loan. The basic files needed to check the creditworthiness of the borrower can be uploaded on the encrypted portals of FinTechs.

The advanced machine learning algorithms that these lending platforms employ read through information such as the net earnings of a business, the educational and professional qualification of its owners, the location from which the business operates and the returns on investment that it drew in the past one year. In comparison to this, a traditional NBFC loan is issued to companies that have been in business for at least 3 to 4 years.

Summarily, the prime reasons for which business borrowers prefer FinTech platforms are:

Simplified application process – Instead of visiting a branch in person, they can apply for the business loans from anywhere and at anytime. As the process is digital, all they need is a reliable Internet connection and the soft copies of minimal documents.

Swift funding – Unlike conventional NBFC loans, the funds from a FinTech corporation do not take long to be approved and disbursed.

No prepayment penalties – To make up for their loss on interest due to early pay-off on the loan, banks as well as most NBFCs charge a percentage of the loan amount as penalty. This is not the case with new-age technology based lending organisations. If a borrower can afford to make complete payment on the loan earlier than its stipulated tenure, there are no extra charges.

No hidden charges – You may on occasions have felt surprised when a bank or NBFC told you that there would be a payment protection “insurance premium” charged on your business loan. In the traditional lending sector, such charges are normal. The lending institutions claim that these help in protecting the monthly loan instalments in case sudden sickness or an accident prevents you from making payments on the loan. FinTech organisations do not include such clauses in their agreements. The funds are granted for business expenses in the short term and are approved based on the ability of the borrower to pay back.

The ability of FinTech firms to trawl the online portals and gather data relevant to the borrower’s paying capacity helps in affording more growth opportunities to start-ups. Many SMEs in India have reasonably strong business models, but they still cannot manage to get funds from banks and traditional NBFCs. This shift towards technology-backed alternatives has been favourable for promising ventures.

At the same time, the conventional lending institutions should also understand that FinTech companies are not a threat to their existence. Both these sectors can collaborate with each other in areas such as customer acquisition, product innovation, analytics, sales enablement and cyber security.

The access to innovation through digital peer-to-peer lenders allows NBFCs and banks to create competitive advantages for their own business.

Customer-centric innovation triggered by FinTechs is here to stay. The possibility of getting a loan for business without security or collateral is real. Open architecture-based wealth management tools, Big Data and online financial advice will continue to help entrepreneurs.

As a digital-age lender in this domain, Capital Float uses proprietary algorithms to inspect large amounts of data and evaluate a potential business borrower’s creditworthiness. We offer timely business finance without collateral to SMEs, start-ups, and freelancers to help them bear the expenses that are crucial for their stability and growth in the business world. Our process of judging the payment capacity of businesses is automated, fast and flexible, while also being diligent. If you need loans in less than a week and do not have a very long history in your industry, do not let any refusal from traditional NBFCs discourage you. Visit www.capitalfloat.com to find the business loan best suitable to you.

Oct 24, 2018