Digital Lending: Growth
Digital lending is one of the fastest-growing fintech segments in India. It grew exponentially from a volume of $9 billion in 2012 to nearly $110 billion in 2019 and is expected to reach $500 billion by 2030.
Currently, Private Banks and NBFCs dominate the digital lending space, with a 55% and 30% share respectively followed by fintech operating in this space. NBFCs moreover have observed an increase in AUM from $ 44.02 billion in March 2008 to almost $ 330.21 billion in March 2022.
India is home to approximately 1,263 digital lending start-ups on Google play store, out of which only 147 (12% of the total 1,263) are backed by venture capital funding.
Digital lending has grown due to
The proliferation of smartphones and mobile internet Customers demanding a better experience Government actions and guidelines to safeguard digital lending for greater visibility and options for borrowers
Growing demand for digital lending platforms among MSMEs, and
The emergence of alternate lending and surge in digital lending during the pandemic.
Digital lending also seems to solve the revenue problem for a lot of fintech startups in India. Eg Paytm pivoted from a payment-first approach to a lending-centric approach to grow their topline and deliver better unit economics
However, on a granular level, immediately after the RBI Digital guidelines in Q3 FY23 the disbursal volumes observed a dip of almost 10% as compared to Q3 FY22. Towards the end of FY23 as well the growth rate in volume disbursals had dipped.
Latest Update:
Digital Lending Guidelines
Since September 2022, a lot has changed.
The Reserve Bank of India finally came out with its Digital Lending Guidelines.
Heres what happened -
First: The Intent
Lending has been one of the oldest professions in the country. Fintechs came and changed the way lending was done, making it seamless for the borrower to take a loan. However, this came at a cost.
The Indian digital lending sector started facing issues, including but not limited to borrower harassment, predatory pricing, lack of financial literacy, and so on.
According to an RBI report in 2021, on a survey of 1100 lending apps available for Indian Android users across 80 App stores, approximately 600 were illegal.
Further, in 2022 Google took action against 3500 digital lending apps listed on its India app marketplace for flouting Play Store guidelines. Google even blocked 2,000 personal loan providers from its app marketplace in India from January 2022 to July 2022.
For the healthy growth of the Indian digital lending space, RBI issued the digital lending guidelines in 2022. It became crucial for RBI to hold NBFCs and fintechs much more accountable for -
1. Educating borrowers
2. Identifying genuine regulated and unregulated entities (FinTechs) 3. Eliminating questionable lenders
Then, the Execution
In December 2022, the Digital Lending Guidelines came into practice. Some major challenges that these guidelines aimed to solve -
Problem 1
Lack of transparency and accountability from the lender
Solution
The lender must now transparently disclose all the charges of the loan to the borrower before the loan has been disbursed. This eliminates foul play through third-party pool accounts and creates a direct link between the lenders and borrowers for better relationships, credibility, and trust
Problem 2
Incorrect and partial information about the loan being passed on to the borrowers
Solution
Key Fact Statement (KFS) should be passed on to the borrower before the execution of the contract in a standardized format for all digital lending products. Henceforth, the borrower must be informed about all the costs associated with the loan, including APR (Annual Percentage Rate) in the KFS.
Problem 3
Misuse and storage of borrower data
Solution
1. RBI directed that data collection by Regulated Entities (RE), Lending Service Providers (LSP), and Digital Lending Apps (DLA) must be need-based and with explicit consent before such data collection. 2. Moreover, the borrower should have the option to deny the use of specific data, revoke consent, and restrict the disclosure of data to third parties. 3. Not only that but borrowers must also be given the option of deleting the data that the Digital Lending Apps have.
Problem 4
Borrowers being coerced into taking loans with confusing language and lucrative schemes that trapped them in a debt cycle
Solution
1. Cooling-off period - Regulated Entities have to provide a cooling period which is an exit window provided to the borrower by which they can repay the digital loan along with the proportionate APR without penalty
2. Borrowers consent must be availed before increasing their credit limit. This is a key step to empower borrowers and prevent unaware borrowers from entering into loans they cannot pay back
Problem 5
Borrowers not having proper mechanisms to raise concerns
Solution
Grievance Redressal - The Regulated Entities and Lending Service Providers are required to appoint a grievance redressal officer. Nodal officers are responsible for resolving complaints relating to FinTech and Digital Lending. A 30-day period is laid down during which the REs will have to take action for grievance redressal after a complaint has been filed.
But, what was the IMPACT!
Initially, there was pushback from the fintech industry since many players were required to make big changes.
Some players like Uni and Slice had to shut down operations because of non-compliant practices. Products like PrePaid cards, Credit cards, Line of Credits, and Buy Now Pay Later offered by the likes of fintechs like Jupiter, ZestMoney, and LazyPay came under severe scrutiny. There were concerns about credit availability shrinking.
Some Fintechs took the safer route and turned into pure-play distributors - passing on leads to regulated entities like NBFCs and Banks. Eg. Paisabazaar started working on capturing potential borrowers through its insurance business.
International Fintechs had to establish Indian Data centers to comply with the data protection norms. Eg Tala, a global lender strengthened its base in India post the guidelines.
NBFCs Fintechs
Many fintechs had to change their workflow and found compliant ways to work in N the system. NBFCs started on-book lending with Fintechs functioning as Lending Service Providers responsible for disbursements and collections. Regulated fintechs started pushing for co-lending arrangements
Apollos POV
RBIs policies were imperative for the seamless functioning and healthy growth of the digital lending space in India.
RBIs Digital Lending Guidelines came at a crucial point - a point where fintechs in the industry needed a check wrt their practices.
RBIs policies are genuinely pro-lending and are solving real problems that borrowers in the informal lending sector face, hence necessary for financial inclusion.
Post the guidelines, collection efficiencies have improved due to stricter credit checks and better policies. This has also paved the way to lower NPAs and less pressure on borrowers who cannot afford credit.
With the guidelines RBI also concretized India as a market where there wont be regulatory loopholes that can be exploited to build businesses thus giving investors reassurance.
Time and again RBI has been proactive about providing fintechs and lenders clarity and comfort. This is a good sign telling us how deeply RBI is invested in not only the borrowers but the fintechs and regulated digital lenders.
These policies further highlight that the best way for fintechs to grow in the space is through collaboration with regulated entities.
Finally, post guidelines Apollos journey was smooth sailing with almost no changes in the operational work flow.
Apollo was already following transparent operations with direct transfer and collection to/from borrowers
Fair practice guidelines published in early 2022 were Apollos compliance north start. We were fortunate to have pre-empted many of the changes RBI went on to announce with their Digital Lending Guidelines From a collections perspective, Apollo had laid out strict rules and processes to make the experience easier for borrowers and eliminate any harassment. This enabled Apollo to seamlessly adapt to collection guidelines published by RBI without making any changes to our operations
Whats next for the industry?
Funding Winter
Funding to Indian startups fell by 79% to $3.3 billion in the Jan-May period from $15.7 billion a year ago (2022). This dip was majorly due to a market slowdown and economic volatility on account of the macroeconomic and geopolitical conditions which have driven inflation and interest rates.
While funding has been on the downturn, fintech has always been one of the favorite sectors for investors to bet on, having said that Digital lending accounted for more than half of Fintech funding in Q2 FY22. Moreover, the Fintech sector in India has seen funding of $8.53 billion (in 278 deals) in FY22.
This trend of lending which started in 2022 is still in an upswing. Startups turn towards lending to get their unit economics right, scale their current offerings and subsequently raise money to expand operations.
Boston Consultancy Group said the share of valuation for lending startups will increase from 13% in 2020-21 to 35% in 2024-25. This goes on to say that by the end of this year, we will see a lot of startups become fintechs. Post which every fintech is diving into lending, starting from Jupiter and Cred acquiring their NBFC licenses. Players like Ease my trip, Housing, and Impactguru are offering lending to make their platforms more attractive and create a better user experience for their repeat customers.
Outlook and Key Trends...
While 2021 saw the rapid growth of the fintech ecosystem, in 2023 - 2024 we will see approximately 50% consolidation in fintechs either through acquisition or funding crunch.
2023 is the year when fintechs will try out many lending products like Personal Loans, Buy Now Pay Later, Co-branded credit cards, and more, each unique in their own way. Further, fintechs will figure out their product market fit with these products and start scaling post that.
We will see a rise in Personal loans given that product has been easiest to master even with changing guidelines.
Moreover, MSME Lending is observing a rise. The MSME sector in India accounts for >90% share across the world with over 63 million MSMEs. For perspective, thats greater than the entire population of Spain. This segment is experiencing exponential growth and so is the credit gap in the segment. The overall credit gap in the MSME sector is INR 25 trillion as of December 2022.
With the onset of RBIs Digital Lending Guidelines, one model that has seen significant traction has been that of Co-Lending. Co-lending is emerging as a marketplace model that will go on to support lenders and help them mitigate risk exposure. This model is set to observe a growth of 3x by FY24.
Opportunities
Collections
The debt collection market in India is a whopping Rs 40,000-crore industry growing at 18% annually.
It has now become an industry-wide consensus amongst lenders and banks that traditional debt recovery practices such as aggressive agents, automated calls, letters, and long dispute resolution, are not the best solution when it comes to a digital borrower base.
Lenders are now opting for tech-intensive collection solutions like IVR, Whatsapp, AI-based systems for borrower profiling, and so on to automate and refine the process.
Innovative solutions are coming up through payment apps like Paytm and PhonePe. These solutions involve app-based notifications and have proven to be successful with small tickets size personal loans due to high penetration in Tier 2,3,4 market
People @ Apollo
The key to any successful organizations growth and prosperity in its people. We truly believe that our workforce is the backbone of the company. With a "people-first" philosophy, weve always made it a priority to create a nurturing environment that fosters the all-round development of every individual on board!
At Apollo, our commitment to inclusivity and welcoming individuals from diverse backgrounds is reflected in our employee diversity. We firmly believe that this blend of unique perspectives enriches our organization, fueling creativity and innovation across the board.
In FY23 Apollo Finvest had a team of 31 people, comprising 16 female and 15 male employees, contributing to 5 different verticals!
Moreover, Apollo has always believed in quality over quantity, and that reflects in our lean but highly efficient team.
In FY23, Apollo had a team of 31 people driving revenue of Rs. 46.15 Cr, thats a whopping Rs. 1.48 Cr revenue per employee!
Each Apollo member believes in the power of financial inclusion, and we strive to enable this credit to as many people as possible.
In FY23, Apollo disbursed Rs.145 Cr of credit to more than 5 Lakh people, making each employee responsible for Rs. 4.7 Cr of credit to over 16 thousand borrowers.
Financial Performance
The financial performance summary of Apollo Finvest for FY 2022-23 vis-a-vis FY 2021-22:
The decline in revenue can primarily be attributed to the regulatory uncertainty that prevailed due to the delayed finalization of guidelines by the Reserve Bank of India (RBI). Nonetheless, with the recent issuance of these guidelines, the fintech industry is diligently adapting its operating models to conform to the new regulatory landscape. As the industry undergoes these necessary adjustments in the forthcoming months, positive momentum is expected to emerge, leading to a steady rise in revenue over the ensuing quarters. This newfound regulatory clarity provides a promising environment for the fintech sector, including Apollo, to capitalize on the ensuing opportunities and thrive amidst challenging circumstances.
In summary, Apollos financial performance reflects a substantial 38% decline in total revenue, which was effectively mitigated by limiting the decrease in Profit Before Tax to a mere 15%. This achievement highlights the companys steadfast dedication to operational efficiency, allowing it to navigate successfully through the challenging fintech landscape.
There has been a 27% increase in Apollos total reserves, which now stand at Rs. 4,827 lakhs as on 31st March 2023. The EPS has decreased by 20% to Rs. 27.01 per share.
The below graph reflects the past trend of Profit After Tax (PAT) of Apollo for the last 5 years:
The Summary of Key Financial Ratios for FY 2022-23:
Ratio |
FY 22-23 | FY 21-22 |
Net Profit Margin |
21.83% | 17.20% |
Return on Capital Employed |
28.77% | 31.94% |
Earning Per Share (Basic) |
Rs. 27.01 | Rs. 34.10 |
Current Ratio |
3.48 times | 3.93 times |
Debt-Equity Ratio |
- | 0.24 times |
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