Forrester - Digital Lending Report

Licensed for individual use only
Q&A: How Digital Small Business Lenders Are

Disrupting Finance In India
Disruptive Firms Have The Potential To Upend The Traditional Lending Business
by Arnav Gupta
July 28, 2020
Why Read This Report Key Takeaways

Traditional lenders lend money to existing Digital Lenders Make Business Loans Easy
customers or profitable businesses. But Indian Fast And Flexible
startups are using digital technology to improve Digital business lending is the practice of lending
business lending by offering quick loans to micro, to MSMEs primarily or entirely through online and
small, and medium-size enterprises (MSMEs) mobile touchpoints. To serve businesses, lenders
that lack sufficient credit history. Startups use invest in digital capabilities like web and mobile
alternative data sources, continuously hone touchpoints, risk underwriting, identity verification
underwriting algorithms, and use digital tech to and fraud detection, and data and analytics.
keep overhead low. Digital strategy pros should
High Credit Demand By Businesses Offers
read this report to learn about the main players in
Growth Potential
Indian digital business lending and how to assess
The reluctance and inability of incumbents to serve
their disruptive potential — and to outsmart them.
MSMEs in India have led to a credit deficit of up to
₹25 trillion (US$331 billion). This is an opportunity
for digital business lenders, which can lend at a
lower cost. Their easy-to-use services, ability to
meet borrowers’ needs and create value, strong
business models, and growth potential make them
an emerging threat to incumbents.
Digital Lenders Will Serve MSMEs Better After

The Pandemic
Pandemic-induced uncertainty has rendered most
credit risk scoring models inadequate and out of
date. Everyone will have to be rescored, and there
will be need for newer credit scoring models that
apply to the pandemic world. Digital lenders have
the advantage of speed and adaptability and will
likely adapt their models faster and keep iterating
them. Their digital processes will also let them
assess and disburse loans faster.
This PDF is only licensed for individual use when downloaded from forrester.com or reprints.forrester.com. All other distribution prohibited.
forrester.com
For eBusiness & Channel Strategy Professionals
Q&A: How Digital Small Business Lenders Are Disrupting Finance In

India
by Arnav Gupta
with Ashutosh Sharma, Oliwia Berdak, Zhi-Ying Barry, Sukriti Dangi, and Bill Nagel
July 28, 2020
Table Of Contents Related Research Documents

2 What Digital Strategy Execs Must Know Digital Disruption Hits Retail Financial Services
About India’s Digital Lenders
Disruptors Belong In Your Digital Ecosystem
1. What are digital business lenders?
Q&A: How Digital Consumer Lenders Are
2. Who are the main players and what do they Disrupting Finance In India
do?
3. What problems are digital business lenders

trying to solve?
4. What headway have digital business Share reports with colleagues.

lenders made already? Enhance your membership with
Research Share.
5. Should incumbents be worried?
6. How can traditional lenders outsmart digital

business lenders?
16 Supplemental Material
Forrester Research, Inc., 60 Acorn Park Drive, Cambridge, MA 02140 USA

+1 617-613-6000 | Fax: +1 617-613-5000 | forrester.com
© 2020 Forrester Research, Inc. Opinions reflect judgment at the time and are subject to change. Forrester®,
Technographics®, Forrester Wave, TechRadar, and Total Economic Impact are trademarks of Forrester Research,
Inc. All other trademarks are the property of their respective companies. Unauthorized copying or distributing
is a violation of copyright law. Citations@forrester.com or +1 866-367-7378
For EBusiness & Channel Strategy Professionals July 28, 2020
Q&A: How Digital Small Business Lenders Are Disrupting Finance In India
What Digital Strategy Execs Must Know About India’s Digital Lenders
The Reserve Bank of India estimates the total addressable credit demand by the country’s MSMEs
at ₹37 trillion ($490 billion) and the overall supply from formal sources at ₹14.5 trillion ($192 billion).1
This credit gap of up to ₹25 trillion ($331 billion) suggests that traditional lenders are either reluctant
or unable to serve this segment of borrowers. In contrast, alternative lenders like FlexiLoans, Indifi,
SMEcorner, and ZipLoan see lending to MSMEs as a business opportunity. They offer a wide range of
alternative lending options, such as working capital loans from Happy, lines of credit from Indifi, startup
loans from Lendingkart, and merchant cash advances from FinBucket. They use technology such as
digital applications, automated underwriting, digital verification, and digital disbursement to improve
risk assessment, accelerate loan processing, reduce costs, and enhance experiences.2
This report answers some of the most common questions to help you understand digital business
lenders and assess their disruptive potential.
1. What are digital business lenders?
Digital business lenders, such as Capital Float and Lendingkart, lend money to MSMEs primarily and
sometimes entirely through online and mobile touchpoints. Typically, lending to businesses that are
unable to get credit from traditional lenders due to insufficient or lack of credit history, long waiting
times for loan approval and disbursement, inflexible repayment and refinancing terms, and strict
collateral and accounting discipline requirements. In contrast, digital business lenders (see Figure 1):
›› Provide loans fast. Digital business lenders let business owners apply for loans digitally via
websites or mobile apps, get loan approval within minutes, and receive funds quickly. Almost all
of the digital business lenders we reviewed approve and disburse funds electronically within three
business days. Some even prefill MSME borrowers’ application forms using government data
sources such as Udyog Aadhaar, Permanent Account Number, and Goods and Services Tax data.3
›› Use alternative data sources to drive insights. Digital business lenders use data to power
business processes like prospecting and credit risk underwriting.4 They combine traditional and
alternative data sources to improve their ability to score credit risk (see Figure 2). Lendingkart
analyzes its MSME borrowers on the basis of over 8,000 variables including the firm’s industry
type, business cash flows and transactions, POS transactions, tax returns, and previous loan and
repayment records along with traditional data sources.5 KapitalTech, another financial technology
(fintech) firm, has a proprietary in-house analytics engine based on statistical modeling that looks
beyond the perceived risk of traditional credit frameworks.
›› Often partner with traditional firms. Many digital business lenders partner with traditional banks,
nonbank financial companies (NBFCs), and venture capital firms to underwrite business loans
(see Figure 3). Typically, the partner bank or NBFC keeps business loans on its books based on
the digital lender’s efficient risk assessment. Capital Float partnered with investment firms Credit
Saison and Cyrus Poonawalla Finance to underwrite MSME loans.6 Of the 20 digital business
© 2020 Forrester Research, Inc. Unauthorized copying or distributing is a violation of copyright law. 2
Citations@forrester.com or +1 866-367-7378
lenders we studied, four rely on incumbent partners to underwrite business loans; nine have NBFC
lending licenses and both assess the risk and underwrite the loan; and seven both have a lending
license and co-lend with incumbent partners.
›› Generate revenue like traditional lenders. Unlike banks, digital lenders cannot raise deposits.
However, both generate revenue through net interest margins on loans — that is, the difference
between what the borrower pays and the interest paid on the capital used to fund the loan. Most
digital business lenders charge origination and service fees in addition to the interest rate. These
lenders have no branches, allowing them to originate and service loans at a lower cost than
traditional lenders.
FIGURE 1 Four Characteristics That Define Digital Business Lenders
• Loan approval takes 5 to 10

Digital loan
minutes.
origination and
underwriting • Loan disbursement takes 3
business days.
• Use a mix of traditional and Insights-driven

alternative data sources. with
• Improve business processes alternative data
like credit risk underwriting.
Of the 20 digital business lenders
Forrester examined:
• Four partner with traditional
Lend in lenders.
partnership
• Nine have their own lending
license.
• Seven lend both on their own
and with partners.
• Interest margins on loans Traditional
revenue
• Loan origination and service
generation
fees
FIGURE 2 Digital Business Lenders Use Multiple Data Sources To Assess Risk Efficiently
Traditional data sources
• Goods and Services Tax • Credit bureaus (e.g., CIBIL, CRIF, Experian)
• Aadhaar • Income verification
• Employee Provident Fund Organization • Address verification
• National Securities Depository Limited • Email verification
(NDSL) • Internal data sources
Alternative data sources
Government sources Personal data

• Vahan NR e-services Social and behavioral data (e.g., Trustingsocial)
• National Election Watch
• DigiLocker Location data
• Election Commission of India • Geotagging
• Digitized state property databases (e.g., • Geotracking system
Maharashtra, Gujarat) • Contact point verification
Corporate information Mobile data

• Businesses’ legal history • Risk scoring based on mobile screen scraping
• Financial details of unlisted companies
• Auditor insights Ecosystem-specific information
• Filling provident fund information for employees Data from partner marketplaces (e.g., Amazon,
Flipkart)
Paid sources • Customer information
• Probe Information Services Private • Purchase history
• Corpository.com
• SaveRisk Anti-money laundering
Paid sources (e.g., Jocata)
FIGURE 3 Digital Lenders Offer In-Principle Approval And Underwrite Loans
Credit
underwriting
Digital
and operations
lenders
Banks
Document Document NBFCs

verification management
In-principle
approval
Fraud
checks
Credit policy
Identity Device Digital
application
verification verification lenders
scorecard
Application
digitization
Prospecting
2. Who are the main players and what do they do?
Many startups have sought to disrupt India’s business lending landscape, dominated by banks and
NBFCs (see Figure 4). We categorize these fintech firms based on the type of loans they offer to
business borrowers (see Figure 5). The credit options they offer to Indian MSMEs include:
›› Term loans. These can be secured or unsecured, depending on whether the borrower intends to
finance long-term assets or working capital. Most of the digital business lenders we looked at offer
term loans, except for KredX, which primarily offers invoice and capital expenditure discounting.
Some, like Aye Finance, also offer the option to apply for additional loans during the term of the
initial loan (known as “top-ups”).
›› POS-transaction-based loans to merchants. Firms such as BharatPe, FlexiLoans, Happy, and

Paytm offer credit to small businesses that already use their services and often tie loans to sales
flowing through their platform. FlexiLoans partnered with more than 100 merchant platforms to
offer merchant POS-based loans; merchants repay these loans via automatic deductions from
future sales.
›› Lines of credit. Some lenders offer lines of credit to give businesses flexibility and eliminate the
need to repeatedly apply for loans. This can appeal to businesses with uneven cash flow and
help them invest in equipment or personnel in advance of their more profitable periods. Finance
Buddha, FinBucket, FlexiLoans, Indifi, and Tribe3 offer lines of credit in addition to term loans.
To help MSMEs cope with the pandemic, Indifi partnered with PayU to offer lines of credit to
merchants, which can borrow up to $66,000 in revolving credit; they can draw on it when needed,
and interest is calculated on the outstanding amount on a given day.7
›› Invoice financing. These lenders purchase the client’s outstanding invoices at a discount. They
determine the likelihood of collecting on accounts receivable and price accordingly so borrowers
can access cash without having to wait for customers to pay. Online marketplace KredX helps
businesses to sell invoices and investors to purchase them; this creates a new asset for investors
while helping clients free up working capital. Capital Float, FinBucket, Happy, Indifi, KapitalTech,
and Tribe3 also provide invoice financing services.
FIGURE 4 Digital Business Lenders In India
Company Founded Funding (US$) Lending model
Aye Finance 2014 $315 million Own NBFC1
BharatPe 2018 $140 million NBFC2
Capital Float 2013 $144 million Own + NBFC + bank3
CoinTribe 2015 $15 million NBFC + bank4
Finance Buddha 2012 - Own + NBFC5
FinBucket 2014 $2 million Own + NBFC5
FlexiLoans 2016 $22 million Own NBFC1
Happy 2016 $20 million NBFC + bank4
Indifi 2015 $31 million Own + NBFC5
KapitalTech 2014 - Own NBFC1
KredX 2015 $33 million Own NBFC1
Lendingkart 2014 $200 million Own + NBFC5
Loan Frame 2015 $2 million Own + NBFC5
LoanSimple 2017 - Own + NBFC5
Niyogin 2017 $36 million Own NBFC1
Paytm Postpaid (& Clix Capital) 2016 $40 million Own NBFC1
SMEcorner 2014 $50 million Own NBFC1
Tribe 3 2016 - Venture capital6
Vistaar 2010 $75 million NBFC + bank4
ZipLoan 2015 $16 million Own NBFC1
1. Has its own NBFC lending license from the Central Bank of India
2. Partners with a traditional lending NBFC
3. Has its own lending license and partners with banks and traditional lending NBFCs
4. Partners with both traditional lending NBFCs and banks
5. Has its own lending license and partners with traditional lending NBFCs
6. Uses funds from a venture capital partner to underwrite loans
FIGURE 5 Types Of Digital Business Lenders By Loan Product
Invoice financing
• Aye Finance
• KredX
Loans based
• FinBucket on POS
transactions
• Indifi
Term
loans • KapitalTech
• CoinTribe • Lendingkart
• Loan Frame • Tribe3 • Capital Float
• Niyogin • Happy
• Paytm Postpaid • BharatPe

(and Clix Capital) • FlexiLoans • Paytm Postpaid
• SMEcorner (and Clix Capital)
• Vistaar
• ZipLoan
• Finance Buddha
• LoanSimple
Line of credit
3. What problems are digital business lenders trying to solve?
The COVID-19 crisis has forced India to adopt strict forms of social distancing, such as a complete
lockdown, at a huge economic cost.8 The nationwide lockdown means that many businesses will bleed
cash in the absence of incoming revenue.9 These firms need credit just to stay afloat, or to kick-start
their business again when economic activity resumes sometime in Q3 2020.10 For small businesses
looking to buy equipment or cover day-to-day operations in the short term, digital lenders solve issues
pertaining to (see Figure 6):
›› Access to capital. To secure a bank loan, a business must demonstrate strong revenue and
profitability. Small firms that are new or have unpredictable income struggle to get credit from
incumbent lenders; despite their recent improvements, the MSME credit gap remains large. Digital
lenders change the game by viewing microenterprises as their primary customers.11 Lendingkart
says that 80% of its borrowers are microbusinesses such as coaching classes, computer
academies, and mobile phone sales and repair shops.12 Digital lenders put more effort into fine-
tuning credit risk assessments using data from alternative sources. Due to improved credit decision
making, Indifi claims to reject just 50% of the loan applications it receives — a much lower rejection
rate than at traditional lenders.13
›› Quick, simple credit. While a timely business loan can expand market potential, speed up
operations, and increase profit margins, traditional lenders take weeks to disburse loans to
business borrowers.14 Digital lenders avoid the cumbersome paper-based application and
approval processes that traditional lenders use. Most of the digital lenders we reviewed
accelerate disbursement by autofilling online applications and using alternative data to assess
creditworthiness. Digital lender Happy quickly meets the borrowing demands of retailers and small
merchants that need working capital on weekends or bank holidays by offering a loan that starts on
Friday and ends on Monday so they can operate seamlessly.15
›› Flexible repayment terms. Many MSMEs expect flexible loan repayment terms — which the
COVID-19 crisis will make more important than ever. While the Central Bank of India has mandated
a three-month grace period in loan repayment, this is a one-time relief package to help businesses
cope.16 Loan repayment flexibility is something that traditional lenders have always failed to
offer to businesses.17 In contrast, many digital lenders offer repayment flexibility as a product
feature. Lendingkart offers business loans that borrowers can repay in equal monthly or biweekly
installments, allowing them to adjust their repayments to their sales and invoicing cycles.
›› Credit scores. Most of the digital lenders we looked at serve businesses that have poor credit
scores due to insufficient credit history. By lending to these businesses, digital lenders help them
not only meet their immediate financing needs, but also build their credit score by sharing their
credit history with credit rating agencies.18
›› Credit for a cause. Many digital lenders also extend credit for a cause. Capital Float offers
educational institutions collateral-free loans to improve the quality of education by investing in
educational infrastructure. Digital lenders such as FinBucket and Lendingkart offer preferential
loans to women entrepreneurs. FinBucket matches MSME borrowers with lenders such as banks,
offering loans under the national government’s “Stand-Up India” scheme to help borrowers from
different social strata and women entrepreneurs set up their own businesses.19 The scheme
mandates that participating lenders provide funding to at least one borrower that needs such
affirmative action support.
FIGURE 6 Five Problems That Indian Digital Business Lenders Solve
To provide this: Do this:
Access to capital Apply advanced risk assessment capabilities
Quick, simple credit Craft products for quick disbursement
Flexible repayment
Offer loan repayment flexibility as a product feature
terms
A chance to build Incentivize good repayment behavior with improved future

credit score credit score
Credit for a cause Lend to startups and microenterprises in dire need
4. What headway have digital business lenders made already?
So far, digital business lenders have proliferated thanks to little competition from incumbents. To
compete with them, a few Indian banks and NBFCs have started to raise their game — reducing the
time to lend, improving risk assessment models, and building end-to-end digital lending processes.
Digital business lenders have:
›› Increased loan volumes rapidly. Digital business lenders have grown quickly by attracting
borrowers looking for loans that they can’t get from traditional sources. Many digital business
lenders have made significant progress in loan disbursements. Lendingkart has disbursed more
than 100,000 loans totaling more than $662 million to over 89,000 MSMEs (up 140% year on year)
across 1,300 cities in India.20 It claims to receive 80% of its applications from first-time unsecured
business borrowers.21 As of November 2019, FlexiLoans had digitally disbursed loans totaling
about $73 million to small businesses in 1,150 cities.22
›› Achieved strong business results. Many digital lenders we looked at generate significant
business results. Indifi grew substantially in its 2019 financial year, reporting a 151% year-over-
year increase in revenue.23 Aye Finance takes pride in sustaining profitability for two years straight,
showcasing the fact that it grew by a factor of 11 in the 2019 financial year.24
›› Attracted substantial funding. Funding of the Indian fintech sector has surpassed that of China;
most goes to digital lending, insurance, and payment platforms.25 From 2015 to 2019, digital
lenders alone attracted about $2 billion in funding — 25% of all fintech investment in India (see
Figure 7).26 Strong funding helps startup digital lenders to scale rapidly; there has been a sharp
rise in monthly disbursements. Despite the coronavirus lockdown and resulting global economic
standstill, Capital Float and Aye Finance raised additional funds to expand their business and
support MSME credit demand in the coming economic crisis.27
›› Embedded themselves in other business services. Digital business lenders use payment and
accounting platforms to find borrowers. BharatPe lets payment solution customers know that they
can apply for a loan and repay it via a percentage of sales made on the payment platform. Lenders
lacking their own payment or accounting platform partner with firms that do. FlexiLoans offers
loans to small businesses based on their activity on Paytm’s platform. Digital lenders such as Indifi
and ZipLoan work with an ecosystem of companies and marketplaces to gather information on
potential borrowers and assess risk before granting loans. Indifi works with food delivery startups
Zomato and Swiggy to assess a restaurant’s credit risk by checking its borrowing history and
customer feedback before issuing a loan.28
FIGURE 7 Funding Of Digital Lending Startups In India
Investments in India’s digital business lending tech startups

(US$ millions)
$709
$553
$469
$281
$76
2015 2016 2017 2018 2019
Source: Data Labs by Inc24, Venture Scanner, and Forrester Research
5. Should incumbents be worried?
Yes. Digital lenders court business borrowers that find it difficult to get credit from traditional sources.
The success of digital lenders is directly linked to their broad reach, digitized application processes,
and advanced credit risk underwriting. They also partner with other digital ecosystem players, such
as digital commerce, travel, and payment platforms, to improve their access to data and prospective
business borrowers. Compared with other digital disruptors, digital business lenders are a moderate
threat (see Figure 8). Incumbents should be concerned about digital lenders because of their:
›› Simplicity and flexibility. Digital business lenders not only support MSMEs’ credit needs; they
also make access to credit fast, easy, and emotionally satisfying. They focus on speed and
superior customer experience to differentiate themselves from traditional lenders. Digital lenders
make business loan repayment fast, simple, and efficient by offering multiple modes and methods
of payment. Some integrate with common tech platforms, such as the Amazon and Flipkart
eCommerce platforms, to ease disbursement and payment; this can also speed the application
process by providing lenders data on the borrowing business so they can make informed credit
risk assessments. Happy partnered with over 10 eCommerce platforms and has focused on
empowering the underserved population of retail microentrepreneurs.29
›› Ability to address unmet needs. Being insights-driven allows digital business lenders to extend
credit to new borrowers that fall through the cracks in the traditional bank-dominated lending
ecosystem and reduce their dependence on bank loans, credit card debt, or loans from family and
friends. Capital Float and FlexiLoans partnered with Amazon’s Seller Lending Network to extend
credit to 3.4 million sellers on Amazon’s marketplace.
›› New value creation. Many digital business lenders are offering innovative products to meet the
needs of borrowers. Happy Loans launched a “lockdown loan” to help MSMEs affected by the
pandemic. It strengthened the offering with COVID-19 protection insurance, which extends a full
loan waiver to the coronavirus-infected.30 FlexiLoans is creating an ecosystem of financial services
such as banking, insurance, credit cards, and other no-core adjacent services. It has already
partnered with Open, a neobank, to offer banking services.31
›› Business model. Digital business lenders have several advantages over traditional firms: Their
use of new and emerging tech, software-as-a-service, and cloud helps keep initial costs low and
in line with scale. Owning fewer physical assets also reduces their capex. In some cases, unclear
or nonexistent regulation has allowed digital lenders to avoid costly and complex regulatory
burdens.32 But margins on a commodity like credit are generally low, so business lenders
are building relationships to achieve viable scale. Lendingkart formed a full-stack co-lending
partnership with NBFC Northern Arc Capital to efficiently disburse more than $13 million in working
capital to MSMEs.33
›› Survivability. To stay in business, digital lenders must get their risk underwriting right. While critics
doubt digital lenders’ potential and believe that they carry large nonprofitable asset (NPA) loans on
their books, Lendingkart claims to keep NPAs between 3% and 4% of its loan portfolio.34 While the
proprietary underwriting models used by the likes of Capital Float and Lendingkart proved accurate
during India’s economic downturn in 2012, the pressing question is whether they can survive
the coming economic crisis caused by COVID-19. The signs of delayed repayment and reduced
credit demand are already visible.35 It will be tough for digital lenders to resume business as usual
and collect on outstanding loans.36 Given the circumstances, we believe that some digital lenders
will shutter or be acquired by well-funded larger fintechs; the pandemic and resulting economic
slowdown have indeed affected the survivability of digital business lenders.
FIGURE 8 Digital Business Lenders Pose A Moderate Threat To Incumbents
Simplicity Unmet needs Value Business model Survivability
Digital business lenders
Digital consumer lenders
Digital point-of-purchase lenders
Peer-to-peer lending
Key
Resolves Creates great Undercuts Likely to
Simple
acute pain new value incumbents grow fast
Allays some Creates some Has a

Moderate Efficient
pain new value chance
Creates no No Big barriers

Complex No need
new value advantage to entry
6. How can traditional lenders outsmart digital business lenders?
Digital disruptors threaten to make incumbents irrelevant by delivering more compelling products,
services, and experiences than traditional firms and at a lower cost.37 To avoid being disrupted,
relentlessly focus on understanding your customers’ needs so you can give them more of what they
want faster. Digital teams at traditional lenders such as banks and NBFCs need to:
›› Digitally transform to provide faster, simpler loans. Traditional lenders challenged by outdated
systems, paper-based processes, and long lending timelines should learn from forward-thinking
banks that are already digitally transforming their lending businesses to let customers access funds
quickly and conveniently.38 ICICI Bank launched ICICIStack, a set of digital banking services and
APIs to extend banking to retail and business customers. The stack enables ICICI to offer 500
services, including “instant” loan solutions such as personal loans, credit cards, home loans, car
loans, overdraft facilities, and business loans.39
›› Partner with or acquire digital business lenders and platforms. Traditional lenders can partner
with a digital consumer lender or even acquire one outright to access its technology or income
stream.40 A few banks and NBFCs already partner with digital lenders to access innovative lending
and underwriting technology. RBL Bank’s partnership with MoneyTap is one example of a bank at
the forefront of using digital lenders’ proprietary algorithms.41 The public sector Bank of Baroda
partners with more than 40 fintech players across lending and payments; digital lending partners
include CreditMantri, FundsTiger, IndiaLends, KredX, Power2SME, and Probe42.42
›› Offer more tailored underwriting and pricing. Digital business strategy teams should learn how
digital lenders translate personal circumstances into risk and loan interest rates. While banks and
NBFCs may not want to take on additional risk, alternative underwriting methods can be more
thorough than a single credit score — and may effectively reduce loan risk and enable deeper
understanding and more accurate pricing of that risk.43
›› Connect small business customers and investors. Consider building a platform that could
expand investment opportunities for high-net-worth clients and financing options for small business
customers. Online lending marketplace platforms like Finance Buddha, FinBucket, and LoanFrame
bring together lenders and borrowers to interact directly and strike a deal among themselves.
Engage With An Analyst

Gain greater confidence in your decisions by working with Forrester thought leaders to apply
our research to your specific business and technology initiatives.
Analyst Inquiry Analyst Advisory Webinar
To help you put research Translate research into Join our online sessions
into practice, connect action by working with on the latest research
with an analyst to discuss an analyst on a specific affecting your business.
your questions in a engagement in the form Each call includes analyst
30-minute phone session of custom strategy Q&A and slides and is
— or opt for a response sessions, workshops, available on-demand.
via email. or speeches.
Learn more.
Learn more. Learn more.
Forrester’s research apps for iOS and Android.

Stay ahead of your competition no matter where you are.
Supplemental Material
Companies Interviewed For This Report
We would like to thank the individuals from the following companies who generously gave their time
during the research for this report.
Aurionpro Solutions Kuliza
Capital Float Paytm
Endnotes
Source: Reserve Bank of India (https://rbidocs.rbi.org.in/rdocs//PublicationReport/Pdfs/
1
MSMES24062019465CF8CB30594AC29A7A010E8A2A034C.PDF).
See the Forrester report “Digital Disruption Hits Retail Financial Services.”
2
Udyog Aadhaar is a government registry of small and medium-size enterprises; each registered business receives a
3
recognition certificate and unique identifying number. Source: Office of the Development Commissioner, Ministry of
Micro, Small & Medium Enterprises, Government of India (http://dcmsme.gov.in/eBook/Udyog_Aadhar_Booklet.pdf).
The permanent account number (PAN) is a unique 10-character identifier issued by the Income Tax Department which
enables it to link all transactions of an assessee with the department including tax payments, tax deducted at source
and tax collected at source credits, tax refunds, specified transactions, and correspondence. PAN facilitates retrieval
of information about assessees and matching of their investments, loans, and other business activities. Source:
Income Tax Department, Government of India (https://www.incometaxindia.gov.in/Pages/faqs.aspx?k=FAQs%20
on%20Permanent%20Account%20Number&c=3).
The Goods and Services Tax (GST) is a single tax into which all central and state government taxes are subsumed.
GST is levied on the supply of goods and services at each stage of the supply chain, from manufacture or import
and until final retail sale. Basically, any tax that is presently levied by the central or state government on the supply of
goods or services will be converted into GST. Source: Goods and Services Tax Council, Government of India (http://
gstcouncil.gov.in/about-gst).
Most digital lenders automate the application process by prefilling application forms from government data sources
4
such as the Udyog Aadhaar database, entity PAN, and GST data source. When the business is a microenterprise
and its owner is the borrower, digital lenders use the Aadhaar data source to prefill the form. Source: Vaishnavi J
Desai, “How Lendingkart’s data strategy improved customer conversion rate,” ET CIO, October 28, 2019 (https://
cio.economictimes.indiatimes.com/news/strategy-and-management/how-lendingkart-s-data-strategy-improved-
customer-conversion-rate/71788603).
Source: Vaishnavi J Desai, “How Lendingkart’s data strategy improved customer conversion rate,” ET CIO, October
5
28, 2019 (https://cio.economictimes.indiatimes.com/news/strategy-and-management/how-lendingkart-s-data-

strategy-improved-customer-conversion-rate/71788603).
After enlisting Japanese firm Credit Saison to deliver working capital financing to MSMEs across India, Bengaluru-
6
based Capital Float forged a similar partnership with Poonawalla Finance. The two entities will co-lend on Capital
Float’s co-origination model to deliver last-mile credit to MSMEs. Source: Peerzada Abrar, “Amazon-backed Capital
Float betting big on co-lending partnerships,” Business Standard, March 1, 2020 (https://www.business-standard.
com/article/companies/amazon-backed-capital-float-betting-big-on-co-lending-partnerships-120022901092_1.html).
To facilitate lending and granting credit to businesses, PayU has partnered with Indifi to offer loans to their merchants
7
requiring credit facilities. Merchants can borrow up to ₹5 million ($66,208) with offers such as a revolving line of
credit with the flexibility to draw down as and when needed and pro-rata interest calculated on the daily outstanding
balance. Term loans with lump-sum disbursement and a flexible tenure of three to 24 months are also available.
Source: Edil Corneille, “PayU launches initiatives to support businesses in COVID-19 times,” IBS Intelligence, April 6,
2020 (https://ibsintelligence.com/ibs-journal/ibs-news/payu-launches-initiatives-to-support-businesses-in-covid-19-
times/).
The next phase of the pandemic will be the management phase, in which the government will lift stay-at-home orders
8
and businesses will be allowed to open in a phased manner. Taking cues from countries further along the pandemic
curve such as China and South Korea, the government will devise and enforce pandemic management protocols and
enterprises will follow with similar rules. Source: George Colony, “Managing Your Company Through The Coronavirus
Pandemic,” Forrester Blogs, April 20, 2020 (https://go.forrester.com/blogs/managing-your-company-through-the-
coronavirus-pandemic/).
Many businesses have been required to close, but a few may still operate, including consumer repair and maintenance
9
service providers partnering with larger corporations; consumer nondurable wholesalers and retailers; pharmacies;
logistics and warehousing firms; online marketplaces such as Grofers.com; and restaurants. While open, many of
these businesses are incurring losses due to declines in sales.
See the Forrester report “Predictions 2020: India.”

10
India’s 60 million MSMEs contribute 30% of India’s GDP and thus form the backbone of the economy. A report on
11
digital MSME lending estimated the demand for MSME credit in 2018 at ₹45 trillion ($600 billion); 40% was served by
informal credit and 25% via personal proprietor rather than business loans. This demonstrates the shortcomings of the
current lending process. This underserved market is a huge potential for MSME lenders and digital players to target
with innovative business models tailored to the segment’s needs and behaviors. Source: Piyush Khaitan, “How digital
lending has the potential to unlock the underserved MSME segment,” YourStory, May 21, 2019 (https://yourstory.com/
smbstory/digital-lending-msme-upi-digital-payment).
Lendingkart cofounder and CEO Harshvardhan Lunia said that 80% of its borrowers are educated and run these types
12
of businesses. Source: Mugdha Variyar and Megha Vishwanath, “Have NPAs in the range of 3 to 4 percent in the last
4 years: Harshvardhan Lunia of Lendingkart,” CNBCTV18, March 5, 2020 (https://www.cnbctv18.com/startup/have-
npas-in-the-range-of-3-to-4-percent-in-the-last-4-years-harshvardhan-lunia-of-lendingkart-5433901.htm).
Despite its longer background check process, Mittal said Indifi has been able to finance nearly half of the applications
13
it receives, compared with about 10% of deals that materialize with banks and other lenders. Source: Manish Singh,
“India’s Indifi raises $21M to expand its online lending platform,” TechCrunch, August 6, 2019 (https://techcrunch.
com/2019/08/05/indifi-series-c/).
The PSBLoansIn59Minutes.com lending marketplace enables preapproval for MSME loans up to ₹10 million
($132,000) in 59 minutes from public sector banks. But MSME feedback indicates that getting final approval from
banks hasn’t been smooth, characterized by delayed approvals and high rejection rates. As of June 2019, only 24%
of preapproved business loans were disbursed. Source: Reserve Bank of India (https://rbidocs.rbi.org.in/rdocs//
PublicationReport/Pdfs/MSMES24062019465CF8CB30594AC29A7A010E8A2A034C.PDF).
Source: Reserve Bank of India (https://rbidocs.rbi.org.in/rdocs//PublicationReport/Pdfs/

14
MSMES24062019465CF8CB30594AC29A7A010E8A2A034C.PDF).
Weekend loans meet the need for loans when banks are shut. Businesses that are capital-intensive and face huge
15
demand on weekends can get loans that start on Friday and end on Monday. This is most relevant to remittance
businesses. Source: Happy (https://happyness.net/index.html#services).
To help MSMEs cope with the pandemic situation, the Central Bank of India and Reserve Bank of India announced a
16
three-month moratorium on repayment of all term loan EMIs outstanding on March 31, 2020. Source: “India- MSMEs
applaud RBI’s Monetary Policy announcements,” MENAFN, March 27, 2020 (https://menafn.com/1099923755/India-
MSMEs-applaud-RBIs-Monetary-Policy-announcements).
A few traditional lenders offer loan repayment flexibility, but not as part of the loan features or not digitally. This leaves
17
businesses at the mercy of their relationship with the banking agent at the branch to process and accept changes in
repayment conditions.
As part of engagement with credit rating agencies such as CIBIL, CRIF, and Equifax, digital lenders are supposed
18
to share details on loan repayments, defaults/missed payments, and related information. Access to this information
informs credit scores and helps businesses get loans from traditional lenders.
The government launched the “Stand-Up India” scheme was launched by the Government of India to provide funding
19
to the scheduled castes/scheduled tribes (SC/ST) category and to women entrepreneurs. The primary purpose of
this scheme is to make lenders offer loans to at least one SC/ST borrower and at least one woman entrepreneur per
branch to enable them to set up their own enterprise. The amount can range from ₹1 million to ₹10 million ($13,200 to
$132,000).
Source: Mugdha Variyar and Megha Vishwanath, “Have NPAs in the range of 3 to 4 percent in the last 4 years:
20
Harshvardhan Lunia of Lendingkart,” CNBCTV18, March 5, 2020 (https://www.cnbctv18.com/startup/have-npas-

in-the-range-of-3-to-4-percent-in-the-last-4-years-harshvardhan-lunia-of-Lendingkart-5433901.htm) and “Digital
lender Lendingkart disburses Rs 1 lakh loans to MSMEs,” KNN India, March 6, 2020 (https://knnindia.co.in/news/
newsdetails/msme//digital-lender-lendingkart-disburses-rs-1-lakh-loans-to-msmes).
Having evaluated 600,000 applications and disbursed more than 76,000 loans to more than 64,000 MSMEs across 28
21
business sectors, Lendingkart has a wealth of data on small business credit. It says that 80% of users are first-time
unsecured business loan borrowers, increasing the number of disbursed loans by 200% year on year. Source: “Inc42
UpNext: Has Lendingkart Got What It Takes To Enter The Unicorn Club?” Dailyhunt, November 22, 2019 (https://m.
dailyhunt.in/news/india/english/inc42-epaper-inc/inc42+upnext+has+lendingkart+got+what+it+takes+to+enter+the+un
icorn+club-newsid-148920746).
Source: “FlexiLoans.com emerges among the top 100 global FinTech innovators’ list by KPMG and H2 Ventures,”
22
Equity Bulls, November 20, 2019 (https://www.equitybulls.com/admin/news2006/news_det.asp?id=259561).
Source: Harsh Upadhyay, “Indifi revenue grows 2.5X in FY19; moves towards efficient scaling,” Entrackr, September
23
24, 2019 (https://entrackr.com/2019/09/indifi-revenue-grows-2-5x-in-fy19-moves-towards-efficient-scaling/).
Source: Aye Finance (https://ayefin.com/financial-statement/Aye_Finance_Annual_Report_FY19.pdf).

24
Although India closed fewer fintech deals than China, it had a larger total deal size — $674 million to China’s $661
25
million — from July to September 2019. Source: Aparna Desikan, “India beats China by a whisker in fintech funding,”
Times of India, November 20, 2019 (https://timesofindia.indiatimes.com/business/india-business/india-beats-china-
by-a-whisker-in-fintech-funding/articleshow/72140607.cms).
Between 2015 and Q1 2019, total funding in India’s fintech industry was $7.6 billion across 478 deals. Of this, $1.9
26
billion was in lending tech startups. Source: Sandeep Singh, “Digital Lending Startups Set To Lead The New Wave Of
India’s Fintech Revolution,” Inc42, June 7, 2019 (https://inc42.com/datalab/digital-lending-startups-set-to-lead-the-
new-wave-of-indias-fintech-revolution/).
Capital Float raised $4.8 million in top-up (Series E) funding from existing investors. Source: Bhumika Khatri,
27
“Exclusive: Capital Float Gets $4.8 Mn Top Up From Existing Investors,” Inc42, April 10, 2020 (https://inc42.com/buzz/
exclusive-capital-float-gets-4-8-mn-top-up-funding-from-existing-investors/).
Aye Finance raised ₹18 billion ($238 million) in debt funding. Source: Sampath Putrevu, “[Funding alert] Despite
coronavirus lockdown, fintech lender Aye Finance raises Rs 180 Cr in debt funding,” YourStory, April 7, 2020 (https://
yourstory.com/2020/04/gurugram-fintech-lender-aye-finance-debt-funding-coronavirus).
Source: Manish Singh, “India’s Indifi raises $21M to expand its online lending platform,” TechCrunch, August 6, 2019
28
(https://techcrunch.com/2019/08/05/indifi-series-c/).
Source: Sheldan Rungasamy, “Lending Platform Happy Loans Acquires Non-Banking Financial Company,” pixr8
29
(https://pixr8.com/acqusition/lending-platform-happy-loans-acquires-non-banking-financial-company/).
Happy launched its “lockdown loan” initiative as it believes that the global coronavirus outbreak has affected about
30
one-quarter of India’s 69 million MSMEs and that loans will help them. Happy claimed that it will give borrowers
easy access to between ₹25,000 and ₹50,000 with bullet repayment after six months. The lender has further
strengthened the offering with COVID-19 protection insurance. Source: Prashasti Awasthi, “Fintech firm HAPPY
launches ‘Lockdown Loan’ to tide over Covid-19 crisis,” The Hindu BusinessLine, May 1, 2020 (https://www.
thehindubusinessline.com/money-and-banking/fintech-firm-happy-launches-lockdown-loan-to-tide-over-covid-19-
crisis/article31478923.ece).
Source: FlexiLoans (https://flexiloans.com/value-added-service.html).

31
Digital lenders do not come under the purview of regulators unless they hold a NBFC lending license.
32
The aim is to enable digital loan disbursement without any manual intervention in data and information flow, bureau
33
check, and document verification and validation to credit decisions and customer funding. Source: Bismah Malik,
“Lendingkart partners with Northern Arc,” New Indian Express, February 27, 2020 (https://www.newindianexpress.
com/cities/bengaluru/2020/feb/27/lendingkart-partners-with-northern-arc-2108929.html).
Some people may not be able to repay the loan; that is part of the business risk. In the past three or four years,
34
Lendingkart has had NPAs in the range of 3% to 4%. Source: Mugdha Variyar and Megha Vishwanath, “Have NPAs
in the range of 3 to 4 percent in the last 4 years: Harshvardhan Lunia of Lendingkart,” CNBCTV18, March 5, 2020
(https://www.cnbctv18.com/startup/have-npas-in-the-range-of-3-to-4-percent-in-the-last-4-years-harshvardhan-
lunia-of-lendingkart-5433901.htm).
Source: Pratik Bhakta, “Coronavirus pandemic | As India hunkers down, digital lending startups brace for trouble,”
35
Moneycontrol, March 23, 2020 (https://www.moneycontrol.com/news/business/startup/coronavirus-pandemic-as-

india-hunkers-down-digital-lending-startups-brace-for-trouble-5060801.html).
While digital lenders have to grant borrowers a loan moratorium, their partner traditional financers don’t do the same
36
for them. Digital lenders are paying for the delayed repayments of their customers as well as the interest on the
funds they borrowed from their financers. Source: Nilanjana Chakraborty, “Covid financial crunch hits easy loans,”
Livemint, June 22, 2020 (https://www.livemint.com/money/personal-finance/covid-financial-crunch-hits-easy-
loans-11592846399597.html).
Digital disruption will tear down and rebuild every product in every industry. Thanks to digital platforms, your
37
customers live in a world of heightened expectations and abundant options; they can get more of what they want, in
more places, at more times, than ever before. See the Forrester report “The Disruptor’s Handbook.”
See the Forrester report “Q&A: How Digital Consumer Lenders Are Disrupting Finance In India.”
38
Source: “ICICI Bank launches digital banking platform ‘ICICIStack,’” Times of India, March 17, 2020 (http://
39
timesofindia.indiatimes.com/articleshow/74676083.cms).
There are potential cultural, commercial, and financial benefits to working with startups, but also plenty of risks. See
40
the Forrester report “How To Work With Fintech Startups.”
Source: Pratik Bhakta, “MoneyTap sets Rs 2,000 crore loan disbursal target in 2018,” The Economic Times, May 7,
41
2018 (https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/moneytap-sets-rs-rs-2000-crore-loan-
disbursal-target-in-2018/articleshow/64057833.cms).
Source: Bank of Baroda (https://www.bankofbaroda.in/writereaddata/Images/pdf/Full-Annual-

42
Report-2018-19-06-06-2019.pdf).
Source: “Bank of Baroda Partners With 7 FinTech Companies,” Medici, July 19, 2016 (https://gomedici.com/bank-of-
baroda-partners-with-7-fintech-companies).
See the Forrester report “Disrupting Finance: Digital Consumer Lenders.”

43
forrester.com
We work with business and technology leaders to drive customer-

obsessed vision, strategy, and execution that accelerate growth.
Products and Services
›› Research and tools
›› Analyst engagement
›› Data and analytics
›› Peer collaboration
›› Consulting
›› Events
›› Certification programs
Forrester’s research and insights are tailored to your

role and critical business initiatives.
Roles We Serve
Marketing & Strategy Technology Management Technology Industry
Professionals Professionals Professionals
CMO CIO Analyst Relations
B2B Marketing Application Development
B2C Marketing & Delivery
Customer Experience Enterprise Architecture
Customer Insights Infrastructure & Operations
›› eBusiness & Channel Security & Risk
Strategy Sourcing & Vendor
Management
Client support
For information on hard-copy or electronic reprints, please contact Client Support at
+1 866-367-7378, +1 617-613-5730, or clientsupport@forrester.com. We offer quantity
discounts and special pricing for academic and nonprofit institutions.
160178

Forrester - Digital Lending Report

Uploaded by

Copyright:

Available Formats

You might also like

Forrester - Digital Lending Report

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Forrester - Digital Lending Report

Uploaded by

Copyright:

Available Formats

Licensed for individual use only

Q&A: How Digital Small Business Lenders Are

Why Read This Report Key Takeaways

Digital Lenders Will Serve MSMEs Better After

Q&A: How Digital Small Business Lenders Are Disrupting Finance In

Table Of Contents Related Research Documents

3. What problems are digital business lenders

4. What headway have digital business Share reports with colleagues.

6. How can traditional lenders outsmart digital

Forrester Research, Inc., 60 Acorn Park Drive, Cambridge, MA 02140 USA

1. What are digital business lenders?

FIGURE 1 Four Characteristics That Define Digital Business Lenders

• Loan approval takes 5 to 10

• Use a mix of traditional and Insights-driven

Traditional data sources

Alternative data sources

Government sources Personal data

Corporate information Mobile data

FIGURE 3 Digital Lenders Offer In-Principle Approval And Underwrite Loans

Document Document NBFCs

2. Who are the main players and what do they do?

›› POS-transaction-based loans to merchants. Firms such as BharatPe, FlexiLoans, Happy, and

FIGURE 4 Digital Business Lenders In India

Company Founded Funding (US$) Lending model

Aye Finance 2014 $315 million Own NBFC1

BharatPe 2018 $140 million NBFC2

Capital Float 2013 $144 million Own + NBFC + bank3

CoinTribe 2015 $15 million NBFC + bank4

Finance Buddha 2012 - Own + NBFC5

FinBucket 2014 $2 million Own + NBFC5

FlexiLoans 2016 $22 million Own NBFC1

Happy 2016 $20 million NBFC + bank4

Indifi 2015 $31 million Own + NBFC5

KapitalTech 2014 - Own NBFC1

KredX 2015 $33 million Own NBFC1

Lendingkart 2014 $200 million Own + NBFC5

Loan Frame 2015 $2 million Own + NBFC5

LoanSimple 2017 - Own + NBFC5

Niyogin 2017 $36 million Own NBFC1

SMEcorner 2014 $50 million Own NBFC1

Tribe 3 2016 - Venture capital6

Vistaar 2010 $75 million NBFC + bank4

ZipLoan 2015 $16 million Own NBFC1

FIGURE 5 Types Of Digital Business Lenders By Loan Product

• Paytm Postpaid • BharatPe

3. What problems are digital business lenders trying to solve?

FIGURE 6 Five Problems That Indian Digital Business Lenders Solve

To provide this: Do this:

Access to capital Apply advanced risk assessment capabilities

Quick, simple credit Craft products for quick disbursement

A chance to build Incentivize good repayment behavior with improved future

Credit for a cause Lend to startups and microenterprises in dire need

4. What headway have digital business lenders made already?

FIGURE 7 Funding Of Digital Lending Startups In India

Investments in India’s digital business lending tech startups

2015 2016 2017 2018 2019

Source: Data Labs by Inc24, Venture Scanner, and Forrester Research

5. Should incumbents be worried?