Earlier it was the local moneylender providing this service, later banks came into existence, offering capital in times of need and crisis. These individuals and banks performed an indispensable job helping communities and businesses.
As societies evolved, the process of lending became more institutionalized and technical terms like collaterals, debt financing, debt-equity swap, credit score and Know-Your-Customer became part of lending lingo. As the economies of the world flourished, communities had access to cheaper capital to an extent that even sovereign nations started borrowing via the IMF and world banks. All this points to a great financial future but there is a huge swathe of people who have no access to financial services. They are people who have no collateral or are migrants or extremely poor and cannot even be considered as potential customers. There is a huge underbelly of underprivileged people who are unable to avail the benefits of conventional sources of capital. For such people, the only option to raise a small amount of money is from local moneylenders at exorbitant rates or suffer due to lack of capital, especially in remote areas. These financially excluded people across the world are still outside the formal lending ecosystem. For centuries, local moneylenders have had a complete grip over the capital needs of the poor and immigrants. Such a need has given rise to the micro financial institution. These micro financial institutions are willing to lend small amounts - as little as USD100 to people who really have no collateral or credit history. These financial institutions quickly prequalify and then lend at affordable interest rates for short durations like a month.
Typically, a large financial institution would ask the following details before considering someone for a loan:
Individuals who fail to provide these details do not qualify to apply for a loan. Poor people need money for various reason like a death in the family, marriage or short duration educational loans. For such needs, micro financial institutions are the quickest way of raising capital without the bureaucratic red tape that envelops the bigger organizations. Despite all the effort and help from governments, there continues to be challenges in reaching out to people in need of money. This is a problem that is being solved by startups. Armed with new ideas and technology, startups are looking at modern ways and means to help raise capital for those who need them.
The advent of Aadhar, large populations of smart phone users, access to Bank accounts and mobile apps have made this whole ecosystem suddenly come alive with new ideas. With the press of a button, a person’s details are available to the lending institution. Startups are well equipped with these details and artificial intelligence to make quick decisions on the eligibility of the borrower and disbursement of a loan.
As part of the Oracle Global Startup Ecosystem program in Mumbai, we get many applications from startups operating in the Fintech lending space. In the current cohort, we have 2 startups operating in the space of micro and peer-to-peer lending.
Both these startups rely heavily on data science artificial intelligence for handling loans and collections. Technology and online platforms provide added push in reaching out to borrowers in a simpler and effective way. The next step in the evolution of such lending platforms would be wide usage of Blockchain- based technologies, providing security and transparency to the digital lending platform. This would reduce inefficiencies, duplication and the cost of doing business. With tech-enabled platforms and increased operational efficiency, these companies have been able to lower the intermediary costs. This enables them to offer loans at lower or competitive interest rates as well and allowing lenders to make higher returns.
Not surprisingly, the NPAs (Non-Performing Assets) are very low and defaults are rare. Unlike private moneylenders, these startups work with formal financial institutions and people who need money, thereby bridging the connectivity gap that arises due to the size of the loan and eligibility factor of the borrower resulting in an all-inclusive and long-term sustainable financial ecosystem.