Indifi and the $400B SME lending opportunity in India

Just over two weeks ago I had an opportunity to speak with Alok Mittal, CEO and founder of Indian small business lending startup Indifi.

Alok is a veteran of the startup and VC world. After selling his web-based recruitment company JobsAhead.com to Monster.com, he established and led the arm of US venture capital firm Canaan Partners in India. Canaan were an early investor in Lending Club, and Alok saw an opportunity to test a version of the model in India.

“Prior to launching Indifi, we had seen the success Lending Club had been having in the US. But of course we needed to really consider that against the dominant credit themes in the Indian market. Ultimately if we were going to do something similar, we needed to ensure a version of the model would work in this market.”

What Alok and the team saw in Lending Club were two key things: Firstly, retail capital supply in the SME space is typically small, meaning building an institutional platform is a more compelling proposition than a peer to peer one. Secondly, a lot of differentiation in lending businesses comes on the back of the strength of the underwriting model. To succeed, this would be critical to scale.

“Whatever the case,” Alok says, “it was clear an institutional lending platform for SMEs was a thesis worth exploring. The question of course was how, and what were the problems Indifi could solve in a unique and market differentiated way?”

The team quickly realized solving originating at scale and accessing financial data were key to cracking the SME market. Which meant taking a deep approach rather than a broad one.

“Small businesses are not homogenous,” Alok contends. “You need to approach them on a segment by segment basis, capturing data that services underwriting by deeply understanding and connecting into the entire supply chain.”

So rather than a ‘one size fits all approach’, careful segment selection for their first go to market pitch was crucial.

“What we looked for initially were segments that were grossly underserviced by the existing financial system, but segments where you could access data from within a highly organized and centralized supply chain. We realized if we could find the latter, we could win.”

Surprisingly travel agencies in the corporate sector fit that bill. Despite the tail off in the consumer travel market as a result of the rise of self-service portals, in India the segment of the market servicing corporate clients was growing year on year.

Even better, Alok and the team discovered nearly all agencies were served through a centralized electronic supply chain. Thus Indifi’s first working capital product was born.

Today via its platform, Indifi connects small business from four segments (travel agencies, hospitality venues, retailers and ecommerce vendors) with lenders. Along the way the business value-adds by providing underwriting services that leverage its deep understanding of a segment’s supply chain via access to financial data.

The company is plugging an estimated $400B gap in working capital – a phenomenal opportunity in what is a nascent alternative lending market. To date the company has originated over 2000 loans, with an impairment rate of just 1 percent. Loans average out at around US$6500.

While 70 percent of borrowers have a credit footprint, 90 percent of borrowers do not have an unsecured loan. Of course like any small business sector around the world, this is not a marker of lack of demand, but a reticence by larger, risk averse lenders to tackle the space. Of course companies like Indifi, who use state of the art data to model risk, believe they can plug this gap safely.

The ability to design working capital products to suit specific segments and working capital cycles is key for the business. Making a credit product relevant to the customer is a niche approach alternative lenders and platforms can win in. And while the core product has remained the same since inception, the way repayments are integrated into the billing and settlement plans borrowers have with their creditors is continuously enhanced.

Outside of Indifi, Alok is an active participant in the startup scene, having co-founded the Indian Angel Network. As such, his inside view on the fintech space in India is valuable.

“Fintech (in India) is a very interesting space – even beyond what we are doing in lending at Indifi. The main driver of this is what is happening in the ecosystem and by way of public infrastructure.

India is one of the few markets that has invested heavily in financial systems infrastructure. There is a unique identity program that was launched by the government about 5 years back. As a result over 1 billion people have joined that program.

This has facilitated a number of other services, like electronic signatures and API based data access. Parts of the financial lifecycle can now be truly automated thanks to the work of government agencies.

Payment infrastructure in India is also ahead of many developed countries. There is interoperability between multiple wallets, banks, non-banks and others. Alongside this there is a pretty radical tax infrastructure change happening in relation to the goods and services tax. So all of this combined is creating an environment in which real innovation can take place in.”

I asked Alok about how he sees this innovation opportunity being realized by global players. India after all is a populous and attractive market.

“Global companies have done a great job in integrating into the Indian market. The business and regulatory environment is open for foreign companies. One of the things we have started to see is global talent coming in to start companies in India. They are seeing the opportunity and bringing their intellect and insights into the market. India really is an open market for entrepreneurs.”

But what about Indifi – is it looking beyond its borders in the same way?

“At this point we are focused on the Indian market. The small business financing gap is huge and we don’t think we need to go out and hunt for other markets at this stage. Having said that, plenty of Indian companies are thinking global, and that is exciting to see.”

So, last of all it seemed only fair to get some final investment gems from this seasoned entrepreneur and investor. Had payments as a sector peaked for example?

“There is a lot of buzz around the payments space, but even when I go out into the market place today, the way consumers and businesses are transacting in India suggests these technologies are still very nascent. So I would say there is still immense opportunity. We look at companies in 3 – 4 subspaces, with several in each space that hold promise.”

  • Payments – Paytm, MobiKwik, Razorpay
  • Alternate lending space  – Lendingkart
  • Consumer financing space – Finomena
  • Personal finance management space – Moneyview

And finally, where is Indifi heading in the next 6, to 12, to 18 months?

“There are two tracks we are trying to run in parallel. First is to achieve an order of magnitude better in terms of growth in our existing and maturing segments. The second track is to continue to experiment in new segments. We think ultimately we’ll have  8 -10 segments in the SME lending space within a few years.”

Indifi is a great success story to date – and one that will surely only continue to get better. One thing is for sure – India’s SMEs will be there cheering them on.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

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