A start-up that small enterprises segment can bank on for quick credit

When Alok Mittal decided to turn entrepreneur again, after a nearly decade-long stint as a venture capitalist, it was the alternative lending space that attracted him. Canaan Partners, whose India operations he helped start, had invested in one such venture in the US.

“We said there is potential to build a marketplace for small business loans. The problem statement essentially being that small businesses are terribly under-served when it comes to credit,” says Alok.

The main reason for the small businesses to be under-served in terms of credit, says Alok, is that banks and non-banking finance companies have adopted a one-size-fits-all structure.

The traditional lending industry’s approach was that irrespective of the nature of business, they would give the same product and assess the business using the same criteria. Whereas, the risk was different by industry. Alok and Siddharth felt that technology and electronic data can be levers for setting up a platform and build a differentiated offering, and expand credit in a meaningful way. This is what Indifi has been doing in the nearly four years that it has been in operation. It has about 10,000 active customers.

Beyond traditional lending

Indifi decided that a traditional branch-led origination of loans for small businesses would not be effective if they were to focus on verticals.

It was fortuitous for Alok that at the time they were working on their venture, the internet was bringing a whole lot of aggregators into play and each of these aggregators had a large number of small businesses on their network.

Indifi would tap into these aggregators to access customers and data. Indifi has tied up with more than 30 aggregators, including Swiggy, Zomato and MakemyTrip, for originating loans.

Swiggy and Zomato, he explains, have brought restaurants, many of them small, online, while MakemyTrip has brought a number of hotels online. “We saw each of these internet companies as a trove of small businesses and data regarding them,” says Alok.

According to him, Indifi focusses on select verticals – hotels and restaurants, travel agencies, retailers such as mobile and apparel retailers, grocery stores and small fleet owners. Nearly 80 per cent of Indifi’s customers are proprietorships, 15 per cent partnerships and 5 per cent private limited. These customers will have an annual turnover of ₹50 lakh to ₹20 crore and Indifi provides them with customised loan products between ₹1 lakh and ₹50 lakh. About 40 per cent of Indifi’s customers do not have any prior business loan, they might have taken a gold loan or some such facility, while 60 per cent would have borrowed from the informal sector.

Two businesses

Indifi has two businesses – one, a marketplace where other banks and NBFCs can come and lend to the small businesses, and the other, an NBFC that provides loans on its books. Alok is convinced that the vertical strategy will be the best for Indifi and it will continue to focus on a few select verticals. Over time, it will go deeper into these verticals.

Indifi has a risk scorecard for each category of customers and the loans are priced according to the risk profile of the category. The interest rate is in the range of 15-28 per cent a year and the loans are of 12-24 months duration.

According to Alok, the risk profile of each business is different. The risk for a travel agency may be different from that of a mobile retailer which will be different from that of a restaurant. So, apart from the regular structure of ability and intent to pay, Indifi will look at the verticalised risk criteria before sanctioning the loans. Then, he adds, Indifi layers it with a product structure that mitigates the risk. “For example,” he says, “about 30 per cent of our loans go out with us having cash flow controls on their receivables. Another 25 per cent go out where we know what is the purpose for which the loan is getting used. We don’t remit the loan in their bank account, it is to their suppliers. Through this innovation in assessing verticalised risks and by putting product structures that mitigate risks, we are able to serve them.”

Indifi serves customers in 200 locations and has a net interest margin of 9-10 per cent. It pays the aggregators from whom it sources customers a small fee and gets paid by banks and NBFCs that lend on its marketplace over the lifecycle of the loan.

The verticalised lending model is a block-and-tackle play, says Alok, which means that they have to be constantly alert about their credit performance. It is an operationally intensive business. Lending to small businesses is such a huge market in India, given the belief that these businesses will be the engine for economic growth and job creation and Indifi’s verticalised lending strategy is one way to tackle this huge market.

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