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The world has been stuck in a low-interest-rate environment since 2009 and most likely will be in it for the foreseeable future. In this backdrop, credit opportunities in India could offer attractive yield enhancement and diversification opportunities to international investors. However, this uptake has not been significant historically. Has Fintech offered a solution
In April 2009, the European Central Bank (ECB) dropped its key interest rate to 0.25per cent. This rate increased over the next few years to around 0.75 per cent before dropping to -0.5per cent in September 2019. In March 2009, the Bank of England cut its interest rate to 0.5per cent, the lowest since it was founded in 1694. Since March 2020, the rate now stands at 0.1per cent. The Bank of Japan has kept its interest rates below zero since 2016. You get the picture, the world has been in a low-interest environment for almost a decade now and looks like it will continue to remain so for the foreseeable future.
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Cut to India, whose SMEs are among some of the highest growing industries in the world. To clarify, I am referring to the pre-pandemic period for now. SMEs in India have suffered significantly from the ongoing crisis. However, as suggested by the recently released Q2 GDP numbers, the recovery is better than expected and “India Inc.” looks like its set to rebound back to its glory in the next 12-18 months. As per data provided by India's Ministry of Statistics and Programme Implementation, between FY 2011-12 and FY 2019-20 (i.e. till March 2020, just before the disruptions caused by the pandemic came into full force), the annual growth rate for some of the sectors was:
Manufacturing: 6.4 per cent
Trade, hotels, transport, communication and services related to broadcasting: 7.8 per cent
Financial, real estate & professional services: 8.4 per cent
An obvious observation but worth noting is that within these sectors there will be the top 10-20 per cent companies which will have an even higher growth rate compared to the average. However, unfortunately, not many of these high growth businesses get access to the easily available, low-interest credit like businesses in the developed world.
Many of them cannot tap public markets for equity issuances or issuance of Non-convertible debentures (NCDs are usually public issuances of debt) as these are luxuries usually enjoyed by the large caps. SMEs often find themselves dependent on personal capital or loans from domestic banks/NBFCs (Non-Banking Financial Company).
They end up paying interest rates north of 12-15 per cent per annum. Many depend on unsecured/secured loans from the informal sector as well. Given the ongoing stresses in the financial sector, the already limited access to credit has also shrunk considerably in recent years. Similar parallels can be drawn in the consumer credit sector which includes mortgages, auto loans, personal finance etc.
I read an interesting piece which highlights that the top 24m households in India account for 70 per cent of the total consumer credit in the country.
One would think that for international investors looking at opportunities in the low-interest world, this under penetration of credit would be an opportunity worth exploring. Investing in credit opportunities in India would provide for yield diversification and enhancement.
Despite the seemingly obvious advantages, international investors haven't yet lapped up this 'credit opportunity'.
As per a research note, credit exposure in India for foreign investors is largely limited to NCDs or redeemable debentures or shares. A large chunk of foreign capital flows into Government Debt while some capital has recently found its way into distressed debt opportunities after the Insolvency and Bankruptcy Code was set up in 2016. The lack of international credit flow to an SME or a consumer credit company could be because of the lack of credit history, both at the SME and the individual level. FX hedging costs and weak contract enforcement laws might also be considerations.
With the rapid adoption of technology in financial services, glimmers of hope are starting to emerge. Recent years have seen rapid digitisation of payments and trading activity for potential borrowers (individual or corporate). It is now no secret that the disruptions caused by the COVID-19 pandemic have accelerated this trend even further. e.g., the National Payments Corporation of India (NPCI) recorded 2.2bn UPI (Unified Payments Interface) transactions worth c.$52bn in November 2020. In October 2019, the number of transactions had just crossed a billion for the first time.
These developments were initially led by digital payments companies like PayTM, PhonePe etc. Starting from consumer payments, a lot of these companies now offer easy solutions for businesses to digitise their transactions as well. The recent launch of WhatsApp payments in India will also help this trend significantly.
Lending companies, including Capital Float and Lendingkart among others, which use technology to make financing decisions, have also popped up in recent years. These are classified as NBFCs as far as the Reserve Bank of India (RBI) is concerned.
Other Fintech companies solving the credit problem focus on Peer to Peer (P2P) financing. These include Lendbox, Faircent, 5Paisa among many others.
A lot of these companies emerged after the RBI released Directions for P2P lending companies in 2017. Some innovative companies, like Valyu.ai, offer to lend in the form of salary advances. A recent article highlighted that the company “uses a technology-led platform to provide paperless, instantly approved, same day disbursal of advanced salaries”. Surely, a lot of business models are expected to emerge as this sector develops.
These new-age lenders have opened up a large pool of capital for borrowers in India. E.g. according to their website at the time of writing this article, Capital Float has disbursed c.$1.15bn worth of loans till date. The question now is, will these new, potentially safer and transparent platforms offer a conduit for international lenders to directly or indirectly access credit opportunities in India
Earlier this week, on 1st December 2020, a news article suggested that Bangalore based SME lending company Vistaar Finance raised $30m from Dutch entrepreneurial development bank FMO. Similarly, in April 2020, fintech lender Aye Finance raised c.$23.8m from Indian and International investors. Should this trend continue and reach a large majority of borrowers (corporate and individual), could this mean that fintech would be India's answer to unclogging credit flow in the country