It is a well-known fact that penetration of credit in India is significantly lower than other emerging markets – both for individuals as well as MSMEs due to a large spectrum of challenges. Domestic credit to GDP in India is ~55% and has improved nominally from 52% in the last decade. Comparison with other economies highlights the significant gap in credit penetration – China at 183%, Japan at 193%, US at 217% and UK at 144%.
Both banks and NBFCs are still dependent on intermediaries and distribution platforms to source new customers whom they can lend to grow their loan portfolios. Hiring inhouse teams is a much more expensive proposition with high fixed costs. These intermediaries are typically paid a success-based fee and serve to solve the access problem for lenders. Banks typically lend to consumers with credit score of 700 and above, while NBFCs lend at credit scores of 650 and above. Hence, this lending is not to New-To-Credit (“NTC”) consumers but to those with some credit score who still need help from DSAs to avail financing.
From a market size perspective, this presents a large opportunity both in the retail as well as the MSME segment. Retail credit in India is expected to reach ₹ 80 lakh Cr by 2025. Accounting for the COVID related impact on this segment which led to a dip in FY21 and gradual recovery in FY22, we estimate ~ ₹ 20 lakhs Cr to be the personal loans market, which implies annual disbursements of ~₹ 9 lakh Cr. These numbers indicate a robust ~30% CAGR in the future, which in line with historical growth rates of this segment. As per IFC, the unmet credit demand for business loans to MSMEs is estimated to be ₹ 36.7 lakh Cr, growing at a 21% CAGR and this number is only likely significantly higher due to the COVID impact on the MSME segment.
As we look at this segment, there are 3 types of such intermediaries that operate in the market today – 1. Traditional DSA Aggregators 2. Agent led technology platforms 3. Online aggregators
Traditional DSA aggregators typically work through a network of smaller DSA firms / individuals who have a network of “connectors” who source customers. They have a fee rate negotiated with large banks and NBFCs on the value of loans successfully disbursed (irrespective of the asset quality, as the credit decisioning is by the lenders themselves). This fee is further shared down the chain to the smaller DSAs who further share a portion with the connectors. This business model has thrived in India for more than 3 decades and today accounts for > 50% of the annual disbursements. We believe that as we look into the future, while the DSA distribution will continue to thrive, there will be necessary pivots in the business models. A technology platform to manage the DSA/connect workflows and better integrations with lenders for quicker loan TAT and efficient approvals will be the key success factors.
Agent led technology platforms – are those which have a network of individual DSAs and have a partner app to manage their workflow in terms of customer acquisition and onboarding to doing basic credit checks and documentation processes. They are also directly integrated into the LOS of banks and NBFCs to enable them to process loan applications faster. We have seen some early success of this model in insurance distribution sector and believe this model can also work for lending products. Online aggregators – are those who generate leads through online marketing on Google, Facebook, etc to get leads, provide them free credit scores and / or financial advice with the objective of converting those customers into borrowers or credit card applicants for their lending partners. They may also be integrated into the LOS of lenders and are usually able to provide comparable quotes for loans from their lending partners based on which the customer could either choose one of the loan options provided online or speak with their tele-calling teams to get assistance on selecting a loan product or a credit card. The success of such a model depends on the ability to source quality leads at a favourable cost of acquisition.
We believe that the agent-led tech platforms could be an interesting segment like what we have seen as early successes of similar platforms in the insurance distribution space. The tech platforms can lead to higher stickiness for agents and can be highly scalable with high network effect.