“One of the keys for Indifi has been neutralising the pre-existing biases and assumptions successful MSME lending. That is helping america get a larger stock of women-run MSMEs and cater to high-risk MSMEs without overmuch risk,” Indifi cofounder and CEO Alok Mittal
MSME lending successful India remains the large anticipation for a big of integer lending startups. Even arsenic fintech startups and ‘super apps’ person flocked to the lending aisle to enactment up flagging gross from different segments, the likes of Indifi and others are banking connected their competitory vantage and MSME-specific hazard models to borderline retired the caller competition.
Founded successful 2015 by Mittal, Siddharth Mahanot. and Sudeep Sahi, the startup claims to person deed its archetypal profitability milestone successful February 2022. Sahi discontinue the institution successful 2017 and is presently the laminitis of a payroll absorption company, Skuad.
Indifi reported a nett profit of INR 5.1 Cr successful FY23 arsenic compared to a nonaccomplishment of INR 32.8 Cr successful FY22, its maiden nett for the afloat year. Revenue from operations much than doubled to INR 198 Cr successful March 2023 from INR 96 Cr, and Mittal is assured astir maintaining this maturation complaint successful FY24 arsenic well.
This makes it a uncommon startup successful the fintech space, arsenic 40 retired of the 48 fintech unicorns and soonicorns posted losses successful FY22. This includes immoderate nonstop rivals to Indifi too the likes of CRED, BharatPe, PhonePe Paytm and the ones who besides lend to merchants.
With rising digitisation and the perpetually increasing recognition needs of MSMEs, the integer lending assemblage has emerged arsenic a captious conception wrong fintech. India is estimated to beryllium location to much than 63 Mn MSMEs, arsenic per the MSME ministry data.
Gurugram-based Indifi’s maturation successful the past twelvemonth has besides attracted investors, adjacent amid the ongoing backing winter. The startup raised $35 Mn successful a Series E circular successful June this year, taking its beingness backing tally to implicit $120 Mn.
Now, equipped with this capital, Indifi and Mittal are acceptable to treble down connected the strategy that has unlocked profitable maturation successful the past 2 years.
How Covid Changed Indifi
First, immoderate discourse connected wherefore integer lending emerged arsenic thing of a victor successful the micro, tiny and mean enterprises (MSME) abstraction aft Covid. Before 2020, astir MSME lending was led by banks and NBFCs, but arsenic much MSMEs adopted integer tools during the pandemic, integer lending players leveraged the caller information that was created to standard up.
The RBI’s 2022 study connected ‘Trend and Progress of Banking successful India’ noted that successful the post-Covid period, recognition maturation to MSMEs successful the concern assemblage was distinctly higher connected a year-on-year basis, arsenic good arsenic successful examination with recognition maturation to ample industries.
Mittal recalled that Indifi beauteous overmuch restarted the concern successful June 2021 astatine astir the aforesaid level that it had near it successful March 2020 erstwhile the pandemic began. “In those 15 months, our hazard models got stronger. When you spell done these down cycles, the antagonistic information of the rhythm starts to travel into your models,” Mittal told Inc42.
The cofounder and CEO besides believes that the marketplace conditions and the improved hazard models from the Covid epoch helped streamline postulation capableness and processes for Indifi, arsenic it did for astir of the different players.
Competing with the likes of Incred, Yubi, Lendingkart, Kinara Capital among a big of different players, Indifi chiefly provides unsecured word loans and recognition lines to MSMEs. The exemplary involves lending straight from the NBFC arsenic good arsenic a marketplace for different lenders.
Indifi’s absorption is wholly connected the MSME people and retail merchants, whereas competitors person occupied different niches. Kinara Capital for lawsuit is focussed connected manufacturing, whereas ofBusiness has built its lending play astir commodity proviso chains arsenic good arsenic manufacturing.
This allows the startup to not lone get nonstop gross from involvement connected loans but besides done origination and postulation fees from third-party lenders. The diversification successful the gross watercourse helps Indifi enactment up the bottommost line, but for Mittal and Indifi, the existent maturation communicative has travel successful the past 2 years amid the pandemic.
Since July 2021, Indifi claims to person quadrupled its concern connected a monthly ground successful presumption of assets nether management. To date, Mittal claims Indifi has disbursed much than 89,000 loans, with a cumulative worth of implicit INR 4,100 Cr.
The institution claims to person an mean summons size of INR 5 Lakh crossed the borrower base. A bulk of its customers (63%) are from metro locations.
Mittal claimed that Indifi targets and maintains a 2.5%-3% complaint of gross non-performing assets (NPAs). But however precisely person Indifi’s hazard models evolved successful the past 2 years and what does the laminitis mean erstwhile helium talks astir antagonistic information from the Covid era?
Rewriting MSME Lending Risk Models
To commencement with, we each cognize that Covid created a batch of accent for MSMEs, resulting successful a melodramatic summation successful their recognition needs. The authorities schemes guaranteeing recognition for MSMEs are a cardinal indicator of the request successful the marketplace successful mid-2020.
But Mittal emphasises that immoderate recognition slowdown doesn’t impact each MSMEs successful the aforesaid manner.
“We started to get information astir what benignant of MSMEs are much susceptible to accent comparative to others. We modelled the accent effect of antithetic MSMEs differently. In a mean case, a peculiar MSME operates successful a definite fashion, but is it resilient to stressful situations? That is the caller magnitude we added to our models,” the Indifi CEO, who was antecedently the managing manager of Canaan Partners, added.
While conventionally, underwriting has been done with a presumption to instrumentality a yes oregon nary determination connected a peculiar application, Mittal said Indifi wanted to delve heavy into conception and class data.
“We tin instrumentality a antithetic approach, a much proven attack of knowing what is the implicit level of hazard that this (any concern oregon category) represents. If idiosyncratic represents a 1% hazard of default, past I tin terms it otherwise for that lawsuit than idiosyncratic who represents a 5% hazard of default,” helium added.
Indifi’s Category-Specific Risk Models
Breaking this down, Mittal reveals the 3 cardinal elements that are factored into the lawsuit models:
- The Extent Of Digitalisation Of The MSME
- How Underserved The Category Is
- How Indifi Can Fill The Gap
“Strategically, we person chosen to beryllium successful the unserved to underserved MSME zone. We don’t privation to spell aft the aforesaid request that banks are going aft due to the fact that we cannot vie connected pricing there,” helium added.
The rationale is that this is typically the customers and categories that person recognition concerns. Take for illustration the edifice business, wherever moving superior needs support increasing arsenic the concern scales and the complaint of nonaccomplishment is precise high.
Banks and NBFCs don’t typically make business-level models, the CEO claimed. “They make surface-level models but not concern endurance models. So, those are the halfway gaps that we look at.”
Something similar 15% of restaurants spell retired of concern each year, helium claimed. Indifi claims to person built an industry-first exemplary to foretell whether a edifice volition beryllium live successful 18 months oregon not. However, the segment-level risks precise often bash not manifest themselves successful currency travel projections.
“So, we inquire deeper questions — which micro marketplace are they in? What cuisine are they serving? What is the terms point? What are customers saying astir them? These extremity up being much predictive of aboriginal show and astir importantly endurance than the existent currency flows,” Mittal told Inc42.
The different large differentiation is, of course, the tech platform, wherever Indifi has automated immoderate onboarding processes for caller customers and wherever it feeds successful marketplace information arsenic it is evolving for assorted MSME categories. Besides customer-level data, Indifi leverages caller information streams.
According to Mittal, what helps integer lending companies is that they are much agile successful adopting caller processes and exertion specified arsenic automating underwriting processes, KYC and managing lawsuit contactability. ”Banks are not adjusting for much information arsenic quickly, and determination are biases successful the mode they attack peculiar categories,” the Indifi main added.
Similarly, different MSMEs person circumstantial risks that alteration from class to category. For instance, successful the MSME question business, the hazard is astir what the moving superior volition beryllium utilized for due to the fact that often it is utilized for idiosyncratic expenses specified arsenic existent estate. In ecommerce, determination are pricing, discounting and commoditisation risks.
“These questions alteration crossed segments, and hence, our solution to them varies depending connected the answer. And these answers are past baked into our hazard models. For instance, we cognize that contactability of entrepreneurs has improved, truthful we usage the grade of contactability information to measure risks,” the cofounder added.
Technology adoption for lawsuit verification and KYC includes paperless onboarding and continuous KYC compliance. Indifi uses a risk-based attack (RBA) to code and negociate identified risks, and this successful crook has improved collections arsenic well.
When it comes to collections, Indifi has an in-house squad and uses betterment agencies crossed states. “We person implemented a tiered strategy based connected postal codes, which person been configured done an AI/ML-based scoring motor done the investigation of thousands of our customers. By categorising regions based connected their capableness and hazard profiles, we are amended equipped to allocate resources wherever they are astir needed.”
Gaining With Financial Inclusion
The category-specific attack has paid disconnected for Indifi truthful acold successful presumption of gross growth. For Indifi, the attack has yielded favourable outcomes for lending to businesses tally by women entrepreneurs, different niche and underserved category.
Mittal believes that the unfavourable outcomes typically seen astir lending to women entrepreneurs are mostly owed to the bias that women entrepreneurs look contiguous from accepted lenders.
Financial inclusion is simply a large nonsubjective for astir of India’s MSME lenders, arsenic precedence assemblage lending by banks and NBFCs has not managed to adjacent the recognition spread for businesses tally by women entrepreneurs.
“If you look astatine the wide MSME market, astir 20% of the businesses are tally by women but ceremonial recognition penetration is little than 10%. If you instrumentality microfinance out, which is the superior women-centric exemplary successful MSME lending, the concern is adjacent worse,” according to the Indifi CEO.
Women MSME entrepreneurs find it harder to rise superior than their antheral counterparts due to the fact that determination are biases successful the accepted banking and NBFC system.
“So, successful our case, what we person done is instrumentality that adaptable retired truthful our hazard models don’t person a sex variable. And conscionable by doing this, we’ve been capable to level the playing field. In our case, 20% to 25% of borrowers are women-run MSMEs,” Mitttal added.
Digital MSME lending players person go captious enablers of the system by supplementing the slope and NBFC recognition lines. Despite respective startups competing for the pie, Mittal believes MSME lending is severely underpenetrated.
To scope caller categories of businesses, Indifi is eyeing lending products successful proviso concatenation finance, secured loans, and adjacent non-lending usage cases specified arsenic insurance, payments and wealthiness tech wherever there’s a existent accidental to disrupt the MSME space.
As per Inc42’s ‘State Of The Indian Fintech Report Q2 2023’ report, the lending tech marketplace accidental volition turn astatine a 22% CAGR from $270 Bn successful calendar twelvemonth 2022 to $1.3 Tn by 2030.
Mittal is assured that the marketplace has much than capable country for the big of competitors. His bullishness seems tenable from a fiscal inclusion lens. Only 15% of the MSME recognition request is being fulfilled by each the players combined, the CEO added.
For Indifi, this country for maturation means much opportunities for each players to lick the fiscal inclusion problem. Ultimately, a thriving MSME assemblage volition assistance each players successful the fintech space.
The station How Indifi Honed Its Indian MSME Lending Playbook For 2X Revenue Growth In FY23 appeared archetypal connected Inc42 Media.