Credit and Co-Credit: How Fintech Startups Can Seize the $500 Billion Opportunity

Sanjay Swamy and Shivani Kulkarni, who lead financial technology investments at Prime Venture Partners, share the key elements entrepreneurs need to start a fintech startup in India.

Financial services—specifically credit—are key to driving economic growth. The pool of profits available here is also quite large. For example, of the 10 most valued companies in India, three are banks (HDFC, ICICI, SBI). HDFC Bank, after its merger with its parent company, is ranked among the 10 best banks in the world.

Why is lending important to the Indian startup ecosystem?

– India is the third largest fintech ecosystem in the world (after the US and China).

– There are 10,000 fintech startups in India, of which 2,500 (25%) are pure lending startups.

The emergence of co-lending as a business model will be crucial in the near future.

– Digital public infrastructure like Aadhaar and UPI will help Indian entrepreneurs set up large businesses for the next 500 million Indians.

– Artificial intelligence will enable new industries to create several lending “unicorns” focused on healthcare, travel, agriculture and more.

Possibility of “borrowing”

Shivani notes that India’s credit gap creates a huge opportunity for entrepreneurs.

“Currently, the SME credit gap in India is over $500 billion. That is how much money can actually be lent to SMEs (small and medium enterprises), but they don’t have access to that credit. From a consumer perspective, only 40 million people have credit cards. Similarly, personal loans and other products are just the tip of the iceberg,” he explains.

He further explains that entrepreneurs can be divided into two broad categories.

“One is consumer loans and the other broad category is SME loans to businesses. Both of these categories can be serviced through secured and unsecured lending products. Secured loans are where the bank lends against assets. And then there is unsecured loans, where the primary medium is customer data, which is used to assess risk.”

The Role of Data in Credit Decision-Making

Sanjay states, “Data is the new currency in lending, the ability to analyze alternative data sources to assess creditworthiness opens up huge opportunities to serve underserved segments (around 500 million Indians).”

He goes on to explain that lending startups can leverage data from unusual sources—such as utility payments, social media activity, and transaction histories—to build more inclusive lending models, allowing them to reach a broader customer base, including those who don’t have conventional credit histories.

He also shared how startups can build their USP using data.

“From a startup perspective, it’s important to recognize that if you have access to the same data as everyone else, that’s not a competitive advantage, you need to identify and build your moat. It could be access to proprietary data that, when combined with all the other data that exists, will help them underwrite better. Maybe better distribution will allow them to access customers at a lower cost, and access customers not only at a lower cost but with proprietary customer information, which will be a game changer.”

Co-borrowing model

Sanjay and Shivani talk enthusiastically about an area they are keen to invest in: co-lending. They detail how co-lending has become a powerful strategy for startups to scale their operations and effectively manage risk. Essentially, this model allows traditional financial institutions and fintech startups to combine their strengths.

“Co-lending allows fintech startups to leverage the balance sheets and credit issuance experience of established financial institutions, while banks can benefit from the technology and innovative customer acquisition strategies that startups bring to the table,” explains Sanjay.

“This symbiotic relationship not only expands the reach of both parties, but also facilitates access to credit for customers who may otherwise be underserved,” he adds.

Sanjay further emphasizes that co-lending is particularly beneficial for startups as it helps them mitigate the risks associated with borrowing. By sharing the loan amount with a partner institution, startups can manage their capital more efficiently and reduce their exposure to potential defaults.

Shivani explains, “Banks lend to NBFCs. NBFCs, in turn, can lend to fintechs, and fintechs ultimately reach out to the customer, unless the fintech itself is an NBFC.”

He explains that this co-lending structure will ultimately benefit non-bank finance companies and financial technology startups.

“There is a common misconception that NBFCs are valued on their books and have limited access to capital. The perception is that if they have raised Rs 100 crore of equity capital, they can probably raise, say, Rs 200 crore of debt and lend a total of Rs 300 crore. But when they go for co-borrowing, that whole constraint opens up. They can actually lend a lot more and build a much bigger book. This way, they are catering to a lot more customer segments without necessarily taking risks on their own books,” he says.

“You’ll have banks on the back end that become your partners; co-lending is essentially a risk-sharing model. So you take 20% of the risk and the bank takes 80% of the risk. That way, if you put in, say, $100, the bank puts in $400 and you can pool $500 and lend to the customer,” he adds.

These insights provide a roadmap for entrepreneurs to build resilient and innovative businesses that not only meet the needs of their customers but also stand the test of time. By focusing on these key areas, lending startups can position themselves for sustainable growth and impact in the fintech ecosystem.

Timestamps:

0:00 – Opportunities and challenges in lending

7:43 – India’s Digital Infrastructure Revolution

15:33 – Segmentation and opportunities in fintech

26:29 – The Evolution of Co-Lending in India

34:16 – Loan and finance opportunities

46:23 – The revolution in fintech infrastructure and automation