The rising tide of cash flow-based loans

The rising tide of cash flow-based loans

Using an app, they submitted their Aadhaar eKYC (electronic know your customer) and permanent account numbers (PANs) and received a loan offer on the app itself

Many small and medium enterprises do not opt for asset-backed loans, the mainstay of Indian banking. They prefer cash flow-based loans to grow their business

In the dusty bylanes of Bengaluru, a quiet transformation is happening that has been missed by banks on the main street. In a rapidly urbanizing city, villages have found themselves encircled by urban sprawl. Houses are tightly packed next to each other. The roads are so narrow that two cars approaching from opposite sides of the road come to a screeching halt and gently inch past each other after much signalling back and forth. A bus entering these lanes looms large as a monster and chokes traffic for 15 minutes.

In these dusty lanes, we met three different entrepreneurs from three different sectors who had one thing in common: they had never taken a loan in their lives, either from a money lender or from a bank, until recently. The tipping point came when Paytm and Payworld approached these individuals and offered them collateral-free instant loans from Capital Float, a non-banking financial company (NBFC) set up to provide unsecured business loans to small and medium enterprises (SMEs). The three entrepreneurs decided to try out this instant loan offer. Using Aadhaar eSign, they accepted the loan agreement. After acceptance, the loan amount was credited to their account within a day. For all three entrepreneurs, this was the first time they had taken a business loan, and this illustrates the growing trend of cash flow-based loans, as compared to asset-backed loans that have been the mainstay of the Indian banking, financial services and insurance (BFSI) sector.

The first entrepreneur that we visited ran a remittance service that helped individuals send money to the bank accounts of their families in other parts of India. In a tiny little shop with a black iron grill that separates the cashier from the customers, this business attracts 100 customers a day who remit an average of Rs2,000 through a service called Payworld. The charges range from Rs10 for remitting up to Rs500, going up to Rs300 for remitting up to Rs49,999. The entrepreneur has to keep a balance with Payworld, and the remittances are deducted from this account. The robust cash flows of this entrepreneur’s Payworld-affiliated business helped Capital Float with the decision to provide payday advance Livingston Tennessee a loan. The entrepreneur was able to use the loan amount to increase his limit with Payworld, and do more business.

A year ago, he had taken the first loan of Rs1 lakh with a tenure of two weeks. These loans helped him double his volumes, until demonetization slowed business down.

So far, he has taken around 17 tranches of such loans, which are credited directly into his Payworld account

This particular segment attracts the highest interest rate of 27% but the entrepreneur, a very tech savvy, 10th-standard pass gentleman, seemed unfazed by the interest rate. In fact, he pushed us to help him increase his credit limit to Rs2 lakh as that would help him do more business.

The second entrepreneur we visited had a thriving business selling vegetables in another crowded inside lane of Bengaluru. His well-stocked corner shop opens at 5.30am and shuts at pm, and has been in existence for 10 years. He sells around Rs40,000 worth of veggies every day at the shop and also supplies Rs50,000 of vegetables daily to 14 restaurants in the vicinity. He was fairly content growing his business without any loan, until Paytm approached him.

Leave a comment