Impact of Demonetisation on Digital Lending Industry


The small and medium enterprise (SME) lending market in India is worth almost $300 billion today and the digital lending segment constitutes 10% of it, approximately $30 billion*. Post-Demonetization in 2017- 2018, Digital lending industry is set to be the growth driver in the SME lending segment, constituting more than 10% of the ever-increasing SME lending market in India.


Demonetisation

The rapid embrace of digital payments followed by the crackdown on cash transactions post demonetisation, is now set to greatly benefit an allied industry: Digital Lending Industry. Digital Payment companies such as PayTM did emerged as the immediate winners post the government’s decision to scrap the high-value banknotes and push for cashless transactions on 9th of November 2016. Then, the Digital lending firms saw a temporary slowdown in borrowings, but industry executives and experts believe that this industry is there to stay and benefit the most. **

Hence, before drawings conclusions on the effects of Demonetisation on the Digital Lending Industry’s, some major reasons contributing to the same are highlighted below:
(A) The total number of card transactions over point-of-sale (POS) saw a whopping increment***

POS

Analysis:
The total number of card transactions at POS saw a whooping monthly growth of 46% in November 2016 and 59% in December 2016. This is majorly because of the monthly 68% increase and 76% increase in number of debit card transaction at POS in November 2016 and December 2016 respectively. Whereas, the number of credit card transactions at POS also saw a nominal monthly increase in 10% and 19% thereon in November 2016 and December 2016 respectively.

The total number of card transactions at POS post demonetisation in the month of March 2017 is 64% higher than the pre demonetisation in the month of October 2016, observing a 104% growth YOY. Similarly, the number of debit card transactions at POS post demonetisation in the month of March 2017 is a whopping 93% higher than the pre demonetisation in the month of October 2016, again observing a 140% growth YOY. Also, the number of credit card transactions at POS post demonetisation in the month of March 2017 is 20% higher than the pre demonetisation in the month of October 2016, observing a 47% growth YOY. The amount of cards transaction follows a very similar trend with a large uptick in the debit card and a nominal uptick in credit card.

Conclusion:
The card transactions at POS machine saw a very encouraging growth, especially for digital lenders who lend against future card transactions at POS.

(B) Digital payments Infrastructure (POS Installation) continues to grow at a steady pace***

point of sale

Analysis:

The installation of POS machine continues to be on rise as per the government mandated installation of 10 lakhs new POS machines by March. An average of 11% rise in the POS machine can be observed.

Effects on the Digital Lending Industry:

1. Reducing risk via massive increase in digital data points: Digital footprints increase as customers are making more purchases through digital wallets or credit and debit cards. This gives rich data points and it will help digital lending players give customised small-ticket loans to individuals or businesses instead of generic ones. This will bring down the risks, especially associated to unsecured loans.

2. Increasing interest on alliances from big banks: Digital Lending firms are seeing increased interest from banks and NBFCs, who are keen on tapping digital data points. For example, IDFC Bank, Yes bank and RBL bank has tied up with other digital lending players. ****

3. Expected higher disbursals post demonetisation: Owing to the higher digital footprint resulted due to increased card transactions at POS and high growth of other digital payments solutions, the digital lending business is set to grow multi fold in India.

“The biggest near-term beneficiary is payments but I think in the next 12-18 months there will be a significant jump in digital lending,” said Bala Srinivasa, partner at venture capital firm Kalaari Capital. ****

4. Big Bet on MCA Business through POS: The card transactions at POS machine saw a very encouraging growth during demonetisation as well as post demonetization (as shown before). Businesses build on loan recovery through POS terminals are to watch out for, as the transaction acumen via POS has received a great boost.

5. Venturing into unchartered territories: Digital Lending firms are partnering with new digital payment solutions like Mobile Wallets, UPI, Aadhar based payments etc, to expand their acceptance ecosystem. These new digital payment solutions are supposedly the future of the payment industry and hence such partnerships are of vital importance.

*Source: Financial Express – “Demonetisation impact” dated January 11, 2017
** Source: TOI- “Digital lending start-ups await their day in the sun” dated December 6, 2016
***Source: RBI Data
**** Source: ET- “Digital lending start-ups feel the heat after demonetisation” dated December 06, 2016