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BW Businessworld

E-tailers Tie Up With Startup NBFCs

The flavour seems to have returned to lending capital to small and medium businesses. Ten years ago private banks like ICICI and HDFC Bank increased their retail lending. In less than two years the global crisis, along with increased defaults in the Indian small business industry, compelled the banks to rein in their lending to the small businesses. Most of the loans, in the early 2009, ended up recovering only 75 per cent of the the total loan value.

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The new age lenders will access at least 100,000 sellers from partnerships; but have to build a credit score to validate lending, writes Vishal Krishna

Now, six years later, guess who has come to the rescue these small businesses? It is the etailers Amazon, Snapdeal and Flipkart that have championed their cause. These small businesses can be furniture retailers, apparel sellers, manufacturers and grocery stores.

Most Indian small businesses are trading shops with revenues of Rs 1 crore or less. Some of them have 90-day credit cycles and cannot depend on payments from clients to keep their business alive. This segment presents an opportunity and a big risk.

Crisil estimates that there are 50 million SMBs in India and only 6 per cent or 3.1 million small businesses have access to loans.

E-tailers have tied up with several Non Banking Financial Companies (NBFC) to provide loans to these cash strapped businessman who have a strong track record in running small family businesses. These NBFCs themselves are startups. Neogrowth, CapitalFirst and Capital Float have all raised money to lend short finance to small businesses. Capital First raised $13 million from investors recently and Neogrowth has raised an undisclosed round from Khosla Ventures. These businesses have a zero collateral-based business model which works on a 30-day credit cycle that will try to replace the bank overdraft facility.

At least the etailers have got the best businesses to partner with them. Albeit it is not a grand design because for them it is all about wooing small businesses sell on their platform. What the etailers do not know is that the sellers will partner with them to avail NBFC loans. But they will use the finace to build their hyper local businesses and may not participate in selling on an online platform.

One must be aware that none of the businesses that these startups will lend to would have a credit score and they are prone to high defaults. The risks involved though is commensurate to the rewards. These businesses, once disciplined to meet their production or cash requirements, would then possibly pay back richly to the small NBFCs. The interest rates charged are usually higher. It is standard bank interest plus 10 basis points; which means the interest hovers at around 23 per cent a year. This should cover the margins of the NBFC and is a game of scale. Sadly the e-tailers alone cannot provide scale for these NBFCs because only 10 per cent of them are really active. The rest focus on hyper local consumption and serve their catchment only. There are 100,000 vendors registered with e-commerce companies.

This industry requires a fillip because it is sometimes the lack of finance that sets this small businessman on a debt trap with the unorganised sector. The lending, by these startups, follows the same principle of micro finance, but on a larger scale. Other players in this market are Lendingcart and SMEcorner. State Bank of India recently tied up with large etailers, such as Amazon and Snapdeal, to serve loans to their sellers' e-tail platforms. Now one may ask if this is a bubble too; unfortunately it is not because the entrepreneur has to pay back the loan. Only when the lending reaches more than a million SMBs will these new age NBFCs have to be careful on the bets that they have taken. By then their businesses will be well capitalised,  meaning they would have to maintain a capital adequacy ratio of 1:1.50 to protect themselves from a collapse. These NBFCs are in a better place for the moment than their e-tail partners.

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e-tailers nbfcs startups vishal krishna