Alternative lending: To overshadow traditional lending in India by 2030

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The growing fintech ecosystem has transformed the lending market in India. The segment is well-positioned to record accelerated growth over the next five years, with alternative lending expected to overshadow the traditional lending market by 2030. The integration of technology into consumer finance, coupled with the fast-rising internet and smartphone penetration in India, has enabled alternative lending providers to reach millions of underbanked and unbanked individuals.

In 2023, the sector will be also driven by factors such as rising inflation and the interest rate environment. The Reserve Bank of India has announced significant rate hikes over the last few quarters, which means that access to traditional credit has become expensive compared to the pandemic period. This is projected to drive more Indians towards alternative, low-cost borrowing options such as the one offered by buy now pay later providers. The emergence of neo-banks, coupled with simplified and automated loan processes, will further aid the alternative lending industry growth over the next five years.

Currently, several players are seeking to tap into the growing credit demand among consumers as well as businesses, in the Indian market. From new-age fintech firms to non-banking financial institutions, the competitive landscape is growing at a rapid pace in the alternative lending segment in India.

CASHe, for instance, is a digital lending platform that caters to the credit demand among salaried millennials. The platform offers short-term loans ranging from INR 1,000 to INR 40,000 to working professionals. FlexiLoans.com, on the other hand, is an online lending platform that caters to the working capital demand among small and medium-sized businesses.

Amid the growing competition in the space, these alternative lending providers are also raising funding rounds to accelerate their growth, by focusing on customer acquisition and loan disbursals strategy.

• In March 2023, Mintifi, the B2B-focused digital lending platform, announced that the firm had raised US$110 million in its Series D funding round, which was led by Premji Invest. Norwest Venture Partners, International Finance Corporation, and Elevation Capital have also participated in the financing round. In addition to expanding its product range, the firm is planning to infuse capital for scaling the B2B payment vertical and dealer management system.
• LoanTap Financial Technologies Pvt Ltd (LoanTap), in February 2023, announced that the firm had raised INR 240 million in venture debt, which was led by Lighthouse Canton. The firm is planning to use the venture debt to support the growth objectives of the firm.

In addition to funding deals raised from venture capital and private equity players, these firms are also entering into mergers and acquisition deals to achieve their growth objectives. LoanTap, for instance, announced that the firm had entered into an acquisition deal with healthcare-focused fintech startup Unofin in March 2023. The acquisition is part of the firm's strategy to expand its presence in the healthcare finance sector. The acquisition is expected to boost the gross loan disbursal amount for LoanTap over the next few years, as the majority of the population in India falls under the uninsured category.

A few of the alternative lending providers are also seeking to expand their geographical presence to drive accelerated growth. Lentra, for instance, announced that it has entered the Southeast Asian market, which lending product launches in Indonesia, the Philippines, and Vietnam.

• The foray into the Southeast Asian region comes on the back of a US$60 million fundraising, which was led by Bessemer Venture Partners, Citi Ventures, and SIG. In addition to Indonesia, the firm has also forayed into the Philippines and Vietnamese markets. With this expansion, it plans to reach US$100 million in annual recurring revenue by March 2024.

The expanding presence of alternative lenders across India presents a significant threat to the growth of traditional lenders, especially in the unsecured loan category. With an increasing number of consumers - including those in Tier II and III cities - turning to online lending platforms, PayNXT360 expects the alternative lending market to overshadow the traditional lending industry from the medium to long-term perspective.

Apart from all of these factors, a favorable regulatory environment is also expected to aid the growth of the alternative lending market in India. In 2022, the Reserve Bank of India updated the digital lending rules to smoothen out the processes, while protecting consumers from unusually high-interest rates of some lenders. This is expected to drive sustainable growth in the segment, while also creating more trust among borrowers seeking short-term loans from alternative lenders.