After E-Commerce, Can Alternative Lending Be India’s Next Unicorn?

For online platforms that offer loans, future growth lies in the huge market opportunity left by a large credit gap

Getting a “unicorn” status is still considered a holy grail for a start-up. The word “unicorn”, presumably referencing to a rare and legendary creature, refers to a startup with limited established performance record, but with an estimated valuation of over $1 billion.

In the recent era of digital disruption, Flipkart, Snapdeal, Quickr and Shopclues emerged as unicorns and made e-commerce a norm for every Indian household. Other notable unicorns in India include Zomato, Ola Cabs, InMobi and Hike to name a few. In the fintech space however, One97 Communications, which owns Paytm, is the only company that has made to this jeweled list so far.

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Why Alternative Lending is the Next Big Thing

Fintech or financial technology can be divided into three main segments — payments, wealth management and lending. With increasing internet penetration, and growing acceptance around Paytm, the payments segment has become quite ubiquitous.

While wealth management is gaining traction amongst tech-savvy millennials, the lending segment is all set to become mainstream after RBI acknowledged the growing importance of online/alternative lenders.

An alternative lending company is an online platform that offers loans to businesses and individuals. It is called “alternative” since it is not a traditional bank and generally doesn’t operate through a brick-and-mortar or branch network.

Instead, the company uses technology and non-traditional data sources, such as a client’s online footprint, to evaluate creditworthiness and doesn’t necessarily require collateral, making the seemingly daunting loan process much easier and efficient.

The online lending platform is scalable and thus promises reach to the under-banked and unbanked businesses and individuals in every nook and corner of the country.

Whether an alternative lending company will become India’s “next” fintech unicorn remains to be seen. But there are several drivers that make it a near possibility.

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Growing Opportunities

This industry is still in its nascent stage in India. But as it grows, it will see specialisation in terms of solutions for specific verticals.

These would range from student loans, auto loans, home-improvement loans, to mortgages and personal loans for consumer financing for individuals, and from supplier financing, healthcare financing to payroll-related loans for businesses.

The emergence of these verticals will bring maturity and depth in the overall market as alternative lending would become as mainstream as traditional banks.

While the alternative lenders of the developed economies are now maturing and looking to achieve profitability, the lenders in India are focusing on creating awareness among consumers, increasing market penetration and working with regulators to create a viable framework. As they look to grow and achieve scale, they might also start exploring non-traditional funding sources such as asset managers and other institutional sources of capital, beyond banks.

While there is still a long way to go, a $1 billion valuation for an alternative lender in the near future doesn’t seem implausible. According to the valuation guru, New York University’s Professor Aswath Damodaran – “The (young start-up) company’s entire value lies in future growth, but you have little to base your estimate on.”

For alternative lenders, the foundation of future growth expectations lies in the huge market opportunity created by a large credit gap, being favorably supported by regulations and policies. As such, it provides a perfect recipe to feed into the birth of a unicorn.

However, whether this unicorn is able to get out of the womb in the near future depends largely on the right execution by the alternative lenders and the supporting ecosystem.

(Rajat Agarwal works as Senior Director at LendingClub, San Francisco. He has 10 years of experience in credit and capital markets. He is an alumnus of IIT Delhi, University of California Berkeley and Goldman Sachs. Views of the author are personal and do not reflect any opinion of LendingClub. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)