Alternating Lending - Advantage of NBFCs - Business Loan Blog - Tata Capital

Alternative Lending Steadily Growing in India

Mar 06, 2017

Finance plays an important role in any business. Funds are required to build assets, run market surveys, manufacture new products, improve existing products, and advertise. Finance is necessary to tap opportunities, take risks, as well as for business growth and expansion.

About alternative lending

With numerous finance options available in the market, the demand for business loans is increasing by the day. Promoters may either borrow from banks or Non-Banking Financial Companies (NBFCs). These NBFCs, also known as alternative lenders, provide finance to those who are not able to obtain a loan from traditional banks due to certain reasons like a poor credit score.

The demand for alternative lending is witnessing a surge due to the numerous benefits such financiers have to offer. They are more flexible in their repayment schedules as compared to banks. Besides, banks have stringent eligibility criteria that entrepreneurs have to fulfill while applying for a business loan. Failure to meet any of the eligibility criteria often leads to the disapproval of the loan. Alternative lenders, on the other hand, have lenient eligibility criteria and require minimal documentation, thus allowing borrowers to obtain a loan quite easily. The demand for loans from alternative lenders is also high due to quicker approval processes. Those businesses in urgent need of cash, therefore, opt for a loan from NBFCs as the duration for loan approval is higher in the case of banks.

Due to such numerous benefits, the alternative lending sector has received an impetus and is further set to grow. Not surprisingly, India is ranked the third largest alternative lending sector, with US and China giving the lead, according to Tracxn, a startup research platform. On an average, 84 companies have set up the base to provide consumer loans. As far as the business loan industry is concerned, India ranks fourth in terms of the number of start-ups set up to offer lending facilities. The US being the leader is followed by UK and China. In India, 34 start-ups have been established so far this year, while in the year 2015, 62 companies were founded in the alternative lending sector. Industry investors have opined that the alternative industry in the country is set to grow even further.

Present scenario

With the recent demonetization announcement by Prime Minister Narendra Modi, the demand for business loans has increased even further. Online portals have reported a 1.5 times surge in demand for loans for business purposes. Small traders and manufacturers, who conduct trade dealings in cash, have lower working capital in hand. Thus, by availing of a loan, the amount is credited to their primary business account. Thus, they are able to make payments to suppliers or any other party through online transfers or cheques. This demonetization move is expected to bring about a surge in demand for such loans till cash is exchanged or regenerated.

Realizing the huge opportunity for growth in the alternative lending sector, many Indian start-ups are now entering into the lending industry. Such a venture is done either through partnerships with existing NBFCs or by obtaining their own NBFC license. With such numerous offerings, individuals will have various options available for borrowing.