They arrive before the money arrives.
The idea is fresh. The product is built. The money is ready to be deployed. The local team is prepped up. All one needs is to start scaling up the business. Entrepreneurs from China who are plush with funds are busy exploring the Indian market.
Sitting in the library café at Sterling Mac Hotel, a few yards from Diamond District building in Central Bengaluru, Peter Pan is busy strategising his India investment plan.
Pan, founder and CEO of Qianli Inc, a Hangzhou-based lending startup is looking to partner with an Indian lending firm to expand his business. Pan, along with his Indian partner, plans to disburse around Rs.100 crore (USD 13 million) within a year of Qianli’s operations in India. He said the average loan size would be between Rs.5,000 to 20,000.
Chinese entrepreneurs and investors eyeing India as the next big market for their businesses, walk in and out of Diamond District building. The** premises **also houses a startup warehouse hub and is close to a few fintech firms in the locality.
Companies shift focus from Southeast Asia to India
The Chinese fintech firms first explored the Southeast Asian region before stepping on Indian soil. The geographical proximity, cultural similarity and the rising economic development of the countries in the area offered ideal conditions. Besides, compared to some of the Southeast Asian countries, adoption of digital payments and smartphone penetration was lower in India. Plus, the Indian banking system was also well regulated, which barred entry of lending firms that were not serious about their business.
However, countries across SEA are now tightening the noose over the lending business. In April 2016, Malaysia brought in P2P regulation just a year after it regulated the crowd funding business.
In Indonesia, P2P lending regulations were brought in by the Financial Services Authority in Dec 2016 and six months later it also formed a fintech advisory forum to oversee this sector. Similarly, in the Philippines, in December 2015, a framework for a “National Retail Payment System” was brought in.
Pressed by the crackdown in China and parts of Southeast Asia, many are now looking at Indian shores for survival and growth. Even though the market potential is huge in India, the Chinese companies are taking a cautious approach due to the tightened regulations.
In 2017, India received the largest share of Asia’s alternative lending deals at 41%. China was second at 32%, and Southeast Asia followed with 17% of total deals. Overall, China saw a 15% decline in total deals from 2016 to 2017, according to a report by CBInsights, a data analytics firm that tracks startup investment across the globe.
Also, the presence of China’s tech giants such as Ant Financial (蚂蚁金服), JD Finance 9京东金融), New Union Online ( 新联在线) and CreditEase (宜信) which provide financial services such as online lending and financial management, in Southeast Asia, are making it difficult for the smaller ones to sustain.
For instance, in November 2016, Alibaba’s fintech arm Ant Financial invested in** **Thailand’s payment company Ascend Money. Ant Financial bought 45% stakes in Globe Fintech Innovations Inc. (Mynt), a fintech business based in the Philippines. It also took control of HelloPay in Singapore. CreditEase, another leading Chinese fintech firm created an investment fund to invest in growth-stage fintech companies in China and global markets. JD Finance, JD.com’s financial wing established a joint venture with Thailand’s Central Group to provide fintech services.
The big players entered the SEA market either directly or through investee companies. For instance, while lending firm Lufax (陆金所) and CreditEase entered the SEA market through subsidiaries in Singapore, others such as jimu.com entered by partnering with local firms.
Many of the companies were betting on short-term gains rather than long-term growth and were banking on the loosely regulated markets in those countries, an expert noted.
In China, the payday loan concept was popular and many lending firms were charging as high as one percent interest rate a day. So, even if there is a high default rate, there was quick money involved in it. But since it was for short term, borrowers did not mind paying high interest rates.
“The Chinese and the Southeast Asian markets were not regulated. So it worked really well for companies looking for quick growth. Anyone could lend to anyone and at a phenomenal interest rate of 100-200%. That will not and cannot happen in India,” Rajan Bajaj, co-founder of Slicepay said.
And with P2P lending, people invested because the companies promised higher returns than the traditional banks which were paying a mere 1.5-2% annual return. But the bubble burst soon as the lending went uncontrolled and the money was stuck in real estate properties.
Soon, the government jumped in to take corrective action. And many went from China to SEA.
“The Chinese companies which entered Southeast Asia, especially Indonesia, repeated the same mistake they did in China. So the government there tried to regulate and tighten the rules,” Pan observed.
“Hence, many are now playing cautiously with India market.”
Pan believes that such exploitation cannot happen in India as many of the Chinese founders and investors have learnt a lesson and the regulations have weeded out bad players in the market.
Why India is attractive now for Chinese lenders?
Sitting on the balcony of his house in Bangalore, 26-year-old IT professional Varun P, browses an e-commerce portal on his smartphone to purchase a Rs 6,000 smartwatch. Varun neither has a credit card nor the entire sum to purchase the product. But the e-commerce portal had tied up with an alternative lending platform that offers him a credit service. Life could not have been any easier for this millennial who rarely stepped into a bank seeking credit.
The digital lending economy is just picking up. The country is experiencing what China did a decade ago--rising internet and mobile penetration rates. India may overtake China as the world’s leader in fintech service adoption, according to a report by Ernst & Young.
The report indicates that while China currently boasts the highest adoption rate of 69%, its predicted future adoption rate is only anticipated to reach 77%. In contrast, India, with its current 52% adoption rate is anticipated to reach an adoption rate of 80%. There are 400 million millennials in the country who are driving India's mobile revolution. About half of them lack access to credit services. Stratups are now cashing on this opportunity and disrupting the banking system.
“Indian banks have an innovators’ dilemma. They have grown so big that they are busy focusing on the next six months’ target but fail to look at the fast growth and market penetration rate. That is what provides us with opportunity,” Slicepay co-founder Rajan Bajaj said.
While Indian startups are doing their bit, many have attracted funds from foreign companies, particularly from Chinese firms. The Passage is aware that at least 10 Chinese companies are either vying to enter the market or are already doing business here. The companies did not wish to comment as they feared it would attract the regulator's eye.
In the past few months, Chinese microfinance company CashBUS (现金巴士) has invested in Delhi-based Olly Credit, mobile phone maker Xiaomi (小米) has invested in Bangalore-based Krazybee which offers loans to purchase smartphones and laptops, early-stage investor 01VC (零一创投) has put in money in Bangalore-based microlending platform Smartcoin, and lending platform Finup has invested in digital payment platform Slicepay. Besides, Companies like Billion Finance (佰仟金融), Fenqile (分期乐) and P2P platforms like PPDAI (拍拍贷), Shanghai Jia Yin Finance Service (上海嘉银), iTouzi (爱投资, Lexin (乐信), and WeCash (闪银) are exploring the opportunities in India.
“Indian market is much bigger than entire Southeast Asia. Putting all your efforts in one market is easier than investing in multiple smaller markets. Also, the percentage of young people is more than that in China which makes it attractive,” said Qianli founder Peter Pan.
“India’s digital lending space is at a nascent stage and there is not much of competition for now. So we can put in time and effort to understand the market better,” he believes.
In Q2’18, there were a total of six deals in India worth USD 53.6 million, all focused on small and medium businesses, according to CB Insights, a data analytics firm that tracks startup investment across the globe.
Until 2016, China maintained its leading position in the global alternative finance market accounting for 99.2% of the total Asia Pacific alternative finance market and an estimated 85% of the total global market with USD 243.28 billion raised in mainland China alone, according to a University of Cambridge report.
Alternative business funding includes marketplace/peer-to-peer business lending, equity-based crowdfunding, invoice trading, marketplace/peer-to-peer consumer lending, marketplace/peer-to-peer property lending among others.
However, China’s alternative lending market has seen its share of Asian deals shrink year-over-year since 2014. This was mainly because of the opportunities available in other economies clubbed with oversaturation in China lending market. A CB Insights report says Chinese alternative lending companies saw a 15% decline in total deals closed between 2016 and 2017.
In 2017, India received the largest share of Asia’s alternative lending deals at 41%. China was second at 32%, and Southeast Asia followed with 17% of total deals.
After Malaysia and Philippines, regulations follow suit in India
According to South China Morning Post (SCMP), there were 3,500 P2P businesses in 2015 in China. But since June this year, 243 online lending platforms have gone bust following a crackdown on shadow banking aimed at reducing risks in the financial system.
The very regulations that sounded the knell for many P2P lenders in China could save the day for those in the business in India. Unlike in China, where regulations came after the market had taken off, the regulations here are being put into place before the market matures.
Much of the Chinese VC money has also flown into established wallet space or into lending platforms that are targeting millennials who could get used to the credit service market.
All non-banking financial entities are required to register with the central bank. The RBI regulations say, if companies are found to be conducting non-banking financial activities, such as lending, investment or deposit acceptance as their principal business, without seeking registration, the Reserve Bank can impose penalty or fine on them or can even prosecute them in a court of law.
RBI has also created a provision for setting up an ombudsman which takes note of all the complaints against such firms.
“In India, in the lending business, one cannot charge more than what the credit card companies charge, i.e., not more than 36-42% interest rate. While it is not explicitly said, but that is how it is here in India,” Balaji of Slicepay said.
“If a person in rural India can have access to credit at 26-28% annual interest, there is no way RBI will allow an urban consumer whose credit scores are well maintained, to be charged higher.”
As per regulations from the Reserve Bank of India (RBI) every P2P company should have a net owned fund of not less than rupees twenty million. The total loans taken by a borrower at any point of time, across all P2Ps, shall be subject to a cap of Rs 10,00,000 and exposure of a single lender to the same borrower, across all P2Ps, shall not exceed Rs 50,000. The maturity of the loans shall not exceed 36 months.
Also, P2P companies in India need the ‘Certificate of Registration’ (COR) that the government started giving out in May this year.
Historically, the financial regulations have initially been tighter, and are loosened later. But that becomes essential for platform’s risk development. It is important because if initially anything wrong happens, the whole perspective of the market goes negative.
Analyst Harish H V, former Partner India Leadership team, Grand Thornton opines that there are too many small and big startups that are entering the field.
“Everyone cannot do everything, there is enough space for multiple players. However, they need to stay focused. Regulations are not affecting the market in the long run,” he adds.
(With additional inputs from Meeta Ramnani.)