Facebook Aims To Close India's SME Credit Gap. But Is It Enough?
Facebook's SME credit is more a marketing initiative than a digital lending push.
Facebook Inc. will offer its platform to India's digital lenders for extending loans to small businesses. But the move, according to industry experts, would do little to push online lending in the country, unless the social media giant does more than just marketing loans.
Last Friday, Facebook announced that it will offer loans to small businesses which advertise on its platform through a non-bank lending partner Indifi Technologies Pvt. The loans, it said, will be collateral-free and range from Rs 5 lakh to Rs 50 lakh at an annual interest rate of 17-20%.
The partnership, according to Alok Mittal, managing director and chief executive at Indifi, is limited to Facebook marketing Indifi's loan products to potential customers. "Facebook maintains an arm's-length distance from the lending process, they are helping in marketing and whoever is interested comes to our platform," he said in a text response to BloombergQuint.
The programme will be open to businesses registered across 200 cities and towns in the country, Facebook said in the statement.
India was chosen as the first country to launch the initiative as its 2020 'State of the SMB Survey' showed that close to a third of small businesses in India will expect cash flow challenges in the coming months, said Archana Vohra, director of small and medium businesses at Facebook India, in an emailed response to BloombergQuint's queries.
There are 200 million businesses, mostly small businesses that use our apps every month to reach their customers. Of these, a significant share are in India. For instance, we support 15 million WhatsApp for Business App users in India. We are deeply committed to creating a conducive environment for small business growth in the country.Archana Vohra, Director, Small and Medium Businesses, Facebook India
The Facebook-Indifi Partnership
Facebook's partnership with Indifi is the first of many such, as the social media firm looks to forge similar alliances with other digital lenders to expand its scope of lending to small and medium enterprises in the country.
This initiative is a not-for-profit arrangement with Indifi, the lending partner. We plan to bring more lending partners on board with time to make business loans more easily accessible to small businesses.Archana Vohra, Director, Small and Medium Businesses, Facebook India
But for now, Facebook will work as a marketing agent for Indifi, which is its sole lending partner in India.
"The partnership with Facebook is a pure marketing alliance, with a co-created program, and will provide the width and depth of access to a large base of small and medium enterprise clients across multiple segments," Aditya Harkauli, chief business officer at Indifi told BloombergQuint.
For Indifi, Facebook is not its only partner. It has similar tie-ups with other online marketplaces and lenders. These include partnerships with Flipkart, Amazon, Zomato, Swiggy and Yatra, among others. For lending, it has partnered with IDFC First Bank Ltd., and non-bank lenders such IIFL Finance, InCred Financial Services, Fullerton India and Manappuram Finance.
The partnership model, Harkauli said, helps the lender build scale and strengthen its relationship with customers. "Through Indifi, borrowers will also be able to choose the best deal from our other partner lenders through a unified interface," he said.
On Facebook, Indifi would provide term loans, for tenures ranging between 12 and 36 months, from its own balance sheet and that of its partner lenders. No processing fee will be charged to borrowers availing loans via Facebook.
SME borrowers would need to give details such as a self-attested proof of identity, proof of address and a photograph to complete their Central Know Your Customer to apply for loans via Facebook. The loan approval could take anywhere between 12-48 hours.
The underwriting, however, would solely be done by Indifi based on data from credit bureaus. If the borrower is new to credit, it will depend on their past bank statements and income tax return filings.
"No data, including the private data, is exchanged between the two partners, Facebook and Indifi. Any data used for underwriting the borrower is obtained directly from the customer and with their prior and explicit consent," said Harkauli.
The Road Ahead
According to Asim Parashar, partner at PwC India, Facebook may need to look at going beyond just marketing loan products.
"Unless it evolves into helping partner lenders with alternative data on the activity of small businesses within regulatory guidelines, or offer capital support, these lending partnerships will make little sense," said Parashar
Still, the Facebook-Indifi partnership has managed to get the attention of other lenders catering to the SME segment.
"Just the MSME credit gap in India—valued at over $300 billion—is bigger than the GDP of many countries! Facebook stepping in to promote small business lending in India brings much-needed attention to this underserved market," said Hardika Shah, founder and chief executive of Kinara Capital, an SME-focused non-bank lender.
Facebook will also benefit from the growing digital adoption by the micro, small and medium enterprise sector after the pandemic, she said.
The SME lending initiative would also allow Facebook to gather credit data of merchants advertising on its platform, apart from increasing the penetration of such loans, said Shachindra Nath, executive chairman and managing director at U GRO Capital.
While some lenders see merit in partnering with Facebook, others are convinced that such a partnership may not serve much purpose.
Santanu Agarwal, deputy chief executive at Paisalo Digital, said a lending tie-up with Facebook may not be suitable for lenders focused on new-to-credit small businesses. "Besides offering a marketing touch point, the platform does not help with any additional data to analyse these businesses," he said.
Also, in its current form, the lending partnership does not focus much on small-ticket loans below Rs 5 lakh, and may not be a good source for acquiring potential micro-business borrowers in rural and semi-urban areas, said Agarwal.
Nath of U Gro Capital raised similar concerns.
As a fintech lender, we look for partners that help us understand our customers better, which eventually also improves our credit underwriting. Facebook would need to provide us meaningful data for the partnership to serve a purpose beyond marketing.Shachindra Nath. Executive Chairman and Managing Director, U Gro Capital Ltd.
A Risky Proposition?
Even as Facebook's initiative helps deepen the SME lending market, lenders may need to tread with caution when it comes to sourcing customers from social media.
"Social media is rife with fake sellers and merchants, and without proper verification of genuine businesses and strong credit underwriting, giving loans to SMEs advertising on social media may become a risky proposition," said Parashar.
Also, given these are unsecured loans and customers are being sourced via social media, it is important that the lender has a proper channel for recovery, he said.
Besides, lending via social media also reduces physical interaction between the lender and the borrower, said Agarwal of Paisalo Digital.
"Lending to SMEs in India, which typically do not have an adequate credit history, require a high-technology, high-touch model to support loan underwriting," Agarwal said. "Without proper physical verification, the lender could be taking an unnecessary risk in hopes of growing its disbursements through social media."
But Facebook India's Vohra is confident the move would fuel growth in the sector.
"The goal of the small business loans initiative is to make business loans more easily accessible to our small business advertisers. Access to timely capital can unlock massive growth opportunities for the sector," she said.