Pioneering Financial Solutions for MSMEs in India: The Product Market Fit (PMF) Journey of Lendingkart
India, a country brimming with vast opportunities, is grappling with a significant obstacle — limited access to capital, particularly for MSMEs. The traditional banking system, known for its stringent requirements, imposes hurdles such as extensive documentation, good credit scores, and collateral, creating a difficult situation for aspiring MSME entrepreneurs who lack the necessary assets.
However, this challenge has sparked the rise of innovative financial solutions that are specifically tailored to meet their needs. One such solution is Lendingkart, a pioneering platform that extends loans to small-scale entrepreneurs. We invite you to join us on this remarkable tale of how Lendingkart found its product market fit and emerged as a prominent player in India’s lending ecosystem.
Beginnings 👣
Hailing from a Rajasthani business family with a legacy of academic excellence, Harshvardhan Lunia pursued his CA and later earned an MBA from the Indian School of Business (ISB). Seeking new experiences, he worked in India and the UK with various banks for a decade. However, he soon realized he couldn’t envision himself stuck in the same job for the next three decades. Due to his family background, Harshvardhan was well aware of the challenges of small businesses. In 2011, he took the entrepreneurial leap and founded a company that provided small businesses accounting, consulting, and loan facilitation services. Although the venture achieved moderate success, scalability became a challenge. Undeterred, Harshvardhan decided to leverage his learnings and embarked on a new venture with the potential for scalability.
During this period, Harshvardhan noticed the rise of the alternate lending industry in the US and the UK. Rather than relying solely on financial statements and tax returns for lending decisions, this approach considers factors such as banking transactions, GST records, geographic indicators, and behavioural patterns related to expenditure and financial discipline. These parameters comprehensively understand an individual’s creditworthiness, character, and financial needs.
Motivated by the success of Lending Club’s IPO in the US and the increasing internet adoption in India, Harshvardhan recognized a prime opportunity to establish an alternative lending business in India. In 2014, he founded Lendingkart with one of his old schoolmates.
Choosing the Customers ✔️
In India, the lending landscape is diverse. Established players prefer to serve large corporations, while regional institutions cater to the bottom of the pyramid, where manual processes limit scalability. Lendingkart chose a different approach by targeting an underserved segment that could benefit from digital solutions. Lendingkart’s typical borrowers are graduates aged 23 to 45, operating small businesses like coaching classes, computer shops, and academic stores. Their banking relationships allow Lendingkart to access their data for informed lending decisions. The company addresses overheads, information asymmetry, and underwriting challenges with digital infrastructure.
Lendingkart’s target audience prefers smaller loan amounts and shorter loan durations, primarily for working capital needs. They are averse to long-term loans that would hang over them for 10–15 years, especially considering future uncertainties. They operate with small profit margins, typically 15–20%, yet efficiently rotate their capital within 90 days for consistent profits. Despite being charged a 3% interest rate for a one-month loan (equivalent to 36% annually), they could earn significantly more than the interest paid. For example, on a one lakh rupee loan, they could earn 30% and pay only Rs. 9,000 in interest.
This justifies their willingness to accept higher interest rates for short-term loans. Furthermore, by leveraging this capital, they negotiate discounts with suppliers by paying them in cash.
Achieving Product Market Fit 🏆
Developing an alternate lending product in India, compared to the US or the UK, presented unique challenges.
In developed economies, small businesses typically have access to desktops, laptops, and exposure to accounting software. Additionally, if you design a single application form in English, you can reach a significant portion of the country’s population. However, small business owners in India often maintain manual records, and the country has 22 official languages.
Fortunately, the penetration of mobile phones solved the hardware problem. In terms of language, Lendingkart recognized the importance of going vernacular. Currently, the company offers services in eight major languages, catering to businesses conducted in different regions, and aims to disburse loans with minimal paperwork within 72 hours.
Lendingkart’s evolution went through many iterations. The team figured out the details of small business owners through yellow pages and intermediaries and ran digital campaigns to generate interest. In the early days, the founders personally engaged with customers, collecting data, underwriting loans, and building relationships, followed by establishing underwriting rules. Initially offering one-month loans, the company gradually expanded to three, nine, and twelve months. Currently, almost 90 % of loan size ranges from Rs. 50,000 to Rs. 10 lakhs, with tenures of 24 to 36 months and interest rates starting from 14–16%, going up to 30% based on the borrower’s financial records.
Lendingkart’s streamlined process converts borrower data into a machine-readable form and uses big data analytics and machine learning algorithms to generate an offer with an interest rate, loan amount, and probability of default. If accepted, borrowers proceed with eKYC and e-signature, with third-party assistance available. This algorithm-driven and data-driven approach has become the norm for Lendingkart, eliminating the need for pre-sanction documents and minimizing direct interaction with borrowers unless requested.
Managing Loan Origination and Default Costs 💰
During the initial 1.5 years, Lendingkart exercised extreme caution and approved only one out of every ten loan applications. This approach resulted in a very low default rate. However, the company’s investors started emphasizing the need to balance default and origination costs. The origination cost refers to the expense of processing numerous loan applications to identify suitable borrowers.
To strike a balance between default and origination costs, Lendingkart had to manage both carefully. This meant neither having a zero-default rate with high origination costs nor approving loans for everyone with low origination costs and high default rates.
Initially, concerns were raised about the lack of face-to-face interactions and the potential for fraud due to the absence of in-person experiences. However, Lendingkart’s track record disproves these worries. With over Rs. 14,000 crores lent in 14,500 pin codes nationwide, the overall default rate has been less than 0.2%. This demonstrates a remarkable repayment rate of 99.8% across the company’s journey.
Harshvardhan says, “Defaulting is typically not a deliberate choice. It is often a result of challenging economic cycles and circumstances rather than a deliberate intention.”
During COVID-19, many small businesses were in bad shape, so Lendingkart took a hit on their profits to ensure providing stability to its customers in the form of provisions. One-time restructuring was also offered. However, in FY 23, the company clocked Rs. 120 crore Profit After Tax (PAT).
Making a Bigger Impact
While building Lendingkart’s lending ecosystem, the team recognized the potential for their digital solutions to be utilized by other institutions in the future.
Harshvardhan says, “We foresaw the ongoing digital transformation and believed our productized or API versions could be valuable to other organizations.”
Lendingkart developed the Lendingkart xlr8 platform, which enables large financial institutions to work with digital platforms like Lendingkart rather than establishing their own distribution channels. This collaboration saves the costs associated with setting up branches and hiring personnel.
Many organizations approached Lendingkart requesting access to their algorithmic underwriting capabilities. Lendingkart responded to this demand by creating another platform — Lendingkart cred8.
The third platform Lendingkart collec10 was born out of the company’s expertise in Pan India collection to assist other institutions with their collection process.
During COVID-19, as people increasingly sought digital and cloud-native infrastructure, personalized service, and engaging experiences, the relevance of digital lending platforms grew exponentially. This led to Lendingkart’s fourth offering — Lendingkart 2gthr, a full-service tech platform encompassing origination, underwriting, and collections. With Lendingkart 2gthr, today, the company collaborates with more than 20 institutions, leverages their capital, and serves a larger customer base. In the process, partner institutions get Lendingkart’s audience base for their small loan offerings.
In conclusion, Lendingkart’s remarkable journey is a shining example of how financial inclusion and digital solutions can revolutionize India’s growth narrative. By steadfastly fostering the expansion of numerous MSMEs, which are pivotal contributors to India’s GDP and employment landscape, Lendingkart has proven to be an indispensable catalyst for the nation’s advancement. We wish the Lendingkart team all the best for their impactful journey.
Lendingkart’s story is the 3rd in IndiaQuotient’s #findingPMF series, where we take a deep dive into successful startups’ journey of finding their Product Market Fit. This term is often thrown around in the world of startups & it’s undoubtedly a challenge many founders face. Achieving PMF is a critical milestone; It does more than just validate a product’s viability, it also sets the foundation for sustainable growth and helps gain competitive advantage.
We’ll be back soon with another journey; until then, you can read Chapter 1 (ShareChat) and Chapter 2 (FRND) of the #findingPMF series or our #pivotseries — Chapter 1 (PagarBook), Chapter 2 (Oakter), Chapter 3 (SUGAR Cosmetics), and Chapter 4 (WebEngage) — and don’t forget to follow us on LinkedIn and Twitter 😃
