According to a November 2020 report of the Indian Brand Equity Foundation (IBEF), nearly a third of India’s GDP is contributed by 63 million micro, small and medium enterprises (MSMEs) engaged in manufacturing or services. Unfortunately, only 1/6th of these of these MSMEs are able to access credit from formal providers; a 2018 report by IFC — Intellecap estimated this credit gap at a staggering USD 340bn. Innovations that enable easy access to credit and other relevant financial products can help unlock the growth potential of these enterprises, with a big impact on the broader economy.
Existing financing mechanisms are largely based on credit extended by wholesalers/ distributors down the chain or informal financiers; for MSME borrowers, these sources are often insufficient/ unreliable, lack transparency, and come at a higher cost due to the limited balance sheet strength of partners. Institutional lenders have historically limited exposure to this segment due to challenges in accessing, underwriting and monitoring/ servicing borrowers reliably, and in a cost-effective manner, given the lack of reliable data/ formal documentation, and low-ticket sizes. While a crop of new ‘digital’ lenders has tried to address the segment in recent years, the extent of adoption remains low for a variety of reasons.
Rupifi is building a new-age, digitally-embedded finance platform that enables MSMEs to have easy access to appropriate financial products. Their solution addresses the key levers for unlocking this market — product/UX, partnerships needed for a seamless digital journey, and a strong risk management engine. The company’s products, like buy-now-pay-later, and cash advance, provide flexible credit solutions to address MSMEs’ recurring working capital needs, in contrast to the one-off, term loans offered by most lenders. The company is initially targeting the growing base of MSMEs that engage with online platforms — whether as buyers on B2B platforms, or as suppliers on B2C platforms. Rupifi leverages valuable data on MSMEs’ orders, transactions, and payments on the anchor platform, to offer suitable credit products through lending partners. Anchor platforms see value in partnering with Rupifi, since availability of working capital credit for an MSME usually leads to a significant boost in their transaction volume on the platform, which lenders see value in getting access to new customers, while optimising for risk and operating cost.
While the huge market gap clearly indicates the potential to build a large business in the space over the longer term, we are excited about the short-to-medium term prospects as well for a couple of reasons. First, the Covid pandemic has led to a surge in digitisation of MSMEs; with a significant proportion of adopters seeing strong growth, rather than just preservation of business volumes, the value proposition for digitisation has become clear. Second, policy direction and ecosystem-level initiatives, including the licencing of account aggregators (AA) for seamless consent and data-sharing, and the roll-out of the Open Credit Enablement Network (OCEN) framework, can create a paradigm shift in the ability to access, underwrite, onboard, and service customers with smaller ticket sizes.
Rupifi’s founders, Anubhav Jain, Ankit Singh, and Jawaid Iqbal, bring in high levels of skill and experience around all the three pillars of growth — product, risk management and partnerships & scaling — to capture this attractive opportunity. The high engagement model that Rupifi is targeting can not only create a clear edge for underwriting MSME borrowers (given the inherent volatility in business flows and high variance in credit behaviour), but also provide data for deepening customer relationships, and building out a broader, embedded financial services platform. With e-commerce taking strong root across verticals and geographical segments, including those that have been relatively unorganised and informal (small business, agri value chains, services like education and healthcare), the universe of platforms that will seek to embed financial product offerings and partner with players like Rupifi looks set to rise dramatically!