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Embedding finance for inclusion

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CreditHaat—making distribution of financial services: “targeted, simple, and effective”

Posted on by MSC

This blog is about a startup under the Financial Inclusion (FI) Lab accelerator program’s fifth cohort. The Lab is supported by some of the largest philanthropic organizations across the world – Bill & Melinda Gates Foundation, J.P. Morgan, Michael & Susan Dell Foundation, MetLife Foundation, and Omidyar Network.

The FinTech market in India is estimated at USD 31 billion in 2021, around 6% of the overall financial market valued at USD 500 billion. Over the next five years, the FinTech market will grow annually at 22% and become more mainstream than today.

Lending FinTechs comprise 16% of the 6,300 odd FinTechs countrywide. Many try to cater to the sizeable unmet credit demand of almost USD 200 billion within India’s micro, small, and medium enterprise (MSME) sector. FinTechs in this highly contested space differentiate themselves based on the efficacy of their digital credit offering to the underserved.

According to the Reserve Bank of India, digital loans increased twelvefold to INR 1,41,821 crore (USD 18.3 billion) from FY 2017 to FY 2020. The share of non-banking financial companies (NBFCs) in the digital lending ecosystem increased from 6.3% in FY 2017 to 30.3% in FY 2020. The increase can, in part, be attributed to many new-age FinTechs tapping into the loan books of NBFCs to funnel credit to last-mile customers. Despite this tremendous growth, digital lending comprises of just around 1% of the total lending in India, with private commercial banks still dominating the space.

Credit is not distributed equitably in India, especially among underserved and unserved populations. At the end of 2021, more than 50% of Indians remained credit unserved. This customer segment lacks formal credit history, making it difficult for traditional financial institutions to analyze their credit behavior. This segment is known as “credit invisible.”

CreditHaat has identified the following three significant gaps in the distribution funnel of credit product workflows:

Figure 1: Gaps in the credit distribution funnel

The light bulb moment

Tanuj Sinha, the founder of CreditHaat, is an entrepreneur who investigates market gaps and creates innovative and scalable solutions to address them. His previous startup, Finlok, influenced him to develop the idea of CreditHaat. Finlok was a digital platform that provided financial services to the traditionally underbanked customer segment. It was based on a chit fund—a saving and borrowing financial instrument in which a group of subscribers contributes a fixed monthly amount for a set period, and members receive returns and take loans based on their contributions. As Finlok grew, Tanuj identified a large customer base keen on availing credit products.

Due to the limited visibility of digital lenders, clunky user interfaces of mobile applications, and complex documentation processes, these customers could not access the right credit providers and navigate the loan application process. Tanuj identified the broken distribution chain for credit products as a significant gap that needed urgent attention. He created a digital credit marketplace solution to bridge this gap, which matches potential borrowers from the credit-invisible segment with relevant credit providers.

Further, the exciting opportunity and potential to make a large-scale impact attracted Awdhesh and Archana to join the core team. Before joining CreditHaat, Awdhesh worked with PaisaBazaar, where he was part of the growth team, and Archana has worked with Bajaj Finance and Digit Insurance previously.

Figure 2: The CreditHaat team

What does CreditHaat do differently?

The CreditHaat platform has created a comprehensive loan marketplace with a simplified lending funnel to bridge the gaps outlined in Figure 1. The platform has registered 800,000 users and has disbursed more than 37,000 loans worth INR 250 million (USD 3.3 million). The focus is on handholding customers through the lending funnel while ensuring that they match with the right lender at the best possible interest rate to prevent drop-outs. The customer can find a suitable lender and complete the journey with operational support from the back-office team, as outlined in Figure 3 below.

Figure 3: The CreditHaat lending model

The loan ticket size ranges from INR 2,000 to INR 1 million (USD 26 to USD 13,000), with tenures ranging from 62 days to five years. CreditHaat uses several channels to source customers to cater to different segments and preferences. They include fully digital acquisition and assisted acquisition through local partnerships (like business correspondents) and on-the-ground field staff for digitally inactive customers. The platform also captures additional customer data, such as demographic and income patterns, to create user profiles and personas. CreditHaat uses this data to gather insights and predict customers’ financial behavior and potential credit needs. This information helps lending partners when designing credit products for the credit-needy segment.

Impact on the low- and moderate-income (LMI) segments

CreditHaat primarily caters to customers from the LMI segment. It acknowledges the unique challenges these customers from less developed geographies grapple with. Nearly 70% of its current customer base has a total monthly household income of less than INR 25,000 (USD 325) and resides in non-metro cities. The focus is to get the right product-market fit so that customers can reach the right lender that offers them a suitable credit product.

The team believes in simplifying access to credit. It also provides an assisted model involving field agents called “Sahayaks,” who handhold customers throughout the onboarding process till disbursement.

Support from the Financial Inclusion lab

CreditHaat wants to expand its partnerships-based acquisition model by onboarding aggregators in the financial inclusion space. It intends to use the aggregators’ agent network and reach out to the target LMI customers. MSC and CIIE.CO supported the startup by developing a strategy to partner with aggregators, such as BC Network Managers (BCNMs), cooperatives, microfinance institutions (MFIs), and farmer producer organizations in its target geographies of tier 2 and tier 3 cities.

MSC developed a detailed approach for CreditHaat to target suitable aggregator partners. The CreditHaat team can use it to prioritize and onboard strategically relevant aggregator partners to enhance its visibility and outreach further among the target customer segments.

The future

CreditHaat has successfully navigated the challenges of building a startup over the past two years by managing available resources efficiently. With multiple partnerships already in the pipeline and the team’s indomitable spirit, its goal is to reach 5 million customers by July, 2023.

As a part of its long-term goal, the startup plans to diversify its product suite by offering investment, savings, and insurance products via its digital platform. CreditHaat aspires to add more aggregator partners to mobilize their existing field force and serve much-needed small-ticket credit products to LMI customers.

This blog post is part of a series covering promising FinTechs that make a difference in underserved communities. These startups receive support from the Financial Inclusion Lab accelerator program. The FI Lab is a part of CIIE.CO’s Bharat Inclusion Initiative is co-powered by MSC. #TechForAll, #BuildingForBharat.

GreyMatter: Delivering impact to farmers at the last mile

Posted on by MSC

GreyMatter is a startup under the Financial Inclusion (FI) Lab accelerator program’s fifth cohort. The Lab is supported by some of the largest philanthropic organizations worldwide—the Bill & Melinda Gates Foundation, J.P. Morgan, Michael & Susan Dell Foundation, MetLife Foundation, and Omidyar Network. MSC is a partner to the FI Lab​,​ part of CIIE.CO’s Bharat Inclusion Initiative.

As per the National Statistical Office’s (NSO) latest report, 31%[1] (93.09 million) of Indian households depend on agriculture as their primary source of income. Around 82% of these households are small or marginal, of which almost 70% of households spend more than they earn to meet their basic needs. This pushes them into a vicious cycle of debt—even for basic needs, let alone an emergency. The NSO report further warns that more than 50% of agricultural households are indebted, and the numbers continue to rise. Alarmingly, farm debt has increased by 58% in the last five years. The average outstanding loan per household stands at INR 74,121 (~USD 988) in 2018, compared to INR 47,000 (~USD 627) in 2013.

Figure 1: Average indebtedness per agricultural household in India

NSO’s report states that medium and large farmers took 69.6% of outstanding agriculture loans from institutional sources like banks, cooperative societies, and government agencies. A limited number of small and marginal farmers (SMFs) availed of such loans. The remaining SMFs borrowed money from informal sources like local moneylenders or friends and family. Respondents cited several reasons for availing of loans from informal sources—the farmer-applicants were unqualified to borrow from formal institutions, the processes were too lengthy, and interest rates against MFI-based loans were too high.

What does GreyMatter wish to solve?

Every day, SMFs in India battle multiple challenges—access to finance is just one among many issues. GreyMatter currently provides them access to finance and quality agri inputs, and is working towards helping them with other phases of the value chain.

GreyMatter’s current work focuses mainly on solving issues farmers grapple with during the initial phase of every crop season, as shown in the figure below.

Figure 2: Areas that smallholder farmers need assistance with

Upaz—from an idea on paper to its implementation as a unique product

These challenges compelled IIM Indore alumnus and Chartered Financial Analyst Neetesh to take matters into his own hands. He had been in the industry for more than 11 years and was associated with the OneAcre Fund before starting GreyMatter.

The industry largely believes smallholder farmers struggle the most with inadequate access to affordable formal finance, which hinders their growth. However, this statement is only partially true. Even if farmers get their hands on formal credit, they often fall prey to local agri-input traders who trick them into buying low-grade agri-inputs for a higher profit margin. If the farmers protest, the traders refuse to supply agri-inputs. Here, the farmers have almost no bargaining power and accept whichever agri-inputs the trader sells them.

Moreover, farmers lack suitable guidance and struggle to grow healthy crops. Unhealthy crops lead to a lower-than-estimated yield, further lowering their income from selling the produce. Since the farmers earn less, they find it difficult to pay their loan installments in full, which pulls them into a—largely informal—debt trap. This is a textbook example of the “domino effect,” as represented in figure 3.

Figure 3: The “domino effect” in smallholder farming, which leads to accumulated debt

This segment specifically needs effective interventions throughout the entire value chain. As shown in figure 2, these farmers need help with access to formal finance and access to quality agri-inputs alike, up until they sell their produce. A bid to solve this problem spurred Neetesh to create Upaz. The product is based on the buy-now-pay-later (BNPL) model, enabling smallholder farmers to access quality agriculture inputs at the best possible prices through affordable financing.

It was important for GreyMatter to ensure that the farmers use the funds only to generate income through farming and do not divert them for personal consumption. The NSO report notes another disturbing feature that only 57.5% of the total loans that respondents availed during the survey were explicitly used for agricultural purposes. This moved GreyMatter to provide in-kind credit to farmers in the form of agri-inputs instead of cash. The total loan amount is divided into six-month EMIs, which the farmers repay during the same crop season. The startup’s offering makes it convenient and affordable for farmers to purchase good-quality agri-inputs using a formal loan process that creates a credit score for them in the background.

GreyMatter employs an engine that recommends the right amount of agri-inputs for its users based on their land size and the crop type. Under the Upaz model, farmers can choose from an array of land size-based packages that apply to them, curated specially for a particular land size, which considers the region, soil types, and other factors that would determine different types or quantities of agri-inputs. Moreover, these packages are customized to fit both the crop seasons—Kharif and Rabi.

Figure 4: Example of different packages offered to smallholder farmers under Upaz

First, the farmers select a suitable package. Then a field officer places a collective order for agri-inputs on behalf of all the farmers in a particular panchayat or village. Within a few days, the company delivers the order at a pre-decided location in the village, which all the farmers can access. GreyMatter’s field officers then distribute the agri inputs equitably among farmers based on their orders.

Currently, GreyMatter procures its agri-inputs from national and state-level distributors. As it adds a substantially higher number of farmers to its network, it plans to procure products directly from manufacturers, as it could then place higher volumes of orders. This will lead to a further reduction in the unit prices of different agri-inputs.

What sets GreyMatter apart from other agri-commerce players out there?

Figure 5: Factors that differentiate GreyMatter from other service providers in the agricultural sector

Upaz can cater to different types of farmers who may have varying needs

Figure 6: Three use-cases where GreyMatter can add value to farmers

Support from the FI Lab

The Lab has offered a holistic support package to GreyMatter, ranging from mentor hours and grant capital to field studies led by financial inclusion experts in consumer and market insights. The support helped GreyMatter understand its users and their scope of usage better to build a more resilient, robust, and impactful solution.

The impact made till now and its vision for the future

GreyMatter has been operational since October, 2021. Currently, the service is live in the states of Bihar and Uttar Pradesh, with a direct impact on the livelihoods of more than 2,500 active users in its service network. However, the impact can be categorized further into the following:

Figure 7: Classification of the impact made by GreyMatter

Currently, GreyMatter is on track to expand to more than 240 villages in India, engaging a total user base of 10,000-plus smallholder farmers. While the startup is currently powered by only one financing partner, it will onboard a few more banks and non-banking financial companies (NBFCs) as financial partners. By 2024, GreyMatter intends to extend its services to 700,000-plus farmers like Bhagwan Singh, Avdoot Kumar, and Hemlata in India.

This blog post is part of a series that covers promising FinTechs making a difference for underserved communities. These startups receive support from the Financial Inclusion Lab accelerator program. The Lab is a part of CIIE.CO’s Bharat Inclusion Initiative and is co-powered by MSC. #TechForAll #BuildingForBharat

[1] Population of India, as of 2020 – 1.38 billion; Average size of a rural Indian household, as of 2012 – 4.6 persons