In the dynamic landscape of private equity and venture capital investments, financial services have long held a prominent position. For the past 15 years, they have stood as a crucial component, accounting for a substantial 40% of the capital deployed. However, a notable and transformative shift has been observed in the last decade, with the emergence of fintech as a force to be reckoned with in the investment arena. Over the last 10 years, fintech has steadily gained traction and significance, now representing approximately 8-9% of PE/VC investments within the last three years.
The financial services revolution sparked with a tech renaissance- from digital/mobile wallets, moving to UPI/payments over the next few years, which is now recording over 310 million daily transactions, and the massive data trails created by the JAM trinity. Going forward, the increase in middle-class households, targeted to grow by 64 million by 2030, coupled with a rising per-capita income and the consequent increase in aspirational consumption, presents a significant opportunity for growth of financial products. Moreover, higher consumer demand for superior experience and digital services has led to a technology driven disruption to the traditional ways of consumption of financial services.
On the small businesses front, there is a wave of higher formalization and digital adoption seen, with over 14 million GST registrations so far. Thus, the ongoing trend of digital data trails and formalization is expected to play a pivotal role in extending financial services products to the untapped segment of consumers and MSMEs. Regulatory initiatives like the National Financial Information Registry are to serve as a key enabler, democratizing access to data among various players in the financial ecosystem. This lays a foundation for enhancing the penetration of financial products across both the consumer and MSME segments.
MSMEs in India today confront a substantial credit gap amounting to $530 billion, necessitating significant financing solutions to bridge this vast divide. Historically, MSME lending has relied on hard collateral posing limitations on credit penetration in the segment. Further a lack of credible data and underwriting challenges has kept high yields. However, advancements in technology and data availability are addressing cost-to-serve concerns. As a result, the MSME lending sector is witnessing new business models and innovative products. Small ticket lending and working capital financing are transitioning towards embedded lending and cash flow-based solutions. This changing landscape presents intriguing prospects, including the rise of digital collateral-based lending NBFCs and innovative underwriting models that facilitate unsecured loans for MSMEs. Additionally, loans based on alternative collateral and embedded financing offerings are gaining traction. Moreover, there is significant potential in small-ticket supply chain financing for vendors and dealer/distributors in Tier II+ cities. These developments herald a new era of opportunities, empowering businesses with tailored financial solutions to thrive in today's dynamic market.
Additionally, consumer lending has been steadily growing at a CAGR of 25% over the last two years, and now accounts for over a third of all loans disbursed in the country, however, challenges in space persist. Partnership-based models between banks, fintech, and digital platforms have improved customer discovery, but accessing the right products at the right pricing is yet to be solved for. Financing still largely relies on individual-assessment models. Improved digital trails will drive business model evolution toward income-based lending and lending based on alternative collateral. From this, some opportunities we see emerging are in the household income-based lending models that combine physical and digital to provide larger ticket sized loans to middle-income households.
In conclusion, fintech has proven its value to the broader financial ecosystem by successfully driving millions of customers into formal financial systems and creating access to multiple financial products. The establishment of partnerships between incumbents and fintech players, coupled with product innovation, strengthen the industry. Robust infrastructure and regulatory support drive new business models, enhancing financial services delivery. These developments indicate that the momentum for funding fintech is expected to be sustained in the coming years.
Contributed by team TVS Capital Funds.
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