Digital ledger startups chase the elusive lending dream

Digital accounting platforms targeting small businesses had scored big-bang fundraises in 2019. But since then they’ve mostly been growing their user bases without much to show by way of monetization. They are now turning to lending to strike a balance between growth and making revenue

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Pratik Bhakta

August 26, 2021

10 Min Read

Armed with over $400 million in venture funding, billing and accounting software startups such as Khatabook, OkCredit, Vyapar and Flobiz are endeavoring to digitize India’s 63 million micro, small and medium enterprises. It wouldn’t be an exaggeration to say they’ve also been endeavoring to find a sustainable and profitable business in this, and not very successfully.

But digital ledgers and storefronts for neighborhood stores and other similar small businesses open the doors to another potentially more viable opportunity—a captive and digitally tracked market for financial services and credit.

Khatabook, which on Tuesday announced a $100 million fundraise led by Tribe Capital and Moore Strategic Ventures, is working on offering loans and other financial services to merchants on its platform. “We are planning to apply for our own (non-banking financial company) license in the next few months,” said cofounder and CEO Ravish Naresh. “Lending is the big opportunity here.”

Vyapar, a maker of billing software, too plans a lending business. “We are currently focusing on the core, which is billing, accounting, tax compliance, etc. Financial services are in the experimental phase but in the long run, they will be one of the business verticals of Vyapar,” said founder Sumit Aggarwal.

On paper, there is indeed a massive opportunity in lending to micro, small and medium enterprises. According to a Reserve Bank of India-constituted committee on MSMEs, the credit gap, or the demand for loans not met through formal financial channels, in this sector is an estimated Rs 25 lakh crore, or nearly $340 billion.

But lending to MSMEs is fraught with risk—from tepid credit appetite to difficulties in chasing after repayments. Data from TransUnion Cibil, India’s largest credit bureau, show bad loans in the SME segment at 11.3%.

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