2021

India
Fintech Report
3 Summary

5 Chapter 1 Indian economic indicators and

microeconomic policies

6 1 COVID-19 in India
2 India’s economic data
3 India’s economic and social indicators
3.1 Unemployment rate
7 3.2 Industrial outlook survey
3.3 Real private final consumption expenditure (PFCE)
3.4 Consumer sentiment index (CSI)
8 4 Government policies and measures against the
COVID-19 pandemic
4.1 Economic stimulus package
4.2 Relief for the poor
4.3 Emergency credit line guarantee scheme (ECLGS)
9 4.4 RBI’s EMI moratorium
4.5 RBI cuts policy repo rate to boost liquidity

10 Chapter 2 Development of India’s fintech

lending industry

11 1. Digital finance in India

1.1 India’s financial inclusion scheme
1.2 Number of bank cards in India
1.3 Digital information system
12 2. India’s online lending market and its regulation
2.1 Market entry and regulation of NBFC-ICCs
2.2 Online lending market size and operation
13 2.3 Impact of COVID-19
2.4 Case study: MoneyTap
3. Indian P2P lending market and regulatory measures
3.1 Access and regulatory requirements for NBFC-P2Ps
14 3.2 Indian P2P lending market size and operation
3.3 Case study: Faircent.com
15 4. Recent policies for the fintech industry
and recommendations
4.1 Special liquidity funds
4.2 Emergency Credit Line Guarantee Scheme (ECLGS)
4.3 Tax exemptions
4.4 Access to eKYC/CKYC

16 Chapter 3 Major focuses in the Indian fintech

lending industry
1. Growth potential of the Indian fintech industry
17 2. Development of potential customers to boost credit penetration
3. MSMEs
4. India’s ban on Chinese apps
18 5. Data security compliance
6. Market risks and anti-fraud measures

19 Chapter 4 More efficient risk control technologies in

emerging markets

20 1. Bank statement analysis

2. Customized scoring
3. Credit reporting
4. Multi-platform detection
 www.advance.ai

Summary
India has imposed a nationwide lockdown since March 2020, limiting the mobility of
the entire 1.3 billion population and most social and economic activities, as a measure
against the COVID-19 pandemic. As a result, the country has seen dropping economic
indicators, climbing unemployment, and sweeping panic among the poor population.
According to data released by the National Statistical Office (NSO) of India in September,
the country's GDP plunged 23.9% in the second quarter of 2020, with a sharp downturn
in industrial and service sectors. Rating agency India Ratings and Research (Ind-Ra) has
further downgraded the FY2021 economic growth forecast for the country from -5.3% to
-11.8%, the lowest since the country liberalized its economy in the 1990s.

While containing the pandemic, the Indian government has also introduced an array of
relief measures and economic plans to mitigate the impact of COVID-19 and revive the
economy. On May 12, Indian Prime Minister Modi announced a 20 trillion rupee stimulus
package to revive the economy with bold reforms. This move is hailed as an Atmanirbhar
Bharat or Self-reliant India campaign.

The package includes an Rs 3-trillion Emergency Credit Line Guarantee Scheme (ECLGS)
to ease the financial stress of businesses during the lockdown. As of September 13,
a total of Rs 1.63 trillion loans had been extended to 4.2 million micro-, small- and
medium-sized enterprises (MSMEs). Meanwhile, to help borrowers facing temporary
financial difficulties, Reserve Bank of India (RBI) announced an EMI moratorium starting
from March to August 2020.

Fintech lending companies including online and P2P lending platforms have played a
vital role in filling the finance gaps of individuals and enterprises during the COVID-19
outbreak. In June, online lending platforms started to increase loans to help MSMEs
get through tough times. The loan amount is expected to multiply over the next two
quarters. Meanwhile, the lockdown expands the customer base of fintech lending
platforms. P2P lending platforms have showed an advantage amid the pandemic due to
their product diversity.

Chinese investors offer individual loan, credit loan, consumption loan, and P2P lending
services primarily by applying for the NBFC-ICC/NBFC-P2P license via their local partners
or by investing in a company that has the license. They are subject to the regulation
of RBI prudential indicators. Currently, India has issued nearly 10,000 such licenses.

3
 www.advance.ai

More than 1,000 companies are running online lending platforms which mainly include
MoneyTap, LoanTap, EarlySalary, Kissht, KrazyBee, PaySense, and CASHe.

India is one of the most fast growing fintech markets. By March 2020, India and China
have been the top two emerging markets by the fintech adoption rate, with India at
87%. As the number of fintech startups proliferates, India is attracting more and more
investors. According to a KPMG report, Indian fintech startups pocketed nearly USD 1.7
billion investment in the first half of 2020, doubling from last year's USD 726.6 million.
The Boston Consulting Group has predicted that India's online lending market size will
reach USD 1 trillion by 2023.

RBI has predicted that India's GDP will rebound to 7.4% in FY2022. The World Bank
has predicted that India's GDP will maintain an annual growth rate of 6%-8% over the
next decade. Thanks to a low lever ratio, fast growing mobile Internet, and open data
infrastructure, India is becoming a hub of fintech startups.

Some fintech companies use technologies such as data analysis, AI, and machine
learning to assess individual or business credit based on nominal data including utility
bills, cash flow cycles, mobile phone records, social records, and psychological test
results. Reaching these potential customers will contribute to an exponential growth of
credit loans.

Meanwhile, India's underserved MSME market presents a main opportunity for fintech
startups to offer and expand sustainable lending services. Fintech loans can solve the
issues of tight liquidation and high credit costs in the MSME market. As more and more
data are digitized, credit assessment cost will also fall.

However, new entrants to India's fintech market will face major barriers including the
uncertainty caused by the ravaging COVID-19 pandemic, tight regulations, and tense
geopolitical situation. Existing fintech apps with links to Chinese investors may also
be added by the Indian government to the list of prohibited entities which is still in
preparation. The fintech industry should keep a close eye on data security compliance
and risk control while exploring new technologies and applications.

With extensive experience in operating in the Indian market and a vast store of
expertise and innovative R&D capabilities in risk control, ADVANCE.AI will provide fintech
companies with more efficient and advanced data and anti-fraud risk control services.

4
 www.advance.ai

Chapter 1
Indian economic indicators and
mcroeconomic policies

To contain the COVID-19 outbreak, India imposed one of the world's strictest lockdown
measures, which has battered the country's economy and social activities. The country
has suffered dropping economic indicators, climbing unemployment, and sweeping panic
among the poor population. The Indian economy contracted by 23.9% in Q1 FY2021, the
worst among G20 countries.

While containing the pandemic, the Indian government has also implemented a 20 trillion
rupee stimulus package to mitigate the impact of COVID-19 and revive the economy. The
package includes an Rs 3 trillion Emergency Credit Line Guarantee Scheme (ECLGS). As of
September 13, 4.2 million MSMEs have obtained a total of Rs 1.63 trillion loans from banks
and nonbank financial companies (NBFCs).

1 COVID-19 in India
India is the second worst-hit country by COVID-19, with 5.49 million confirmed cases as of
September 21, 2020.

To contain the disease, the country imposed one of the world’s strictest lockdown
measures. On March 24, 2020, the Indian government ordered a 21-day nationwide
lockdown, limiting the mobility of 1.3 billion population. As the outbreak worsened, the
lockdown was extended three times till May 31.

In June, India started to phase out the lockdown. Malls, religious places, hotels, and
restaurants are allowed to reopen from June 8. Metro rail services are allowed to resume
in stages from September 7. People are required to wear masks in public space, in
workplace, and on public transit.

5
 www.advance.ai

The strict nationwide lockdown has battered India's economy and social activities. The
country has suffered dropping economic indicators, climbing unemployment, and sweeping
panic among the poor population since the lockdown. While containing the pandemic, the
Indian government has also implemented a stimulus package to mitigate the impact of
COVID-19 and revive the economy.

2 India’s economic data

According to the NSO data released on September 1, 2020, the country’s GDP slipped
23.9% in Q1 FY2021 ended June, the worst among G20 countries. The GDP grew by
3.1% in Q4 FY2020 ended March.

The GVA shrank by 22.8% in Q1 FY2021, with a sharp downturn in industrial and service
sectors: 50.3% in construction, 39.3% in manufacturing, 47% in trade, transportation
and the like, and 5.3% in finance and other professional services. However, agriculture,
forestry, and fishing maintained a growth of 3.4%.

Following the release, Ind-Ra further downgraded its FY2021 economic growth forecast for
the country from -5.3% to -11.8%, the lowest since the country liberalized its economy in
the 1990s. According to forecast data released by RBI in August, India’s GDP will slide by
5.8% in FY2021, but may rebound to 7.4% in FY2022, compared with a growth of 1.5%-
2.8% estimated by the World Bank early in April and a growth of 1.9% by IMF, still the
best among G20 countries. However, after the Indian government announced its economic
plan in late May, the GDP forecast was adjusted to negative growth.

6
 www.advance.ai

3 India’s economic and social indicators

3.1 Unemployment rate
According to CMIE, India’s unemployment rate had reached 7.1%, with 8.9% in cities and
6.2% in rural areas, as of September 20, 2020.
During the lockdown, an estimated 140 million people lost their jobs while many others
were given a pay cut. In April 2020, the country’s unemployment rate hit a record
low at 23.52%. As the lockdown loosened, the unemployment rate rallied to
7.4%, the level before the COVID-19 outbreak.

2020 Indian unemployment rate (%):

8.35 in August; 7.40 in July; 10.18 in June; 21.73 in May; 23.52 in April; 8.75 in March; 7.76
in February; 7.22 in January

3.2 Industrial outlook survey

On August 6, 2020, RBI released the results of the 90th round of Industrial Outlook Survey
(IOS) conducted in Q2 2020. The Business Assessment Index (BAI) fell sharply to
an all-time low at 55.3 in Q1 FY2021 from 102.2 in the previous quarter.
Manufacturers expect improvement in production and order books in Q2 FY2021. They are
somewhat optimistic about their financial prospects, but with a bleak outlook on profits
and external needs. The Business Expectation Index (BEI) for Q2 FY2021 dipped into the
contraction zone at 99.5.

7
 www.advance.ai

3.3 Real private final consumption expenditure (PFCE)

According to a forecast RBI made on August 6, 2020, India's PFCE might fell by 6.0% in
FY2021, but rebound to 8.0% in FY2022.

3.4 Consumer sentiment index (CSI)

According to the consumer confidence survey for July published by RBI on August 6, 2020,
India’s Consumer Sentiment Index (CSI) dropped sharply to 53.8 from 63.7 in May, but the
Future Expectation Index (FEI) swung back to the positive zone at 105.4 from 97.9, which
signals that the country's economy will revive in the coming year.

120

110 108.8

102.2
100
99.5
90

80

70

60
55.3
50
2015-16 2016-17 2017-18 2018-19 2019-20 Q1 Q2
2020-21

Business assessment index (BAI) Business expectation index (BEI)

150

130

100 105.4

90 97.9

70 53.8
63.7

50
Jan
Mar

Jul
May

2014 2015 2016 2017 2018 2019

2020

Consumer sentiment index (CSI) Future expectation index (FEI)

8
 www.advance.ai

4 Government policies and measures

against the COVID-19 pandemic
4.1 Economic stimulus package
On May 12, 2020, Indian Prime Minister Modi announced a 20 trillion (around USD 275
billion) rupee stimulus package, accounting for 10% of India’s GDP. The package aims
to revive the economy with bold reforms and is hailed as an Atmanirbhar Bharat or Self-
reliant India campaign. On May 13-17, the Ministry of Finance of India disclosed the details
of the package which mainly focuses on MSMEs and agriculture.

Part 1: More than Rs 6 trillion is used to guarantee

funds and loans for MSMEs, NBFC/HFC, DISCOMS,
contractors, real estate developers, and workers.

Part 2: More than Rs 3.1 trillion is used to provide

relief for rural migrant workers, farmers, street
vendors, and the poor.

Part 3: More than Rs 1.5 trillion is used to support

agriculture, dairy, livestock, and fishing industries.

Part 4: More than Rs 500 billion is used to support

eight key areas: coal, mining, national defense,
airspace management, social infrastructure, power
distribution, aerospace, and nuclear.

Part 5: This part specifies supports and reforms

for health care, education, law, and public services.
Part 5: This part specifies supports and reforms for
health care, education, law, and public services.

4.2 Relief for the poor

On March 26, 2020, the Ministry of Finance of
India announced the Rs 1.7 trillion Pradhan Mantri
Garib Kalyan Yojana (PMGKY) package to provide
foods, welfare payments, and wage subsidies for
the poor and medical coverage for healthcare
workers.

9
 www.advance.ai

4.3 Emergency credit line guarantee scheme (ECLGS)

On May 23, 2020, the Indian government launched the Emergency Credit Line Guarantee
Scheme (ECLGS) to provide Rs 3 trillion additional funds to standard companies/MSMEs.
National Credit Guarantee Trustee Company Ltd (NCGTC) would provide a 100% guarantee
to member lending institutions for all loans from GECL. Standard companies/MSMEs with a
loan of no more than Rs 250 million are eligible for the scheme. As of September 13, 4.2
million MSMEs had obtained a total of Rs 1.63 trillion of loans from banks and NBFCs.

4.4 RBI’s EMI moratorium

To help borrowers tide over temporary financial difficulties amid COVID-19, RBI announced
a six-month moratorium on Equated Monthly Installments (EMIs) from March to August
2020. During the period, borrowers may opt to stop paying EMIs, but outstanding balance
will still incur interests. Meanwhile, their credit ratings will not be affected.

4.5 RBI cuts policy repo rate to boost liquidity

RBI’s Monetary Policy Committee (MPC) held an unscheduled meeting on March 24, 2020
and announced an unprecedented reduction in the policy repo rate, the cut of the cash
reserve ratio (CRR), and a number of other liquidity improvement measures to temporarily
ease market concerns.

10
 www.advance.ai

Chapter 2
Development of India’s fintech
lending industry

Thanks to its continuous GDP growth, popularization of mobile Internet, and open data
infrastructure, India has become one of the fastest-growing fintech markets and a hub for
fintech startups. Between 2014 and the first half of 2020, the country’s fintech startups
raised more than USD 10 billion in total, involving 692 transactions.

India’s online lending market reached Rs 2.7 trillion (USD 37 billion) in 2019. The Boston
Consulting Group estimated that the market will grow rapidly to USD 1 trillion in 2023.

During the COVID-19 pandemic, fintech lending companies like online lending and P2P
lending platforms have filled the funding gaps for individuals and businesses. Online
lending platforms started to expand their lending in June, in an effort to help MSMEs
recover within a short period. It is estimated that the loans granted will increase
exponentially in the following two quarters.

1 Digital finance in India

1.1 India’s financial inclusion scheme
In August 2014, the Indian government launched Pradhan Mantri Jan-Dhan Yojana
(PMJDY), a national financial inclusion scheme, to ensure access to financial services,
namely, basic savings & deposit accounts, remittance, credit, insurance, and pension, in an
affordable manner. Under the scheme, a basic savings bank deposit (BSBD) account can
be opened in any bank branch or business correspondent (Bank Mitra) outlet, by people
not having any other account. In addition to the free zero balance accounts, holders of
accounts opened under PMJDY will also be provided with accident insurance coverage of
Rs 2 lakh and an overdraft facility of up to Rs 10,000.

11
 www.advance.ai

As of September 9, 2020, the number of accounts under PMJDY and the number of Rupay
debit card accounts reached 406.3 million and 299.3 million, respectively.

1.2 Number of bank cards in India

According to statistics compiled by Findex, the proportion of people who own bank
accounts and have access to financial services in India rose from 54% in 2014 to 81% in
2018.

There were 845.4 million debit cards and 57.3 million valid credit cards in India as of June
2020. Around 33.5 million new debit cards and 7.6 million new credit cards were issued
from July 2019 to June 2020.

1.3 Digital information system

The fast growth of India's fintech industry may be driven mostly by the government’s “Digital
India” Program. Regulators of the program are dedicated to promoting process digitization,
which is required for financial inclusion, such as PAN, GST, Aadhaar, eKYC, and UPI.

• PAN
As per India’s Income-tax Act, 1961, all taxpayers,
including both individuals and businesses, shall apply
for a PAN from the tax department. Banks are not
allowed to accept the tax paid by a taxpayer without
a PAN. The tax department of India required all the
international companies that are set to run business,
receive remittance, sell products and services, and
obtain invoices in the country to apply for a PAN starting
from April 1, 2010.

• Aadhaar
India started to promote Aadhaar, an electronic identity
system, in September 2010. Indian residents or passport
holders can voluntarily obtain a 12-digit electronic
identity number based on their biometric features (facial
images, fingerprints, and irises) and demographic data.

12
 www.advance.ai

The identity numbers will be linked with their mobile phone numbers and
bank accounts. As the world's largest biometric ID system, Aadhaar is
managed by the Unique Identification Authority of India (UIDAI).

• eKYC/CKYC
As per India’s Prevention of Money Laundering (PML) Act, Know Your
Customer (KYC) is a mandatory process for all financial institutions. It is
used to verify user identities to prevent fraud and track abnormal behaviors.
Identity information, addresses, bank statements, and other data should be
submitted for KYC. KYC data will be stored at the KYC Registration Agency
(KRA). Aadhaar-based eKYC allows financial service providers to verify
user identities electronically. The Indian government introduced Central
Know Your Customer (CKYC) in July 2016, enabling users to trade with all
financial institutions under regulatory supervision with one KYC only. CKYC
is managed by the Central Registry of Securitization Asset Reconstruction
and Security Interest of India (CERSAI).

• UPI
In April 2016, the National Payments Corporation of India (NPCI) launched
Unified Payment Interface (UPI), which is linked with India’s electronic
identity system Aadhaar to enable real-time bank and e-wallet transfer via
mobile devices.

13
 www.advance.ai

2 India’s online lending market and

its regulation
2.1 Market entry and regulation of NBFC-
ICCs
A total of 9,283 NBFC - investment and credit
companies (NBFC-ICCs) had registered at
RBI by July 16, 2020, and over 1,000 of
these companies have engaged in large-scale
operations.

NBFC-ICCs account for 95% of the total number

of NBFCs, and they mainly include three types of
companies:
asset finance companies (AFCs)
investment companies (ICs)
and loan companies (LCs)

LCs mainly provide individuals and businesses with credit lines or loans. Chinese investors
shall apply for an NBFC-ICC license through their partners or invest in companies with
NBFC-ICC licenses before conducting credit loan or consumer loan business in India.

NBFCs’ assets in India have increased to more than USD 370 billion from 2008 to 2018,
contributing to 20% of the total credit loans issued in the country.

2.2 Online lending market size and operation

Online lending platforms provide users with personal, credit, and consumer loans, as well
as short-term unsecured loans for MSMEs. The personal and MSME credit lines are usually
Rs 5 lakh and Rs 50 lakh, respectively. In general, applicants who have passed eKYC
verifications can obtain loans within 8 to 72 hours. Renowned fintech lending platforms in
India include MoneyTap, Capital Floa, Lendingkart, Zest Money, and Indifi.

According to an ICICI Bank – CRISIL report, India’s online lending market stood at
Rs 2.7 trillion (approximately USD 37 billion) in 2019, and is expected to reach
Rs 15 trillion (USD 204 billion) by 2024, which will account for 16% of retail loans, higher
than the 6% registered in 2019. The Boston Consulting Group estimated that India’s online
lending market will grow rapidly to USD 1 trillion in 2023.

14
 www.advance.ai

2.3 Impact of COVID-19

As impacted by COVID-19, India’s healthcare, bill payment, and groceries are being
digitized at a fast pace, while entertainment, fashion, transportation, and travel industries
are stalled. Essential product consumption alone cannot prop up the rapid development of
the fintech ecological system.

In March and April, most Indian online lending platforms slowed down the granting of
loans. McKinsey pointed out in a report that new loans granted online slumped 85% year
on year during the lockdown, forcing 40% of online lending platforms to close or suspend
at least one service.

In mid-May, the Indian government rolled out an Rs-20-trillion stimulus package. NBFCs,
including online lending companies, are eligible for the Emergency Credit Line Guarantee
Scheme (ECLGS). Upon the approval of the Ministry of Finance, the scheme was expanded
to cover individuals who are engaged in business activities. Since June, online lending
platforms have increased the loans granted to help MSMEs recover rapidly. NBFC insiders
predicted that loans will grow exponentially in the two quarters ahead.

The EMIs suspended by online lending platforms accounted for 30%-40% of the total
investment portfolios during COVID-19. After the termination of the EMI moratorium policy
in August, online lending platforms began to implement a one-time loan restructuring
plan for borrowers struggling to repay their loans. The plan encourages users to at least
repay part of their loans, in a bid to balance current asset allocations and cater to the
forthcoming seasonal high demands for credit loans.

15
 www.advance.ai

2.4 Case study: MoneyTap

MoneyTap, the first online credit line app in India, revealed that it cumulatively issued Rs
10 billion loans between 2016 and 2019 and it plans to grant Rs 50 billion worth of loans
within the next year.

Thanks to its ZeroTouch model, MoneyTap helps users obtain credit lines online without
human assistance and provides loan insurance through the partnership with Acko. Its
expenditure from and revenues brought by money lending business experienced a 35%
QoQ increase in the second quarter of this year. The platform saw cash withdrawals and
loans for travel and wedding ceremony participation slump, whereas loans for education
and healthcare surge during COVID-19.

3 Indian P2P lending market and

regulatory measures
3.1 Access and regulatory requirements for NBFC-P2Ps
On October 4, 2017, the RBI issued the Non-Banking
Financial Company – Peer to Peer Lending Platform (Reserve
Bank) Directions, 2017, mandating that non-banking
financial companies which carry on the business of a P2P
lending platform (NBFC-P2Ps) must obtain the Certificate of
Registration (CoR) from the RBI. By July 16, 2020, there had
been 21 RBI-registered NBFC-P2Ps.

On December 23, 2019, the RBI raised the ceiling for lending
on NBFC-P2P platforms: The aggregate exposure of a lender
on all P2P lending platforms has been increased from Rs 1
million to Rs 5 million (approx. USD 70,000). For any lender
with an investment of over Rs 1 million on P2P platforms, its
net assets should not be less than Rs 5 million, as attested by
a chartered certified accountant. Meanwhile, the aggregate
amount of loans to be taken by a single borrower on all P2P
platforms should be subject to a cap of Rs 1 million. The
exposure of a single lender to the same borrower should not
exceed Rs 50,000.

16
 www.advance.ai

3.2 Indian P2P lending market size and operation

To prevent financial systematic risks, the RBI has imposed
prudent regulatory indicators on NBFC-P2Ps. The low
ceiling for loans hinders the industry from growing bigger,
and restricts P2P platforms from providing larger loans to
MSMEs.

According to The Economic Times, an Indian business

newspaper, the Indian P2P lending market size was about
Rs 2 billion (approx. USD 27 million) in 2018. Bloomberg
reported that in 2019, the total loans issued via P2P
platforms amounted to about Rs 5 billion (approx. USD 68
million).

In India, the interest rate of P2P platforms for low-risk

borrowers is around 12%, while high-risk borrowers may
face an interest rate up to 30%. Individuals, NBFCs and
banks are the major lenders. It is worth noting that active
lenders are mostly NBFCs and banks. They provide loans
to borrowers on P2P platforms as a means of finding
potential customers.

P2P loans are filling up the funding gap of individuals

and MSMEs amid COVID-19. The lockdown has enlarged
the customer base of P2P lending platforms. Diversified
platform products have exhibited their strengths in the
economic recession: lenders with diversified investment
portfolios are more likely to earn steady returns. Products
for education and daily consumption, particularly, can
yield high returns.

3.3 Case study: Faircent.com

Faircent.com has the largest share in the Indian P2P lending platform market. By
September 21, 2020, its average annual interest rate had reached 25.28%, with a current
lending amount of Rs 1.492 billion (approx. USD 20.23 million).

17
 www.advance.ai

This platform announced in January 2020 that its revenue had increased by 50 times in
the last 12 months, with the monthly loan amount climbing from Rs 250 million to Rs 1.2
billion. It also aimed at a monthly loan amount of Rs 7-8 billion in the next year. Based on
its estimates, the Indian P2P market size will rise up to Rs 30-40 billion in the coming two
years.

Faircent.com launched Anti-Lockdown Loans during the COVID-19 outbreak for lockdown-
affected borrowers in low-risk areas, allowing repayments at reasonable rates after a
3-month EMI free period.

Below are the loss rates and net return rates of its products at five risk levels from April to
September 2020:
Minimal Risk: loss rate 0%; net return rate 12.9%;
Low Risk: loss rate 0%; net return rate 17.2%;
Medium Risk: loss rate 0.5%; net return rate 19.9%;
High Risk: loss rate 5%; net return rate 18.7%;
Very High Risk: loss rate 10%; net return rate 18.6%.

The loss rate is the percentage of borrowers who have more than six unpaid EMIs, and the
net return is the difference between the percentage of interest income from investment
and the potential loss on default.

Loss rate
30 (>6 EMls)
Medium risk
Loss rate:0.5%
Net retum rate:19.9% Net retums
25
Percentage(%)

20

15

10

0
Minimal risk Low risk Medium risk High risk Very high risk

18
 www.advance.ai

4 Recent policies for the fintech industry

and recommendations
4.1 Special liquidity funds
On May 14, 2020, the Indian government launched a Rs 300 billion Special Liquidity
Scheme for NBFCs, housing finance companies (HFCs) and microfinance institutions (MFIs),
as part of its economic package.

4.2 Emergency credit line guarantee scheme (ECLGS)

To help MSMEs gain access to credit, the Indian government expanded the scope of
the ECLGS on June 21, 2020, authorizing not only the banking system, but also NBFCs
(including qualified HFCs) and all India financial institutions (AIFIs) to provide credit lines
under the scheme.

4.3 Tax exemptions

Based on discussions between the Fintech Convergence Council (FCC) and the Department
of Economic Affairs (DEA) in July 2020, loans from NBFC-P2P platforms are exempted from
taxes such as income tax and goods and services tax (GST).

4.4 Access to eKYC/CKYC

In December 2019, the Ministry of Finance had discussions with the RBI, the Unique
Identification Authority of India (UIDAI) and the National Payments Corporation of India
(NPCI), to allow NBFCs (including insurance companies, loan companies, P2P lending
platforms, and digital wallets) to verify the customer certificate using Aadhaar-based eKYC.
NBFCs may be able to access the UIDAI via third-party entities (possibly including NPCI).

19
 www.advance.ai

Chapter 3
Major focuses in the Indian
fintech lending industry

Uncertainties arising from COVID-19, stringent regulatory standards and the geopolitical
tension will be the major barriers to entry for Chinese companies targeting the Indian
fintech market. Fintech companies should keep a close eye on data security compliance
and risk control while exploring new technological applications.

1 Growth potential of the Indian

fintech industry
India is one of the markets where fintech is the fastest-growing sector. By March 2020,
India and China had been leading fintech adoption among all the emerging markets, with
India at 87%.

In the coming ten years, India will become a hub for fintech startups owing to its rapid
GDP growth, extending mobile Internet access and maturing open data infrastructure.

The World Bank forecast an annual GDP growth rate of 6-8% for India over the next ten
years, the highest in the world. Meanwhile, the domestic credit to private sector (% of
GDP) in India was merely 50.04% in 2019, far below the ratios in China and the U.S. (both
above 150%). There is still plenty of room to increase the ratio in India, which will bring
decent dividends for the financial industry.

According to data released by the Telecom Regulatory Authority of India (TRAI), the
number of Internet users in India climbed from 718 million to 743 million from the end of
December 2019 to the end of March 2020, up 3.4% quarter over quarter. Among them,
720 million were wireless Internet users, accounting for 97% of the total in the market.

20
 www.advance.ai

Indians consumed 8GB of mobile data traffic per month on average, keeping up with the
developed markets.

Underpinned by a maturing open digital infrastructure, Indian fintech companies are able
to leverage technical means such as digital identity system (Aadhaar), electronic payment
system (UPI) and enterprise taxation system (GST) to establish unconventional credit
evaluation systems that help reduce the cost of credit and include more individuals and
organizations into the national credit reporting system.

As the number of fintech startups proliferates, India is attracting more and more investors.
Between 2014 and the first half of 2020, the country’s fintech startups raised more than
US$10 billion in total, involving 692 transactions.

Despite the loss and depression of the financial industry during COVID-19, the fintech
investment has been rising. According to a KPMG report, Indian fintech startups pocketed
nearly USD 1.7 billion investment in the first half of 2020, doubling from last year's USD
726.6 million. The Fintech investment between July and September increased by 17% on
a month-on-month basis.

2 Development of potential customers

to boost credit penetration
According to Findex, the proportion of Indians who have a bank account and access to
financial services rose from 54% to 81% from 2014 to 2018. However, only about 1/5
of the Indian population have a valid credit score recognized by the banking system.
Individuals without fixed monthly salaries and some MSMEs are unable to provide
information such as salary proof or regular transaction records.

For these potential or suboptimal customers, fintech companies provide alternative

credit solutions based on simplified and effective pre-loan evaluation. Some fintech
companies use technologies such as data analysis, AI and machine learning to evaluate
the creditworthiness of borrowers (individuals or companies) based on factors other than
the credit score, including nominal data such as public utilities bills, cash flow cycle, mobile
phone records, social media footprint and psychometric results.

21
 www.advance.ai

The development of these potential customers will drive exponential growth in credit
penetration.Meanwhile, banks are starting to pay attention to technological innovation,
working with fintech companies to maintain their leading role in domestic online lending.

3 MSMEs
The growth of MSMEs is a top priority in India. According to the 73rd National Sample
Survey (NSS), there are about 63.052 million non-agricultural MSMEs in India, of which
51.25% are in rural areas, and 48.75% in cities. MSMEs have created 111 million jobs,
including 36.041 million in manufacturing, 38.718 million in trade and 36.222 million in
services. They contribute to 8% of India’s GDP, 40% of the total exports and 45% of the
manufacturing output.

According to International Finance Corporation (IFC), all formal and informal MSMEs in
emerging markets are facing a funding gap of USD 2.1-2.6 trillion, equivalent to 30-36%
of the current credit balance for MSMEs. The MSME loan market is underserved, which is
a big opportunity for fintech startups to create and develop sustainable services through
loans. Fintech loans are applicable to the MSME market which has poor liquidity and high
credit cost. And the deepening of data digitization will lead to lower credit evaluation cost.

ICRA data estimates that by March 2022, 23% of NBFC loans will flow to MSMEs, in
contrast to the current 15%.

4 India’s ban on Chinese apps

4 India’s ban on Chinese apps
On June 29, 2020, the National Informatics
Centre (NIC) ordered the prohibition of
Chinese apps, banning 59 apps from Chinese
developers. On September 2, the NIC made
another announcement on the ban of 118
more Chinese apps, increasing the total
number to 224.

22
 www.advance.ai

The ban has significantly affected E-commerce, information and entertainment. Compared
with other industries, the fintech lending industry has more local allies—Indian NBFC
license holders. Also, struggling under COVID-19, MSMEs and individuals are in urgent
need of online loans.

On the grounds that fintech loan apps may collect sensitive identity and financial
information, the Indian government will target fintech apps with connections to Chinese
companies. According to the Indian media, such apps are likely to be included into India's
new list of prohibited entities.

5 Data security compliance

In December 2019, the Indian Parliament approved the Personal
Data Protection Bill, which specifies the personal information rights,
sets forth the rules for personal data processing and storage, and
proposes to establish the Data Protection Authority (DPA) for its
enforcement.

This Bill has a great impact on data-intensive industries in India,

including software, AI, finance and pharmaceuticals. It proposes
data localization restrictions, according to which “sensitive personal
data”, including financial, health, biometric and genetic data, can
only be transferred out of India upon DPA's approval. The Bill
authorizes the central government to define “critical personal data”
and prohibits processing of such data outside India. This limits the
avenues for commercialization of data and greatly affects cross-
border M&A transactions.

The fintech industry is subjected to privacy and confidentiality requirements of regulatory

authorities. Therefore, relevant companies have done what is required by some of the
provisions in the Bill. For example, financial institutions should inform users of their
data collection approaches and seek users’ consent. Fintech lending companies are also
required to save and process data related to business activities and users on hardware
systems in India, and take stringent measures to ensure information security. After the Bill
took effect, financial institutions must further strengthen their personal privacy system,
upgrade the data encryption technology, and meet data compliance standards when
collecting and using “critical personal data” of borrowers.

23
 www.advance.ai

6 Market risks and anti-fraud measures

Fintech lending companies should pay attention to the high non-performing loan ratio
(NPLR) and frequent frauds (e.g. identity thefts) in India. In FY2020, India reported
52,006 cases related to fraudulent use of debit cards and credit cards and Internet
banking fraud, involving a total transaction amount of Rs 2.244 billion. Moreover, there
have been 140,471 similar frauds reported between FY2017 and FY2020. As the industry
grows at a high pace, fintech lending companies must take risk control measures, such as
a more robust credit reporting system and anti-fraud solutions, to keep NPLR within an
expected reasonable range and regulate debt collections to promote the industry's healthy
development.

24
 www.advance.ai

Chapter 4
More efficient risk control
technologies in emerging markets

In emerging markets, opportunities and challenges are everywhere. In the fast-growing

Indian market, fintech lending companies must take risk control measures, such as a
more robust credit reporting system and anti-fraud solutions, to keep NPLR within an
expected reasonable range and regulate debt collections to promote the industry's healthy
development.

With extensive experience in operating in the Indian market and a vast store of expertise
and innovative R&D capabilities in risk control, ADVANCE.AI will provide fintech lending
companies with more efficient and advanced data and anti-fraud risk control services.

1 Bank statement
analysis
It applies to banks, payment banks, small financial
banks, NBFCs, e-wallets, online fintech services, etc.
More than 200 Indian banks are using this solution,
meaning over 99% nationwide coverage. Based on
classification and statistical analysis of validated
original data in bank statements, it generates
useful financial performance information for credit
scoring and modeling. It also enables effective fraud
detection through analysis of file modification history
and balance accuracy. Such analysis can help the
lender evaluate other debts of the borrower, including
existing debts and recurring payments, which may
affect the ability to repay the loans.

25
 www.advance.ai

2 Customized scoring
Based on joint modeling, this is a tailor-made solution that combines the features of the
customer’s customer base with exclusive information from the customer and ADVANCE.
AI. The solution boasts short development cycle and good modeling performance, and
is flexible to meet any needs of update. It is recommended for loan review: a low score
indicates that you can reject the loan application; a high score indicates that you can
approve the application; medium scores entail human judgment. Apart from the output
scores, other fields can also be used in the customer’s own model as variables.

AUC:0.82471 KS:0.60555
1.0 1.0

0.8 0.8
FPR

FPR

0.4 0.4

0.2 0.2

0.0 0.0
0.0 0.5 1.0 400 600
FPR Score Rage

600 0.8

0.6
400
0.4
200
0.2

0 0.0
316 351 386 419 449 477 503 527 551 630

3 Credit reporting
Users can access the official data of Equifax, one of the four largest credit reporting
agencies in India, to check the borrower’s personal information, credit records (loan
and repayment histories) and official credit score. It can be used for credit evaluation to
measure customers' repayment capacity and willingness. Many fields in the credit records
can be used as the input variables in the customer’s own model.

26
 www.advance.ai

4 Multi-platform detection
Based on ADVANCE.AI’s massive database, this solution can generate a history of queries
about the user on different lending platforms, to effectively identify the risk of multi-
platform loan applications. Serving over 100 lending companies in India, ADVANCE.AI has
accumulated over 10 million data records. Users can access this service through APIs to
get real-time results. It also supports offline retrospective testing.

Multi-Platform Detection Product_lndia_demo

Request

*PAN BOEPG3945R

Check

Result

Time Period Total Number of Queries Query Org Count

1-30d 4 3

1-60d 11 7

1-90d 11 7

1 lnput:PAN

2 Output:Total inquires and total organizations(30/60/90 days)

27
About
ADVANCE.AI
ADVANCE.AI is a leading big data and
AI company in Asia. Providing customers
with digital transformation, anti-fraud, and
process automation solutions.

The company has attracted investment from

Silicon Valley and well-known Asian venture
capital firms. Headquartered in Singapore
and with offices in other Asia Pacific
countries such as Indonesia, India, China,
the Philippines, and Vietnam, the company
targets industries including banking,
financial services, fintech, payment, retail,
and e-commerce.

It is committed to transforming and

reshaping the business world with AI
technology,and providing users with better
information, products, and services.

www.advance.ai

sales@advance.ai

Internal information for communication only

produced by the marketing department of ADVANCE.AI
ADVANCE.AI all rights reserved

28