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Fintech firms bear brunt of mess at IL&FS, DHFL

Equity funding drops 5% to $394 million as risk investors turn chary about backing digital lending startups.

Updated: Jun 11, 2019, 09.45 AM IST
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The total quantum of equity funding in the fintech lending sector stood at nearly $394 million in 2018-19, an about 5% drop from $413 million in the previous year, according to data from Tracxn.
BENGALURU: Risk investors are turning cautious about backing digital lending startups, following the twin blow from a liquidity crisis at Infrastructure Leasing and Financial Services (IL&FS) and after Dewan Housing Finance (DHFL) missed repayments to its bond holders.

The total quantum of equity funding in the fintech lending sector stood at nearly $394 million in 2018-19, an about 5% drop from $413 million in the previous year, according to data sourced from business intelligence platform Tracxn.

Further, the number of companies that raised funds stood at 60 against 73 in the previous year. The number of equity funding rounds dropped to 76 in 2018-19 from 91 in the year before, as per Tracxn.

The funding data is till March 2019, but industry sources told ET that the last two months have been perceptibly challenging due to the liquidity crisis. “The liquidity crisis in the NBFC space has been biting us, now the DHFL issue is bound to make matters worse,” the founder of a fintech lending startup said. “I think valuations based on balance sheet will come down because of all this.”

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Multiple companies that sought fresh equity rounds over the last couple of months have found it tough to close deals, ET has learnt. In some cases, existing investors are ploughing additional capital at a preferred valuation, which may be lower than their previous rounds, said the founder of another fintech lending startup.

ET reported in its May 23 edition that lending startup Capital Float, which has been in talks to raise fresh funds from PayU, has been hit by a long due diligence process due to its asset quality. The discussions may lead to an acquisition, people familiar with the deal had said. Others, like lending marketplace Rubique and Loan Singh, have also been on a sticky wicket.

Venture capital funds invest based on growth metrics. Debt funding, however, is on the basis of asset quality, profitability and credit ratings. “If we cannot borrow money at rates below 20% then it is very difficult to lend to customers at such high rates. We will get customers who may not be quality borrowers,” said a Mumbai-based fintech startup founder.

A top investor in this space said that they should have been more careful while writing big cheques, as the lending business is less about venture capital and more about raising quality debt capital.

“We needed the lending companies as there was need for quality credit. We have fallen well short of that and are very worried about the developments,” the investor, who did not wish to be named, said.

Micro and small enterprises, which have been facing a funding crunch as banks were traditionally cautious about lending to these entities, have turned to fintech players for loans.

In many cases, however, these loans have been used to service their existing debt from banks.

“A lot of capital has been poured into the space, but a number of companies haven’t been able to scale to the extent that would have made venture capital investors happy. This is happening at a time when there is a liquidity crunch — it’s a mix of performance and macroeconomic issues,” said Ajay Hattangdi, managing partner, Alteria Capital Advisors.
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