As fintech lenders chase secured credit options, VCs up their bets

Time of India

19-06-2025

As unsecured lending slows, investor interest is shifting to secured lending platforms, attracting significant venture capital. Startups are expanding into secured loans like LAP and vehicle financing, but face challenges like high operational costs and default risks. Fintechs aim to offset this with technology-driven efficiency and selective physical branch expansion.
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The slowdown in the unsecured consumer credit market is resulting in an increase in investor interest in secured lending platforms, a sector dominated by traditional financiers till recently.Over the past one year, venture funds which typically fund tech-first companies have been betting on home financing startups , branch-led secured lenders offering products such as loans against property (LAP), loans against securities like mutual funds, vehicle lending companies and asset-based lenders. Easy Home Finance , Basic Home Loan and Vridhi Home Finance received significant equity infusions from venture funds such as Elevation Capital, Bertelsmann India Investments, Norwest Venture Partners and Ranjan Pai's Claypond Capital. Together these startups, founded between 2017 and 2022, have raised around $150 million in equity capital from these funds.More recently, Techfino raised around $7.5 million (Rs 65 crore) from Stellaris Venture Partners and others. Mahaveer Finance, which has been lending for used vehicles since the early 1990s, raised $23 million (Rs 200 crore) from Elevation Capital and others with an aim to add LAP and other similar products to its portfolio.'When we look at NBFCs (non-banking financial companies), we typically index on highly experienced promoters or founders, great track record on execution, prudent approach to risk management and underwriting, and a technology driven mindset,' said Mridul Arora, partner, Elevation Capital. 'Valuation multiples, however, are more a function of market cycle and risk-reward for that particular investment versus being determined by whether it is family owned or not.'With the winds blowing towards secured products, even well-funded unsecured consumer lending startups are jumping onto the bandwagon.Startups such as Kissht, Loantap, Fibe and Kreditbee, all unsecured consumer lending players, have now built secured products including LAP, mutual funds and vehicle loans. Among the large fintechs, Cred, BharatPe and Paytm have also announced their entry into secured credit products over the past one year.Some of these players like Kreditbee are also looking to build branch networks, hoping to underwrite the underlying assets better.'We have run down our consumer lending book by 50%. Now the focus is to build small business loans for retailers,' said Satyam Kumar, CEO of Loantap.The Pune-based startup recently closed $6.2 million in equity funding from July Ventures and others.With a strong understanding of certain customer cohorts, these startups feel that they can scale up secured products quickly catering to consumers who might be too risky for an unsecured personal loan.While secured lending is a major opportunity to compete with banks and larger NBFCs, fintechs will need to invest heavily in branch expansion.That could push up costs and make the small ticket size lending business unviable.'Investments in physical assets and branches would eat into the delta that fintechs can make between the cost of borrowing and the rates they can offer to their customers,' said Rohit Chokhani, founder, Easy Home Finance. 'This business will be sustainable only when there is major scale.'Add to that the need to build collection teams, another major cost item, given that these loans would require agents to take possession of machinery or property in the wake of a default.Data released in January by TransUnion Cibil on the credit market in India showed that as of September 2024, 1.7% of the loans under LAP were due for at least 90 days, among the highest in all categories of consumer credit.To compete with the traditional bigwigs, these startups are trying to disrupt two major business areas – one, to reduce the operational cost through technology and, second, to ensure that the online application forms can weed out unwanted customers without human intervention.'Traditionally, 70 to 80% of a housing finance company's costs go into running physical branches. We're bringing that down to 40 to 50% by leveraging technology, which enables lower customer acquisition costs and better interest rates,' said Atul Monga, chief executive officer, Basic Home LoanCurrently, customers can be charged 25-27% for micro LAP products, way more than 15-20% for a personal loan. Startups are trying to find out whether technology can help reduce these costs.'We have built our in-house loan origination and loan management systems, which helps make the entire application process digital. We will still invest in expanding our branch network over the years, but back-end processes need to be technology-led,' said Ratikanta Satpathy, cofounder, Techfino.