In a spot like never before, fintech lending wavers. Get ready for intense M&As.
Among the fintech players, digital lending is the worst hit by
the Covid-19 crisis. As companies cry for a ‘moratorium on the
moratorium’ given by RBI, the industry will see a high mortality
rate. Smaller firms that can hold on for six months might be up
for acquisitions, while the big boys will become bigger. Last of
a three-part series.
This is some kind of a joke that’s happening with us”. Harshvardhan Lunia, co-founder and CEO of Lendingkart, followed up his disquieting remark with a
feeble laughter when asked about how the fintech-lending space is coping with the Covid-19 crisis.
Lunia’s sentiment is echoing across the fintech-lending industry in India these days. The segment is not new to heavy headwinds blowing away its real prospects to become a sustainable model for lending. From demonetisation to an e- KYC (know your customer) ban to the DHFL and IL&FS debacles, and more recently the Yes Bank episode, the last five years have been very challenging for digital lending. But the Covid-19 pandemic has put it in a spot like never before.
While the previous instalments of this series on the challenges faced by fintech companies in these trying times narrated the pains faced by o!ine-payments and digital-payments players, the concluding part tracks the worst a”ected of them all — digital lending.
Fintech lending has been an action-packed sector for the last two years both in terms of new entrants joining the race and venture-capital (VC) funds showering their love. Till one point, apart from pure-play entities, firms across fintech domains with huge customer bases have been foraying into digital lending.
But that was all in the past.
“Especially between October 2018 and February 2020, the market tightened. Covid-19 has added two more layers on top of that liquidity crunch,” Asish Mohapatra, CEO of OfBusiness tells ET Prime.
The first layer is the direct hit on revenue because no one is able to make fresh disbursements. The second is the moratorium announced by the Reserve Bank of India (RBI).
The moratorium on loan repayment is the most-discussed topic right now among fintech lenders, especially NBFCs, with one set of players looking for “clarity” and another for “hope”. But more on that later. First take a look at how the contagion has impacted some of the prominent names in the digital-lending space.
Disbursements have come to a halt
As the sector is overcrowded with several fintech lending companies, ET Prime decided to talk to people across fintech- lending segments to get a sense of how they are placed now in terms of disbursements and the measures they are taking.
Lendingkart: The SME-focused fintech-NBFC, backed by Fullerton, says there has been no customer acquisition or new disbursements. It used to disburse INR270 crore-INR280 crore a month before Covid-19. This has now come down to INR2 crore a day (only for existing customers). Big-ticket SME loans need physical KYC, which is not possible in the current lockdown.
The company, which employs 650 people at its Ahmedabad and Bengaluru o#ces, is not planning to lay o” anyone, but is restructuring the team. “There is no work for the marketing team right now, so we almost doubled our collection team from 40 to 80,” says Lunia.
On cost-cutting measures, he says, “Last year, we gave a good 16%-18% salary increment. So, this time we are doing limited salary hikes and for those whose salaries are in the INR3 lakh- INR5 lakh category. But at the senior level, we are taking suggestions on salary cuts.”
The company has clocked a loan volume of 100,000. The focus will be to reach out to the existing customer base for at least April, May, and June. Lunia also claims that he is still getting 25%-30% business enquiries daily. Whenever the market reopens “we will have a pipeline of customers, to whom we can disburse at that time”, he adds.
MoneyTap: The Sequoia and Prime Venture-backed startup, which recently raised USD70 million in equity and debt funding claims to be better o” than its rivals. The company also received an NBFC licence last year. “We always had bank and NBFC partnerships. Our own NBFC got operational only this year, so the ‘own book’ is still very small. When the credit crunch happened, the NBFCs tightened their purse [strings], but banks were still forthcoming. But now both banks and NBFCs are silent,” says Anuj Kacker, co-founder, MoneyTap.
The company is well capitalised to run its own NBFC, but “will be cautious now”. Kacker says its own NBFC book is still small today, and it was supposed to be built out now. However, the plan will now get pushed by another three months.
MoneyTap, which o”ers a line of credit to consumers, says the majority of the “lines” was created three years ago, and every month people were drawing nearly INR200 crore-INR225 crore. “Now, we are taking precautionary measures and the situation is literally changing on an everyday basis … the business might come down to 50% or 75% levels.”
The 125-employee company isn’t thinking of layo”s currently.
“We will spend money cautiously because there will be no funding scenario in the next 12 months. So, internally we have created scenarios A, B, C, D – wherein A is a growth scenario and D is where people are dying on the streets … our reality is somewhere in between, and we are modelling it as we go. The beauty of the credit-line business is that it is not dependent on new customers. People who transacted with us in April 2016 transacts even today.” However, the company has enforced a few more caveats.
Biz2Credit: TheUS-based fintech NBFC claims that it does lending worth USD1 billion a year in its home market. In India, it operates more as a platform and works with NBFCs and banks and does end-to-end underwriting and scorecards, etc. The company also operates in Canada and Australia.
Co-founder and CEO Rohit Arorasays there is a sharp drop in its revenue and like any other company it has also laid o” people and cut salaries in the last two-three months because of the very grim situation globally.
In the US, Biz2Credit employs 100-120 people and has laid o” around 20% of the workforce. The rest have taken salary cuts. “In India, where we employ 300 people, we have not laid o” anyone and no salary cuts [have been exercised] yet. We are discussing internally that we will give some salary deferments if the situation doesn’t improve. I and my brother (co- founder) have taken 70%-75% salary cuts for the rest of the year,” Arora tells ET Prime.
Biz2Credit’s India market revenue share is less than 10%. About 80%-85% of its business comes from the US, and the rest from Canada and Australia. “In India, we were getting a lot of pick-up recently, but now things have all shut,” he says.
Arora finds one thing unique about India — here companies don’t cut costs or lay o” people as quickly as in any other market. In the US, if the economy is hit, it is very acceptable that people will be laid o” and salaries will be cut. In India, it is like a taboo. “But it is very clear that to survive this crisis, you will have to hunker down and conserve cash. The main thing is you need to survive because if you don’t survive, you won’t be able to take the advantage of the post-crisis opportunity,” he says.
He, however, believes that layo”s are coming in a big way in India. “The culture is di”erent. The challenge is no one wants to stick their neck out and will do it very subtly. I don’t foresee how India will survive with delaying these cost-cutting measures.”
Faircent: The major peer-to-peer (P2P) lending company, which doesn’t depend on banks and NBFCs for lending, is doing its business cautiously. But like other lenders, the disbursements have not stopped.
“There will be stress. [But] there are enough lenders lending money. In the last week of March, we slowed because there was some issue while onboarding last-mile customers, physical verifications, especially for higher-ticket size loans, but now it has started,” Rajat Gandhi, CEO, Faircent shares.
He claims that Faircent has a good captive borrower base, who it is still lending to. Some of the segments such as lending against receivables; loans for money-transfer companies and other partners who were giving consumer loans especially for online trading; small-ticket cash loans of INR1000-INR10,000 are moving. Bigger-ticket loans are an issue. The company is creating new products for last-mile customers.
“Based on our credit policy, borrowers who qualify for this loan will not have to pay anything for the first three months. They can either pay the principal plus interest at the end of the third month, or extend that for six months,” says Gandhi.
Mostly the o#ce landlords of Faircent have waived o” rent for April and some are ready to forego rent for May also. “We are going line-by-line. We are also looking at bringing down our third-party call-centre cost; because of work from home, they are saving on rent which is their major cost component,” Gandhi adds.
The company, which has been doing INR110 crore-INR115 crore in disbursements every month for the last four-five months, says it disbursed one of its highest in March, but since April, it started seeing a drop of 10%-20%.
EarlySalary: The short-term small-ticket loan company, which also has its own NBFC, started seeing early signs of stress. “We saw too much demand hitting. The panic started some time ago,” says Akshay Mehrotra, CEO, EarlySalary.
The company, which targets the salaried segment, disbursed INR150 crore in March and says new customer acquisition has stopped. “We want to cater to our existing customers, then go and acquire customers. We are like a credit-card [company] and have half-a-million customer base. I am hoping we can serve them,” Mehrotra adds.
It employs 243 people. Right now, marketing has stopped, so the company is not wasting money on that front. “As we reduce new customer sourcing, it automatically reduces our cost by INR2 crore-INR3 crore a month. That gives us a lot of cushion. We have to run a tight ship.”
EarlySalary says it is still recovering from two financial crises, IL&FS and Yes Bank. It believes getting debt will be extremely di#cult. “We are seeing that pressure,” Mehrotra states. “We are just lucky that we have INR170 crore of net worth and 1x leveraged. Our leverage is not too high, and on short-term products, there’s flexibility – if you see a risk, you stop lending.”
The company claims that it was close to profitability, but now it will be delayed by a few months.
EarlySalary says it was also doing a lot of experiments with several “riskier” categories. But it has been forced to pull back and focus on products that give higher yield. “Currently, the focus is on our core three-month product.”
OfBusiness: The Matrix Partners-funded NBFC, which o”ers credit lines to SMEs that can be used to purchase raw- materials, says it is witnessing a di”erent pattern. “The SMEs, who we funded, did their revenues for January, February, March, and it was one of the best quarters. So, for the three- month payment cycle, which was April, May, June, my customers are paying me now,” Mohapatra says.
The company claims it had 14-15 month of cash before Covid- 19, and now since there is no new disbursement, and SMEs are paying back and not taking further materials from the OfBusiness platform because there is no construction happening anyway. “The cash reserves have gone up substantially, and now we are sitting on 18 months of cash,” Mohapatra reveals.
“When the o#ces start, we will start audits and processes will be cleaned up. We are expected to start doing secured lending on May 3 to sectors which are more resilient. Infrastructure projects are mostly funded by global institutions, so you can’t hold that for too long … so that needs to start. It will take three-four months to come back to where it was before lockdown,” he adds.
There will be zero new disbursement for NBFCs in April. If the market opens on May 3, there might be 20%-30% disbursement of what it was in March. (In March, OfBusiness did INR330 crore in disbursements, of which INR100 crore was new disbursement.)
“So, the INR100 crore will be INR30 crore in May. I am expecting by June, and in a best-case [scenario] August- September, 50%-55% of [the business] should be back to March numbers on new disbursements,” Mohapatra adds.
The company plans to do appraisals.
CreditMate: The Paytm-backed loan-collection platformis facing a lot of issues at the moment.Collection was never an easy business. Due to the moratorium on EMIs, there are limited collections right now. “Earlier we used to tell people please pay or your credit score will su”er; but now we can’t say that because they’ll say the government has said that the three months won’t count. There’s no teeth in collections right now,” says founder and CEO Jonathan Bill.
As a company, it needs to hunker down for the next three months because revenues will slow down and cash flow will be impacted, he adds.
CreditMate, which employs 63 people , has reduced salaries across the board to save costs. There is no change for people earning INR25,000 a month; 10% salary cut for people in the above INR25,000-INR40,000 salary range; and 20% for above INR40,000 bracket; and eight people who earn INR1 lakh and above are taking 25%-100% cuts.
“I have seen three recessions and believe that it’s better to take action early on rather than have actions forced upon you,” Bill says.
The company has 30 lending clients, including banks and new-age fintech players such as True Balance, Branch, Zest Money, Capital Float, and Paytm. It claims to have done 1 million collections till date.
What has added to digital-lending players’ worries is the moratorium on repayment. A tweet from Capital Float co- founder and CEO Gaurav Hinduja says it all.
A moratorium that wasn’t
The moratorium announced by the RBI has created stress for the fintech NBFCs. First, there was some confusion among the borrowers that the interests for three months have been waived o”, say industry players. But it is only an option that allows a borrower to delay repayment, but with interest. This will put further pressure on the borrowers once the moratorium ends.
For instance, if there is a three-month extension on an INR5 lakh loan, the accrued interest will actually look like “an added interest of 30-45 days – which means an extra burden of 1-1.5 months of EMI for small businesses,” Lunia from Lendingkart explains.
The moratorium announcement was for banks. The RBI had left the NBFCs, Mohapatra informs.
“Some private banks such as Kotak, HDFC Bank, and others are putting a conditional moratorium – which means if you are a good customer with a good history and you are hit by Covid-19, then you will be given a moratorium. So, when banks did this, NBFCs also followed suit and started doing conditional moratoriums. And, we have put it on our site, too,” he says.
Lunia further explains, “If the banks give moratorium to us, we will pass it on to the customers. Otherwise, the customer won’t give us [the money], and we will not be able to give it to the banks. Then the RBI will have to create liquidity.”
The central bank has created a liquidity of INR6 lakh crore- INR7 lakh crore in February and March. While banks are enjoying it, they are reluctant to pass it on to NBFCs, founders of several NBFCs claim.
If NBFCs want a “moratorium on a moratorium”, they must go and present a case to their lenders. And, there’s a high chance of getting turned down.
“The only advantage is that even if I don’t pay back my loans, the RBI allows me that I should not go back to [become] an NPA,” Kacker from MoneyTap notes. The Digital Lending Association of India is in discussions with RBI and presenting its case that this moratorium on moratoriums should be honoured by all banks.
Collections drying up
For lending companies, it’s like a recession. Even if the issues get resolved in one-two months, the recovery will take much longer. Consumer spending and earnings will take a long time to be normal again and till that time, digital-lending companies will be out in the cold.
Harshil Mathur, CEO of Razorpay, says he is seeing 15%-20% decline in repayments or collections. Some states have even come up with guidelines to not call customers for collections. But companies are still figuring out ways to collect their dues. “Otherwise, how will the business survive?” asks Lunia.
If some industry sources are to be believed, the collection for NBFCs was typically 90%-95% earlier, which has now slipped to 40%. “Because of the asset-liability mismatch, the NBFCs have to pay [back] 100% of the liability (since there is no ‘moratorium on moratorium’), but they are only able to collect even 40% [of the loan]. So, there is a big gap plus most of the fintech NBFC companies are loss-making. It compounds the issue. In about three-four months, smaller NBFCs in term loans can see between 15%-30% NPAs,” an NBFC founder tells ET Prime on the condition of anonymity.
Consumer-lending market players are far more exposed and many smaller firms have picked up riskier bets. They are always in a hand-to-mouth situation and will take more time to revive because they are “mass-populist”. It will take 12-15 months for impulsive-purchase lending for segments such as consumer durables, travel, hospitality, and retail to pick up again.
Consumer lending is expected to get impacted because if people start losing their jobs, there will be income shocks. If that happens, the market will start seeing defaults, then there will be a spiral e”ect in the industry. “If there is a spiral e”ect, they [the companies] will not be able to raise capital. It’s a vicious cycle and it is very di#cult to stop it,” Kacker from Moneytap says.
It is estimated that NPAs of SME-lending companies will shoot up to 15%-20%, while the consumer lenders can see their NPAs rising anywhere between 10%-30%.
What the future holds
In the next six-nine months, the fintech-lending market can see some of the following scenarios playing out.
Question mark on survival: Most NBFCs run a tight ship. They usually have three months of cash as the typical business cycle is to raise liability, lend, collect it back, and re-deploy. But now that the liability side has totally stopped and banks are hesitant on giving ‘moratorium on the moratorium’, survival becomes a challenge. Apart from some large public-sector banks that have committed funding, companies say there has been no debt o”ered by any bank in the last two months. Another source says that ICICI Bank has stopped lending to fintech companies. This will have a cascading e”ect.
Companies with a fat cash bag or the ones that raised fresh funding will survive.
But a lot of small NBFCs of INR200 crore-INR300 crore size will be wiped out, says Mohapatra. “For a typical NBFC, the market, if everything remains fine, will take six-nine months to get back to normalcy. So, it is a nine-month rigorous journey, which means the company needs to have nine months of cash – which is not true for the market in general. The market in general needs just three-five months of cash,” he adds. Except the top 10-15, no one else will survive without an NBFC moratorium. The industry will see a high mortality rate.
The lending platforms will resort to layo”s and salary cuts, although they are better o” compared to the NBFCs.
Liquidity is one factor for survival, but capital availability will be one critical criteria. “I raised INR1,000 crore and INR850 crores is left with me. If I burn INR15 crore-INR25 crore in the next three-six months, I can still absorb it; but not all fintechs are in this position,” Lunia says.
Growing from here will be another challenge. “If I was doing INR280 crore disbursements, and if my business falls to INR230 crore [level] and my growth target is to achieve INR310 crore, then I would need growth capital. So, for now the only resort is to lower the expenses,” he adds.
Startups that are in a growth phase will have to be prudent to at least run their businesses till December.
A wave of consolidation: Smallercompanies that can hold on for another six months might be up for acquisition. “If things go well, then maybe in six months, we might look at acquiring a few of these companies,” shares Lunia.
Mohapatra from OfBusiness believes that if the ‘moratorium on moratorium’ doesn’t come, then by June-end there will be too many M&As. He says there is a possibility that some companies may not avail moratorium because when the market reopens, they won’t get money. “The banks will say you took moratorium and all,” Mohapatra says.
OfBusiness is open about buying profitable companies with good management across three domains: it can be an NBFC with a branch-led model penetrated deeply. Second could be companies in supply-chain products like bill discounting, platforms. It could be NBFC/non-NBFC. The third could be entities with licences for insurance/mutual fund etc. “We want to do these verticals but haven’t been able to do so till now,” Mohapatra says.
Lending as a feature will vanish: In the next 12 months it would be very di#cult to get new funding. Every company in the fintech space was getting into lending and lending as a feature was in everybody’s mid. That’s up for a toss now, believes industry insiders.
In India, VC money has made fintech players fat and lazy, says Arora from Biz2Credit. Companies just wanted to grow at any cost without any discipline, he adds. Private banks have also taken so much hit, that they will also be cautious before giving funds. “So, the co-lending model that was getting developed will stop for some time,” he adds.
Since banks will be under pressure, the ‘hot’ neobanks that were buzzing with activity for a year or so will also take a hit. “I don’t know how the rails will be available and how aggressive the rail providers will be now. They will save their business first,” founder of a fintech company observes.
The bottom line
Once the dust settles down and the market reopens, the percentage of lending that happens digitally will go up, with the mindset changes brought about by the pandemic. “We are seeing that even those lenders, who were traditionally not the first-movers, are looking at digital very seriously right now. For every rupee lent, the share of digital is going to skyrocket,” believes BankBazaar CEO Adhil Shetty.
The revenue side of the balance sheet is already taking a body blow. There won’t be any new funding from VCs either. Raising debt will be an issue, too.
While a clear picture will only emerge six-nine months from now, the smaller players will have to fight a tough battle for survival while the big boys will have to turn this crisis into an opportunity.
The storm this time is relentless. The digital-lending space needs to show its messianic zeal to live to tell the tale.