One of India's leading mobile phone brands makes an average $2 per
smartphone it retails. The company is clear about the fact that they won't make
money on the hardware and caps its ambition at 5%. However, the company doesn't
plan to keep its profitability capped and plans to make most of its money from
the internet services they will sell to their customers who have become part of
their hardware eco-system. This is easier said than done. Other than Apple,
there is hardly any hardware company which has milked their customers on
services. Then how will this particular firm make money? Of course they may try
ads and make clients pay for the in-built apps.
One of the interesting avenues this mobile handset maker is exploring is
super short term loans popularly known as payday lending. The idea is simple-
before the end of the month; most youngsters today spend their salary out; so
help them out for the last few days of month. These are typically loans which
run for 10 days to 3 months. Let's see how it works. The mobile brand
integrates the payday lending app in their firmware and takes necessary
permissions from the users for reading SMS, apps, GPS etc. Using this
information, it models the user's earning and spending behaviour and
underwrites a loan; usually a micro-loan to start with, to minimise the risk.
This is pushed to the user at the right time, typically the end of the month,
when the user normally runs out of cash say 20th. The offer is for a Rs 5000
(amount it knows the user will spend in next 10 days based on his credit/debit
transaction summary) & 10 days loan which can be paid back on 1st after
getting the salary. Instead of Rs 5000, user needs to pay Rs 5100 plus a Rs 100
processing fee. Rs 200 is nothing for the user when someone is ready to lend
him at the time of need and so he takes it without any issues. Now let's look
at the actual rate of interest charged:
Rs 200 is 4% interest for a 10 day Rs 5000 loan
Monthly level, that works out to 12% interest
Annual level, that's 289% interest
Welcome to new age lending!
Obviously our user of mobile brand won't realise this since he is only
paying Rs 200. The success of this model depends on the intelligence of the
code to identify the correct users who will pay back and give them cash when
they need it the most. The more turns they are able to do with their cash,
higher the returns. The brand tried integrating a fin-tech company into their
eco-system called Krazybee and have filed for a NBFC licence in India.
The mobile brand I spoke about, is just an example of a high speed
runner on India's new payments highway who with the help of technology are
doing what Indian banks have failed to do in past 70+ years- lend to the
segments of the society who didn't have access to capital. These runners are
mostly fin-tech companies, NBFCs, payment banks who are leveraging technology
in a big way to reach, identify & filter out a prime borrower from
sub-prime. The new age borrower they are catering could be a SME entrepreneur
in Moradabad or a college kid in Bangalore. According to CIBIL, there are 220
million prime customers in India who are in the age range of 20-69 years and
earn more than 2.5 lacs an annum. Of these 220 million, banks will only give
retail loans to 72 million through their existing underwriting models. This
leaves 150 million customers with these nimble footed runners hungry for
business.
The revolution in access to capital to sectors traditionally considered
risky started with the NBFCs. GE Capital's exit from India in 2013 and
subsequent push by Bajaj into the white goods lending space, modelling itself
the same way GE did in US in 60s, changed a lot of things for Indian market.
Bajaj sourced their customers majorly through white goods purchase, a very
emotional acquisition for Indians who normally does this when they buy or build
a new house. Bajaj identified the emotion associated with the purchase and used
it as the mechanism to acquire new customers who paid back in time. The rise of
CIBIL as a bureau to identify someone's propensity to default helped the cause
a lot. Bajaj, with the help of CIBIL, over time, developed very successful
underwriting models and paved way for a zero cost EMI revolution covering the
sector. Companies like Capital First, Capital Float, HDBFS replicated the same
extending the idea to multiple new sectors like Education, Health, Services
& even FMCG. Today your Bajaj card can be used just like a credit card
to buy groceries on Big Bazaar & Amazon. The underlying idea is simple:
Lend money when they need it at no interest and make the brands pay the
subvention.
NBFCs didn't stop with this. The idea of lending to non traditional
sectors which banks don't touch, was extended to working capital lending to
SMEs and new age companies. Fin-techs like Capital Float took this to the next
level by doing most of the loan processes online without physical interaction
with the customer both in B2B & B2C spaces. Suddenly, there is a new
genre of nimble footed entrepreneurs who had all India reach but hardly any
work force. They sourced customers online or through partners effectively
outsourcing the customer physical verification. In this, the fin-techs were
ably supported by the multitude of innovations which happened in finance sector
through Aadhaar and National Payments Corporation of India (NPCI). Aadhaar and
NPCI were 2 "ahead of time" ideas pushed by Modi government to
revolutionise India's financial sector. These could have supercharged India's
payment highways to another level thus bringing a very large part of the
financially non serviced out of their banking pariah state. Due to push from
the Modi government, 89% large part of Indian society have Aadhaar numbers.
These Aadhaar numbers provided fin-techs with a bio-metric based process to
ascertain the identity of the borrower. It doesn't end there, again due to push
from the government, 87 cr out of 110 cr bank accounts (80% of all accounts) were
linked to Aadhaar and 60% of the mobile numbers were also linked to Aadhaar. So
Aadhaar not only provided an opportunity to ascertain the identity of the
borrower correctly, it also helped the fin-techs to set up a seamless process
for repayment and communication using Aadhaar. With so much of data available
on the customer, Aadhaar provided an option to fin-techs to lend to nearly half
a billion population who didn't even have a CIBIL or other bureau scores by
using surrogates.
Next question obviously is the supply side. Where does these NBFCs and
fin-tech get money to lend to this "risky" customers? The answer is
the market. Most NBFCs like Bajaj are AAA rated companies and are able to raise
money from the market through commercial paper borrowings. This market is new
in India and Mutual funds are one of the biggest buyers of these commercial
papers. This eco-system works well as long as NBFCs do short term lending since
the paper borrowing is generally for a short term. However, all NBFC don't do
short term lending. There are ones active in real estate and infra sectors like
IL&FS which do long term lending with these short term funds. To solve this
dichotomy, they roll over the debt before the cashing date. This eco-system
worked well and even thrived till end of 2018 when 2 events crashed it all. One
was the Supreme court ruling which declared illegal the use of Aadhaar by
private companies for identity verification and second the infamous default of
IL& FS on his interest repayment. When the ruling constrained the ability
of these companies to process loans since the process of KYC now needs to be
manual and hence expensive and the fear psychosis which ruled the market after
IL& FS crash drained the market out of cash.
