india fintech – Boom.. Bust ..Boom..Bust..B.. what’s coming next?

We recently hosted leaders from the Fintech ecosystem at our Mumbai office. As VCs, we learn from the experts, and we got a lot of them to come together and talk about a few burning topics, such as:

• Liquidity crisis in NBFCs
• Supreme Court’s ruling against the Aadhaar usage by private companies
• Retail borrower in india being potentially over leveraged

Excerpts and thoughts from the session below, with ‘9 Key takeaways for Fintech founders to navigate short term volatility’

Liquidity Crisis in the NBFC sector

Liquidity crisis is apparent with a sharp rise in the bond yields of NBFCs

Source: Credit Suisse india NBFC Report Sept’18

1.   Raise long term debt. Double down on select bank/NBFC partnerships

“if i were running my own lending start up, i would choose to play safe and not be greedy, given the environment it’s better to sacrifice little return in the short term. i would go for long term lines even if i am paying a little higher for it.”

"Raise debt to lend, not equity. Equity is your cushion for a down-cycle like what we  have today"

2. Equity: Raise for margin of safety and hoard. Be valuation insensitive if need be

“You’re not going to get away with a leverage of 6 to 7 times with a startup, if you hit 5x of leverage you’re going to be skidding on the road, which means you need more equity, and equity raises, ROE’s come down, so valuations start to look like what they should have looked like earlier and a bit of normalization will happen. i would pick up whatever equity i can even if it’s a down round from the last time but still a realistic price.”

3. Evaluate your product for: ALM, Customer pricing elasticity, growth potential

“For certain players like HFCs and LAP Lenders, growth will be compromised. People are not well capitalized, debt will continue to be a challenge. People who have been growing at 60-80%YoY, will have to compromise on their margins to be able to continue on their growth path.”

4. Focus on the value drivers: Opex, asset quality, buildingcore capabilities

“Advice to all NBFC founders now should have an extreme focus on lowering opex and improving the asset quality. Now is the time to sit tight and build competencies for your business – be it tech solutions or Hiring the right people, so that once this cycle ends you can really accelerate well.”

Supreme Court’s ruling against usage of Aadhaar for authentication

5. Focus on true innovation and opportunities for establishing identity at low cost

“Come up with innovative solutions with different KYC packets and take it to RBi to figure out how to establish identity in an Aadhaar agnostic way. if Aadhaar is there, great if not, you should still be fine.”

6. Vertical specific KYC solutions likely to emerge from innovations

“OTP based eKYC was not allowed initially. But it was made compliant for a limit below 60K after a pilot with the Ministry of Finance, so that players could book lower ticket size loans profitably. Focus on such incremental solutions for specific use cases.”

State of consumer lending: is the retail borrower in india over leveraged?

Early trends of NTC decline and multiple loans by retail borrowers in India

Source: TransUnion CiBiL Retail Credit industry insights June’18

7. Find underserved, new segments: hard to reach, less data

“it’s important to not concentrate on the same corporate salaried customer and keep chasing the same people for more credit. Blue collared workers through aggregators, small MSME traders with GST data etc. can be interesting NTC segments which the banks will never touch.”

8. Verticalization of Fintech: innovative use cases & supply chain integrations can be long term moats

“Bajaj Finserv is a clear example of innovation on vertical specific use case – they make the CD purchase through a 0% EMi scheme so compelling, that they have won the segment who now uses a Bajaj EMi card for everything.”

“Frankly a good quality customer would have 40 options of loans on Bank Bazaar. The point is that you have to catch him before he goes there and so the use case becomes very important. The reason why we were successful in that product was because we were present as a check out finance option for the customer when he was shopping on the Big billion day, while others weren’t.”

9. NTC by segment is still underserved

“if you break down these charts further, you would find that there are many segments where proportion of NTCs is much higher and can be interesting segments to lend to.”

“Fintechs have just scratched the surface – if you look at the total retail loan originations by Fintechs combined, it would be 75-80k per month which is not even 1% of the market. There is enough and more potential for them to go to underserved segments, and with the use of smart alternate data be able to lend to them.”

Vikram Vaidyanathan, MD, Matrix Partners stated our internal view closing the discussion “Every Fintech founder should be able to navigate the volatility that comes every few years. The current chaos is a good thing for great founders and teams, and ultimately the survivors and innovators will own the ecosystem. We need to remember that great companies like Bajaj Finserv emerged out of a period of volatility. We continue to be bullish about the ecosystem and will continue to invest in this sector.”

We take great pleasure in hosting such events and will continue to do so to give everyone an opportunity to come together and learn from the experiences of others in the ecosystem. We sincerely wish to thank a bunch of individuals who contributed to this discussion: Anindya Dutta, Anurag Sinha, Bhavik Vasa, Deep Agrawal, Deepti Sanghi, Kshitij Puri, Kunal Mehta, Nitin Chugh, Pravash Sinha, Rohan Angrish, Saurabh Sinha, and Sunil Gulati.

if you are building a company in this space, or have a point of view on this, please feel free to write to us at Fintech@matrixpartners.in