Transcript
Speaker: Lending is a simple business model, but it's a complex business. Only about 15% of small businesses in India have access to formal finance. 85% of Indians, your countrymen and my countrymen, are not credit unworthy. There was a realization that when we talk about entrepreneurs, we are only talking about venture-backed entrepreneurs. That is what the media has focused on. How do you decide about the risk?
Speaker: How do you analyze risk for new-to-credit customers? In the good cycle, every lending company looks good on those matters. What looks great in a good cycle can suddenly come back to buy it. How do you find the courage to press the red button to say no to growth when everyone around you is continuing to grow? Alok Mittal is the founder of Indyfee Technologies, which has lent more than $500 million to 55,000 small businesses. Indyfee pioneered digital lending using alternate data. For example, how many swiggy orders does a restaurant get? How many UPI transactions happen at a store?
Speaker: How many parcels does a seller ship? In this episode, Alok shares the playbook to build a profitable lending business in one of India's toughest sectors.
Speaker: Alok Mittal, welcome to the Founder Thesis podcast. Thanks for having me on the podcast. So IndieFee is a B2B lending business. um You previously were a venture capitalist. ah What stage of businesses were you investing in? Was it early stage, growth stage? What kind of check sizes? Early stage, this was seed and series A. Typically, we would start with a check size of somewhere in the 1 to 5 mil range at that point in time. This was 15 years back. Okay. Which is pretty substantial. Which would be like today's 10 mil check, I guess.
Speaker: Yeah, I think the seed hasn't changed much. So there is still an appetite for what what was 1 then is maybe 2 today. ah That was typically the first round that the company was raising. The angel syndicate phenomena was not prevalent at that time.
Speaker: And to that extent, these were the first checks in the company. um And yeah, the five end of it could be today's time. Okay. ah So did you evaluate lending businesses as a VC?
Speaker: We did. We actually invested in Equitas Microfinance, which was a microfinance lending business. ah So, yes. So, I want to kind of ah ask you to help me understand how a VC evaluates a lending business. what are There must be, you know, people who watch Shark Tank know how to analyze a D2C business. For example, you will say, what is the cost of goods sold? What channels are you selling from? What is your customer acquisition cost? What is the churn retention? you know, that... is somewhat democratized that knowledge of how to analyze D2C businesses. How would you analyze a lending business if someone was sitting in front of you and making a pitch? So I think there are two different lengths to look at a lending business from a VC standpoint, right? One, and I think that's something one that we followed in case of Equitas, was that ah it was ah playing into a new category. Microfinance was still ah not mature at that point in time.
Speaker: So growing rapidly um and within the set of companies available at that point showed superior execution. So that was kind of mainline, more a growth equity bet really than a venture bet.
Speaker: um And then the second lens where we invested, for example, in the US market, in lending club, was a technology led bet.
Speaker: ah right FinTech wasn't the term we were using at that time. But essentially, ah there are a lot of lending businesses that have come in ah using technology in novel ways.
Speaker: And on back of that technology promising a better lending business. Better could be risk, better could be faster growth, better could be serving underserved customers. So that's the more venture-friendly lens to look at lending businesses.
Speaker: This is not deep enough. Okay. um Now, ah for example, do you look at, I feel like growth is not really a challenge when you're giving money.
Speaker: but Lending businesses are essentially giving money, right? um but what ah So but what are the metrics which tell you that this is business will not a crash and burn?
Speaker: And lending businesses have crashed and burned because of various factors. Yes. So I think the answers are different when you are looking at a growth stage business, which has had a track record, which has a full credit team.
Speaker: You can look through the portfolio. You can understand how decisions are being made. Is there a metric that tells you quality of decision is good? There are metrics. um But in a good cycle, every lending company looks good on those metrics.
Speaker: but You have to kind of go beyond the metric. right To say, you know how's the system actually performing? right Is the knowledge dispersed in every branch of that business?
Speaker: Or is there a way for the overall business to capture ah these you know knowledge elements from daily interactions and systemize them, which means that the whole system is improving?
Speaker: Okay. And ah what are those metrics which look which you said look good across all companies? So classical, right? So you will look at NPAs in the company. You will look at what is called vintage pool analysis, which is saying if we originated a set of loans in a given duration, what is their losses running like and how do they mature over time?
Speaker: Right. So that um in effect, ah it neutralizes for growth. The NPA metric is very growth sensitive. You're growing fast. NPAs will look good. But when you do a vintage pool analysis, you're able to step away from growth rate and look your read credit performance.
Speaker: Okay, okay, understood. Because NPA is percentage of bad loans with the denominator being total loans. And if you're giving a lot of loans, they haven't had time to go bad yet.
Speaker: Yeah, so the denominator inflates, ah which brings down the overall number. But if you're looking at, you know, let's say January to March 2023 originations. Right.
Speaker: Now, that cohort is fixed now. And how are losses rising in that cohort? Are they stable across different cohorts? Right. I think those are some of the ah metrics you would look at.
Speaker: oh But given that, you know, even when we are saying growth stage, we were not coming in at a very late stage. there was always the peeling of the onion to say, hey you know, who's handling credit? What are the systems?
Speaker: How do they avoid overexposure to a single business? um and Right? What is the on-ground diligence in that case which is being performed? What does the collection infrastructure look like?
Speaker: Is it reflecting in recoveries and collection efficiency? Right? So like any other business, ah you know, the qualitative lens is important to differentiate one from the other, especially when you are in a good cycle.
Speaker: Okay. okay And typically, like ah how do businesses differentiate? Is it mostly on the basis of their customer acquisition strategies? Like some could say, I will acquire customers digitally. Some could say, i will tie up and it will be like a B2B to C or whatever. or ah like What are the ways in which lending businesses? So that has changed over time, right? And that is changing with the advent of digital, right? So classically, ah cost of fault is the biggest driver.
Speaker: ah for banks and NBFCs, right? If you have a lower cost of fund, you can actually go and tap into lower risk pool of customers. Your risk will look lower, right? All of those.
Speaker: um Given a certain cost of fund, ah operational excellence, right, both on distribution and on credit, ah is what has created good businesses.
Speaker: So when you do different branches, are you able to replicate the practices from one branch to another? Are you able to train people fast enough? Are you able to train talented people fast enough to take the right decisions?
Speaker: Is knowledge getting captured and recycled back into the whole system? Right. So a lot of it is operational execution. And if you notice, a lot of successful and NBFC businesses have been built by entrepreneurs who are great at operational execution.
Speaker: With the yeah with the advent of digital and technology, you know those have started to become now elements that can differentiate. So again, the prior differentiation drivers are not gone.
Speaker: The cost of fund is still there. You are able to raise debt capital. ah Execution remains, but may not be branch-based execution necessarily. NDP, for example, doesn't have branches.
Speaker: um And on top of that, you now have this element of saying, hey, can I use technology to serve underserved customers? If you can do that, right, then you can hit a better optimization point between the pricing you can command and the risk you have to tolerate.
Speaker: Right, that is essentially where data plays in into our business. Right, can you lower operating cost because you are using technology? Right, so if you look at the profitability of lending business.
Speaker: It's essentially what the customer pays you minus what you pay for your cost of funds, minus the operating cost, minus the risk. right And risk refers to bad debts. Bad debts, yes.
Speaker: right So you have to be able to move one or more of these to you know build a profitable business. And then you have to be able to grow it and scale it fast. So either you reduce cost of funds or you reduce bad debts, reduce operational expense or increase what you're charging the customer.
Speaker: ah Like this is how you would make it a profitable business. That is correct. And then you can do more than one of these. And then there is this overall at a market level, you know, the higher the pricing, the higher the risk, you know, that holds at a market level.
Speaker: So within that, can you get, you know, ah tangible advantage? Because otherwise, the best customer is going where they can get a 10% loan. And then customers who can't get that are going to someone who will give them at 15, and the customers who can't get that are going to 20, right? So broadly speaking, the market stack ranks to that.
Speaker: So the risk engine is important only if you are at a higher interest. Someone who's giving loans at 10% doesn't necessarily need a very strong risk engine.
Speaker: ah they can afford to say more no's than yes's. Yes, so the basis of their differentiation is lower cost of funds. So they don't need to differentiate as much on the risk engine.
Speaker: However, there have been, you know, umptive examples where banks who had very good cost of funds have landed up with, ah you know, bad risk, higher credit costs than what they had assumed.
Speaker: So your operational discipline and excellence is still relevant. But risk may not be a differentiator for you as much as for a company that's operating in a higher risk zone. Okay. What risk zone does Indy fee operate in?
Speaker: So, you know, our average interest rate would be in the 22 to 24% range. And our risk levels will be in the 3.5 to 4% annually. Right. So that is kind of the ballpark.
Speaker: However, one of the things that we've been able to do, and again, this is something that technology enables, ah This was one early realization why we started this business. Is, you know, when you have a branch-based people-driven model on risk, you tend to play in a very narrow band of yields and very narrow band of risk.
Speaker: but Because human beings don't have the ability to to to discriminate a 1% chance of loss from a 5% chance of loss. What is the word yield? wi you said Yield means the pricing.
Speaker: Okay.
Speaker: So human underwriters are very good at looking at a policy and saying yes or no. But they are not very good at looking at a file and saying, hey, is the probability of default here 2% or 5%? And why does that matter? The reason that matters is because then you are forced to create a policy which gives you 2%.
Speaker: Right? So you won't serve the 5% risk customers even if those customers are willing to pay you higher. So a lot of banks and NBFCs, ah which have a and branch-based execution framework, will play in a very narrow band of risk and very narrow band of pricing as a result of that.
Speaker: So I only do loans which will be sub 2% risk, and I'll only play in 17 to 20% pricing. ah The data-driven credit models that we have built allow us to discriminate this risk. What is 1% probability? What is 3%? What is 6%?
Speaker: And hence you will see us playing in a much broader band of business. right So we will do loans at 16%, we will do loans at 28%. We will do loans that have 1% probability of default. We will let do loans that have a 7% probability of default.
Speaker: And that is one of the things that we bring to the table in terms of saying, hey, now I can grow faster because I have the ability to price risk. So when a loan has a 7% probability of default,
Speaker: You would look at it as a portfolio, like I can have 1000 such loans which have 7% probability of default and I charge them an additional 7%. So even that ah risk of, the the risk factor is taken care of basically. no So there are two or three things that we can do, right?
Speaker: So there is a pool of customers that the market considers a 7% because they have limited ability to differentiate risk within that pool. So first thing, which is the value to the business is... And what's an example of this, like, just to make it real? So let us say there is a Kirana store, right? Small Kirana store.
Speaker: And this is unsecured lending, right? And let us say that if you got thousands of these Kirana stores, right, in a similar, let's say, civil risk ban, because that is available to everyone, right?
Speaker: Maybe 15% of them will default over a two-year period, right? Right? So the first thing that we would do is not to look at that as one segment, but to say, hey can we discriminate risk within that and find a pool of people who will be less than 5% default and leave out the pool that is more than 25% default, right? Just in the manner of thinking.
Speaker: Okay. For example, you might discover that people with a bachelor's degree have a lower... Yeah, we may discover that. We may discover that Kirana stores that are very dependent on tobacco are higher risk than Kirana stores that are dependent all on, you know, household goods.
Speaker: Right? So there may be different ah elements of how you discriminate that. So that is the tangible value bring to the table of saying, hey, within a certain pool that the industry regards as homogeneous, you know, can we bring better risk discrimination to the table?
Speaker: The second is, what is the right product? Again, when conventional NBFCs and banks are looking at this, they will typically be, you know, one or two product companies. And what does that mean? I might give them a term loan for three years.
Speaker: Okay, that's the product. Right? Where every month you pay me an EMI, but it's a three-year loan. Right? The second thing we will say is, okay, what can we do to further mitigate risk? And for this customer, is a 12-month loan the right product?
Speaker: Or is a 36-month loan the right product? Right. So again, that is another way for us to contain risk. In your world, products are just different tenures or is there something else also?
Speaker: It could be tenure. Term loan is one product. For example, we do, ah you know, loan facilities where the customer can only pay one of their suppliers. They can't take money in their own bank account.
Speaker: Okay. Okay. So that is another flavor of the product where we know where the money is going. Inventive financing. Okay. so So that is another flavor of the product. So sometimes products can help you mitigate risk.
Speaker: Right. And then the third layer is then to be able to price risk. Of saying, okay, now I figured out that I want to make loan to this customer. I've been able to discriminate risk and get under 5%. But I still need to price that 5%. Right.
Speaker: And that depends on your confidence of what you say 5% is going to land up being 5%. So risk is important. Volatility of risk is also very important. ah For every loan that you give, you also score a confidence level on your risk assessment on that loan. So, okay. The confidence level is scored more on the overall risk level.
Speaker: So we know that if we are if we think someone is a 5% risk, right, ah as a pool, then what is the pool level volatility we are likely to see?
Speaker: Okay, okay. And that... Pool level volatility, utility what is that number? Like, is it a, would you say, like, it's a 1.0, what does that number look like? So, it ah it increases with risk. So, my 1% pool doesn't vary as much as my 5% pool does.
Speaker: ah But on the whole portfolio, what we have seen is we are at about 30% across cycles, right? So, a good credit cycle versus bad credit cycle. you've seen about a 30% swing. So if I'm saying something is 5%, then it may land up being 6.5%.
Speaker: Okay. Understood. Okay. Okay. Okay. Got it. Okay. And this ah volatility for a pool, ah it influences the interest rate that is eventually charged to them? or Yes. Yes.
Speaker: Yes. And it also influences where we say no. See, at certain point, suppose I have an 8% risk customer, but I'm not confident this is 8%. and i then we can't price it.
Speaker: So I can't say, you know even if that customer is willing to pay me 40%, forty percent I still won't do that loan because I've not got a good handle on the risk, right? So, so the pricing, risk pricing is not an infinite range.
Speaker: It is limited to where ah we believe we can ah control the volatility. What is the edge of your comfort level? About the 5% number. 5% is the edge. You would not want to give loans to anyone with more than 5% risk level. There are different scenarios, but broadly, that's a good way to think about it. yes Okay, okay. Interesting. ah You mentioned a couple of things while you were explaining the lending business as such.
Speaker: First thing i want to ask you is about cost of funds. Can you go a little deeper on what ah differentiates cost of funds between different players? What are the sources of funds and therefore what are the costs associated? See, when a lending business, and I'm talking about NVFC businesses here,
Speaker: ah when a non-banking financial company starts its journey, their source of funds will largely be other larger NBFCs. Right? Depending on what business I am in, my starting cost of borrowing may range anywhere from 15-16% down to 12%. So if I'm in a secured business where my own yields are lower, right I might be able to get to that 12% end of the spectrum.
Speaker: If I'm in a consumer lending business where my APRs are 40-45%, then lenders understand that there is higher risk. APR? This is the ah all-in pricing, including ah the interest rate and the fees that we charge to the customers.
Speaker: Okay. So you're saying the the oil in pricing can be double of the interest rate advertised? no, no. So we are not in that business. I'm just giving an example of... food Okay. Right. So... okay um oh So if if that is high, then lenders also want their share out of it. And the reality is that you are borrowing from NBFCs who themselves are not the largest NBFC, because they don't want to get into this risk.
Speaker: Largest NBFCs have their own distribution channel, access to customers, loan sourcing. They do that. But even if they are lending to other NBFCs, they would like to see larger and more established NBFCs, which carry lower risk.
Speaker: right So everyone is kind of grading their cost of fund and the risk they want to take. ah So that is where the journey starts. oh The largest NBFCs in the country will be sub 10% on cost of borrowings. because right And they will be borrowing from multiple sources. They will be borrowing from banks.
Speaker: They will be having their own ah capital market borrowings. So, you know, issuing instruments that retail investors like you and we can subscribe to. right So choices increase and cost falls as you go up the scale threshold, which means that you've also demonstrated your ability to make money, your ability to control risk, write all of those things.
Speaker: of ah So that is kind of the range that it goes down to. Banks will have further lower cost of funds because when you and I put our money in a saving bank's account, right We hardly get any interest on that. right yeah right ah But the bank uses that money to make loans.
Speaker: right So in the case of a bank, you might see a cost of funds which is in the 5%, 6% ballpark. right So the difference between a new NBFC and a bank can be 10 percentage points. right And that means that you know even with equivalent efficiency and risk management, you have to price your loans 10% higher.
Speaker: which means you'll get higher risk. right And hence, you construct your business model towards being able to absorb that higher risk. Are you in the unsecured business or the secured business? are Mostly unsecured.
Speaker: ah We have just recently started a secure line of business, but that is very nascent for us. Okay, okay, okay. ah Does foreign capital also come in as debt for NBFCs, etc.? Like, say, Japan has near zero interest rate. Yeah, it does. um Again, ah ah cheaper capital will find its way into low-risk, larger businesses.
Speaker: So, the nature of foreign capital that is available to younger businesses, especially if you are in the impact space, right We are in the MSME lending space, for example, ah is that there are several ah impact lenders globally who want to be able to support these businesses.
Speaker: But the the cost of borrowing from them is not necessarily less expensive. ah So from a cost standpoint, it lands up in the same ball. Okay.
Speaker: Like say, Asia Development Bank or something like that. Sure, sure, sure. So, MSME lending is considered to be impact-based? Overall, yes. But again, ah different impact lenders will have their own definition of what they consider impact, what are they going after, what their objectives are, right?
Speaker: So, someone will go after low-income households, right? Someone may think of MSME as impact, right? Someone may think of rural as impact, right? So, definitions of impact can vary by who you're speaking to.
Speaker: Okay, okay, okay. Understood. You also mentioned how ah risk engines can allow you to serve underserved customers.
Speaker: ah Can you just zoom in a bit on that? Like, what's an example of underserved customers who can be better served? So, ah you know, when I say underserved, I'm saying underserved from a credit standpoint, availability of credit standpoint.
Speaker: Right. And I think the ah clearest kind of ah definition of what is underserved can come from prior borrowing history of the borrower. Right.
Speaker: So, for example, there will be borrowers who have never borrowed before from the former financial system. Right. They might have taken money from the money lender or, you know, from their family, but they've never really gone to a bank or an embryos.
Speaker: These are called new to credit customers. And they are unserved. okay Then there are customers who might have borrowed, but for example, they might have taken a gold loan, but unsecured loan is not available to them.
Speaker: right They might have taken a consumption loan like a two-wheeler loan, right ah but again business loan is not available to them. They might have borrowed in the MFI context, right, as part of a group. Their business has grown.
Speaker: Now that business needs more money, which cannot be served through the microfinance system. Right. So these are all examples of underserved customers. Right. And then there'll be customers who regularly borrow.
Speaker: Right. Who might have three loans running right now. Right. And they need a fourth one. Right. So that is a well-served customer.
Speaker: So if you look at our portfolio, for example, right, about 6 to 7% of our customers will be unserved customers, the new to credit customers. Right.
Speaker: There'll be another 30% who have never got a business loan before. Right. So these again, from a business loan standpoint, are unserved.
Speaker: Right. Even though they might have taken a gold loan, a vehicle loan. And then 65% of our customers will have a prior business loan. right But the reason they are coming to us fully understanding that we are relatively a high priced lender is because whatever business loans they have are not sufficiently catering to the growth that their business is seeing.
Speaker: right And so that is the underserved customer in our context. Okay. Okay. ah How do you decide about the risk? How do you analyze risk for new to credit customers?
Speaker: So as I said, new to credit customers is, you know, single digits for us. And rather than, you know, trying to analyze too much, we look at what product can we offer them, right? So for example, let us say there is a restaurant that is, ah you know, making home deliveries through Swiggy.
Speaker: right And we can see that month on month they are making deliveries of 50,000 rupees a month through that channel. They have not taken a loan before. right But their transaction track record on Swiggy is giving us the confidence right that there will be an ability to pay here.
Speaker: right And hence we may bank on that. We may look at their bank account statements and see that they normally don't bounce checks. right That might give us the confidence that they have the degree of financial discipline to service alone.
Speaker: right So those are the kind of criteria. So it's more product innovation than necessarily a lot of credit model innovation as far as the new to credit customers are concerned. Okay. okay oh Have you ah created credit model or risk model innovations within Indyfee?
Speaker: Oh yeah, that's our core business, right? That's why we exist. ah You know, otherwise... how have you done it? what Give me some... So, for first thing is that, as I mentioned earlier, ah the state of the art in underwriting MSME credit is our policies.
Speaker: Right? What is a policy? Policy will say, hey, the Sibyl score should be more than 700. The business should be in existence for three years or more. Right? There should be no default in the last six months.
Speaker: Right? So these are very broad brush parameters and they do a good selection of a risk, but they leave a lot of people unserved. Okay.
Speaker: Now we have built data-driven models, right, where roughly about 50 to 60 of such parameters, right, goes into the model, right, and those parameters are competing against to each other in some sense to say this customer is credit worthy or not.
Speaker: right So for example, if someone's civil score is not 700 plus, but I'm not seeing check bounces in their bank account statement. right i mean My credit model may take the call that this is still a manageable risk.
Speaker: right And I don't need to reject this customer. right So your ability to foot a lot of different relevant parameters, um and let them comp compete against each other to come to ah what at this point is optimum, right, is one element of that.
Speaker: And the second element is that we are not trying to necessarily then contain risk under 1% or under 2%. Right, so our risk tolerance ah is higher, assuming we can control the volatility.
Speaker: And that also allows them to serve customers who ah other banks and NBFCs may not serve. Now the other reason why people will come to us besides the fact that they can get credit with us and they might not be able to get credit with others um is because of the convenience and distribution.
Speaker: So about 50% of our business for example comes through the channels like I mentioned Swiggy earlier. So we have these partnerships with other ecosystem players where MSMEs are going to conduct their business.
Speaker: right And then a relevant credit offer is available to them. So this MSME may not be even proactively going and talking to people about, hey, I need credit. But the fact that their business is growing and they have credit available easily may prompt them to apply.
Speaker: Right? Similarly, our journeys are digital, which makes it convenient for customers to navigate their journey. So customer experience and access is an equally important part of you know why we win business in an environment where a lower cost option may be available to the customer.
Speaker: This kind of lending where ah the aggregators are giving you access to the revenues generated by their vendors, so this is revenue-based financing, bill discounting? like what what What is this called?
Speaker: No, so, um see revenue based financing ah normally refers to um
Speaker: lending to unprofitable businesses for a short duration of time, right, under the assumption that revenues will keep coming and hence we can take a part of that revenue for repayment, right.
Speaker: So, that is not the bulk of our business. So, this Swiggy restaurant, for example, is a profitable business. right And we may go and give it a full two year to three year credit. Okay. right To grow their business. right The closest ah analogy to this is what was earlier called merchant cash advance.
Speaker: Where payment players did this. right or Going and giving someone money on back of the point of sale device. Right. And then deducting money from that point of sale terminal. Right. So that's the closest analogy.
Speaker: Do you also deduct money from Swiggy's payouts to restaurants or the restaurant pays you directly? Like in this kind of a model. So in this kind of a model, Swiggy earnings of the restaurant would be available to us to deduct money. Again, it's a question of policy of where we go behind that versus directly from the bank deduct.
Speaker: Okay, okay, okay. and Understood. ah yeah Tell me what made you want to start a lending business? You know, this is not an easy business to be in a highly regulated space. Regulations keep changing. You, I'm sure, have seen the whole up and down demonetization, Nylon FS, all the RBI regulatory changes. Why did you choose such a tough battle to fight? Yeah, I think, ah so there's a question of motivation and there's a question of opportunity, right? ah
Speaker: So from a motivation standpoint, ah you know, I've been an entrepreneur all my life. ah And in my venture role and angel investor role, I was backing a lot of entrepreneurs.
Speaker: And at some stage, there was a realization that when we talk about entrepreneurs, we are only talking about venture-backed entrepreneurs. right That is what the media has focused on.
Speaker: The ability for venture capitalists to build a narrative around that is very powerful. um Whereas there are 60 million other entrepreneurs in the country who are running their business. Many of them have the ambition to scale those businesses.
Speaker: And those entrepreneurs are underserved for capital. right So I think that is the personal connect that I found and continue to be motivated by. as far as the space is concerned. Was there a turning point in your journey as a venture capitalist when you got... it To me, it sounds like you got disillusioned with venture capital as a way to support entrepreneurs.
Speaker: No. ah So there is a space for equity. So I continue to make angel investments. My own company is funded by VCs and PE players. So there's a role that is served by them.
Speaker: right ah This other side of the market is venture capital blind. right So they normally have their own sources of equity for a long time before they get to the growth stage and private equity players might come in and support them.
Speaker: And hence their reliance on debt is very high. ah But the availability is very low. right So only about 15% of small businesses in India have access to formal financing. So 85% of people don't.
Speaker: And the popular narrative is that they are not credit worthy. right And the way we turn that narrative around, and we are a small fish in a big pond, right so I'm not by any way means claiming that we have solved that 85% problem.
Speaker: But we think it's a problem that providers have with our ability to discriminate credit. See, 85% of Indians, your countrymen and my countrymen, are not credit unworthy.
Speaker: yeah true We have not been able to figure out which ones are and which ones are not. So I think that is an interesting problem to solve. So that was the motivation element of why we did this.
Speaker: And then there is an opportunity element, right which is that digitization was beginning to continue. And we believe that digitization is a lever to help solve this problem. right both on distribution side and give you examples of you know ecosystem-based lending which didn't exist ah before 2014.
Speaker: right I gave you examples around how credit evaluation can be changed to make sure more people get served. And the third key piece the role of technology is in bringing lower cost funds to these entrepreneurs.
Speaker: So why can't I partner with a bank? right to let the bank lend to this audience, whereas I manage the risk on their behalf. right So this was a pretty novel concept when we started out. I had seen this work in Lending Club, yeah which I mentioned earlier was a US-based deal. You introduced India to co-lending?
Speaker: No, we did not we did not. So there were players alongside us who were also doing it. So around 2014, we saw an emergence of three or four players. who were motivated to follow this process.
Speaker: And interestingly enough, ah over the next five years, by 2019, right, ah we had collectively made the case to the regulators that this is something that benefits everyone, right? Rather than the bank lending to a large NBFC lending to a small NBFC lending to a MSME, right, let's create a mechanism by which the small NBFC can enable the bank to directly lend to the MSME.
Speaker: right And then ah now the regulator has co-lending guidelines and so on. So it's ah it's a regulated pathway now. But yeah, ah you know, it started with, um actually started a long time back with what is called the business correspondent originators. ah okay right that ah that That business has existed forever.
Speaker: right But this claim that, hey, these business correspondents don't need to be one-time originators, but can add value through the loan siphon. That whole notion started to pick steam in 2014, 2015, when digital lending started to show up.
Speaker: So those were the key levers that we thought were available to actually solve the problem. And I think much of that has um only gotten reinforced over time.
Speaker: Why would the banks not just the use their own branches to lend? Why would they want to work with other lending companies and lend through their platforms? Yeah, so I think banks will continue to use their own branches, right? um If there is incremental growth of the nature that the bank would like to get, then they're also very open to working with players like us, right? But the key ah to this entire thing is, can we bring our risk management capabilities for this segment?
Speaker: See, if you look at corporate lending, banks have enough risk management capability that they've built and they probably excel at that. right But if you go to this 3-4% risk bracket in an MSME, a lot of banks haven't built that capability.
Speaker: So if we can bring that to the table, that enables them to address a market that they were earlier not addressing. And command higher yields in the context of their business. right ah So I think those are some of the motivations for large NBFCs and banks ah to work. But yeah, yeah you know it's not like every bank is jumping up and down and saying, hey, this is a risk bracket I want to go to.
Speaker: right So there are certain banks and NBFCs who like this opportunity. There are banks and NBFCs who are saying, hey, I don't need to go there. I'm happy with my 1% business. right And that is what I'm going to run. Okay. Okay. ah You know, I want to share my own...
Speaker: ah MSME entrepreneur debt story. ah you know Surprisingly, I somehow found PSU banks to be incredibly supportive of ah someone like me. I did not have any sort of... I was new to credit the first time I took a loan. I used to run a spoken English training business. My goal or my dream was that one day it will become like NIT, multiple branches. It never scaled beyond one single branch. But even to build that one single branch, something like buying an AC was not something I could afford. And so I had taken a small loan to
Speaker: kind of spruce up my infrastructure and have like a glass panel at the entrance and ah stuff like very small loan, like a one lakh loan. But i got it from a PSU bank. ah The only thing which the branch manager asked me is where did you study from? I told him I'm from MDI, gorgao like a tier one B school. And he was like, why are you teaching English? What's the... and I told him, I believe one day this will become a big business. And and just purely on that conversation, he gave me a loan.
Speaker: No, no, that's amazing. And I resonate with you, right? See, there's someone who's doing that 15%. And PSU banks certainly are a large part of that solution.
Speaker: um So this is not to undermine the effort that has gone in and the penetration that has been built. But the reality remains that 85% is not solved.
Speaker: Yeah, true, true, true, true. yeah So ah now, you know when you started with this ah working with the digital aggregators, I think there were other companies who also started with a similar thing. One of them pivoted into B2C and now it's actually been acquired by an e-commerce company.
Speaker: oh What made it possible for you to succeed when others did not? Is there some lesson to be learned on why? You know which company I'm talking about. you know so so Yeah, i see, I don't think I see this as a race to success.
Speaker: um I think different companies have made different strategic choices. ah And it's hard to look at those strategic choices in a rear view mirror, you know, and pass a judgment on those.
Speaker: I think ah those companies have been successful in their own way. Right. We are still chasing success. Right. Remember what our goal is, what our mission is. right I don't think we are at 1% of where we need to be.
Speaker: and So I don't think we think of ourselves as we have succeeded, you know and we don't think of others as they're not. I think there are choices we have made. I think we are persistent about the choices we have made. ah And if you ask me as an entrepreneur, that is probably our biggest strength.
Speaker: right that ah we um are purposeful about solving for this problem and we will we will solve it. See, imagine if we were having drinks together and I would ask you, k kawa who company you nili yeah why did they pivot? You would probably be more willing to give me a take that probably this was a mistake they made. I'm just wondering if you're open to... Absolutely. And and and that's the reason why I said I don't think this is about the same notion of success.
Speaker: um Digital consumer lending businesses have actually scaled much faster than MSME lending businesses.
Speaker: Right? So I think from a pure value creation standpoint, that space has performed better. Okay. Now within that, some players are more successful than other players. In our space, some players are more successful than other players.
Speaker: So I think I can completely see the rationale for that strategic shift. Right. And that's, that rationale is validated by the market today. Right. You got digital consumer lending players with 10,000 crores per sub assets.
Speaker: You don't have that in the MSME zone yet.
Speaker: And that's why i come back to, you know, you know, what is our strength is being persistent about our purpose and mission. right And that is what keeps us ah you know nibbling away at this opportunity. you know the Different founders start with different stages of life. A lot of people are married to the idea of entrepreneurship. I think you were married to the idea of supporting entrepreneurs. And this was your method of supporting entrepreneurs, which still keeps you on track and you know probably allows you to say no
Speaker: to things which are not aligned with that. Yeah, I think that is part of it. um And along the way, we have attracted partners who are with us for the same purpose.
Speaker: Okay. Right. So I think when you start out, the founding team starts out by itself. But over time, you get enough people who believe in the same mission. Right. ah All of us are also very conscious about value creation.
Speaker: right So this is we have never called ourselves a social venture because we don't think that is the lens that we are pursuing this with. ah But yeah, I think the whole company now is built in alignment to that purpose.
Speaker: So, you know, the 2015, post 2015 period, there was a lot of like fintech as a sector and especially lending side got created, a lot of funding received with companies, different, ah different moats or USPs. One such motor USP was that or is, I'm not sure if it's a is or a was, um If you provide accounting software to small businesses, that gives you access to proprietary data, which gives you the ability to better price risk and therefore scale faster. But I don't feel like that has proven
Speaker: to be a true moat. What are your thoughts on this? what you know Do you agree with this as a moat or are there more fundamental things that businesses need to get right? It's not about access to proprietary data.
Speaker: No, I think it is about access to proprietary data. right The reason why 50% of our business is ecosystem business is because you believe in that. right I'm accessing proprietary data through a Swiggy. So I think it it is absolutely about proprietary data, both because you can underwrite better but also because you can make the customer journey far more seamless because you're not asking them the questions that you already know answers to.
Speaker: Right? You can target customers better because you can pre-qualify customers. So I do think that proprietary data is a big lever. ah In the accounting space, I think
Speaker: there have been challenges to execution, right? So if I look at one end of the accounting business, right, The largest accounting players in the country have traditionally not had visibility to this data.
Speaker: It's a desktop software. I run it on my desktop. I run it in-prem. Yeah, Tally can't see. Right. Okay. So so I think ah that is why the opportunity at that end has been constrained. Right? Multiple players at that end of the spectrum understand this.
Speaker: And so they've been building that capability to, with customer consent, be able to see that data. Right? And I do think that that market will fructify. The second end of the market was where fintech companies came up as accounting players.
Speaker: They understood this opportunity, so day one they built the cloud. Right? However, I think the business segment that they have gone after, right, let us say Kirana stores.
Speaker: Right? Don't have a natural rhythm to follow an accounting software.
Speaker: Okay? So partial data lands up on that accounting software. Right? I'm a Kirana store guy, why do i need to do all of this? Right? yeah Yeah, yeah, yeah, yeah. So so I think ah there the challenge has been to get rich enough accounting data, even though you're in the accounting software business.
Speaker: And if you've got a million people using your accounting software, maybe 25,000 of those, you know, have the real data on the software. So that has been part of the challenge. so So I think both these worlds will meet, right? The new age innovators will try to move up the curve in terms of size of customer.
Speaker: which will then give them richer access to data. The incumbents are definitely trying to get more visibility on the cloud and hence um be able to play in the credit opportunity for their customers.
Speaker: But I think it's it's a play in motion. I don't think it's done. no Okay. okay ah What about the QR code based approach? That is that is very successful.
Speaker: So all the large ah UPI QR players have a robust lending business to merchants.
Speaker: So that that space has worked very well. What is the AUM for these QR code ah businesses? Is it comparable to yours? What is your AUM right now? So we are at about 2,000 crores right now.
Speaker: ah The AUM of these players combined, you know, I won't have the exact numbers, but my senses would be at least 10,000 to 15,000 crores as an industry. So yeah, they have scaled up quite quite well. And they would typically take a cut from the incoming money through the scan or or like there were different models?
Speaker: No, so RBI guidelines don't necessarily support that. ah So they would, but they have awareness of when money has come in and when it has gone to the bank account.
Speaker: So a lot of this is now done on being able to trigger a UPI mandate on a daily basis and recover from there. Okay, got it, got it. One of your peers in B2B lending recently, again, With a larger loan book got acquired through some sort of a distress deal. What happened there? Like, is this a cyclical thing or what? ah No, so the industry, the MSME, unsecured lending industry, and to some extent, the secure lending industry has gone through a credit cycle, adverse credit cycle.
Speaker: Largely, let us say, in calendar 24 and 25. In fact, can I make you go... is back even further. Can you tell me what cycles you have seen in this business? And what was the outcome of each of those cycles? And maybe we can end with the 24 cycle, the most recent one. See, the um this is really the first credit cycle we are seeing.
Speaker: And then I'll explain why I call it the first cycle. And how would you define credit cycle for someone who's an outsider? today So, classically, what happens is, ah you know, when risk is running very good, which means losses are low, a lot of players come into lending.
Speaker: Okay? Those players also lower their guard on risk management. So they will be more permissive to lend to customers who they otherwise might not lend. Right?
Speaker: As a result, a lot of customers pick up more debt than they can service. Right? And hence their ability to pay back goes down. Defaults start to increase.
Speaker: Right? Players, NBFCs and banks see this. They withdraw from the market. Over a period of time, let's say 12 months, 18 months, the market deleverages. The customers, whosoever had to default has defaulted.
Speaker: People who have not defaulted have proven their own trade discipline. Risk goes low. A lot of people come back in. Okay. right So that is the classical credit cycle. And this is the first one, at least in the last 10 years, that we have seen.
Speaker: Before this, we have seen events. right So when GST was launched, right There was disruption to certain kind of MSME businesses. right So that was an event risk.
Speaker: When demonetization happened, right suddenly there was an event right which led to higher losses. Now in case of both ah demonetization and GST, we actually were not affected by that.
Speaker: And part of the reason being that we were completely sitting behind evaluating the banking cash flows of the customer. right And those were preserved. Right.
Speaker: right So lenders who... orders would still be online payments. Right. The lenders who were very branch-based and were doing in-person assessment of the cash business of the customer, you can imagine what happens when UPI comes into play. right so ah So I think those the businesses who were more affected.
Speaker: ah So this was between 2016 and 1980. And at some level, the resilience of a customer who's... more formalized in at least the transaction sense of the word, right, started to show up.
Speaker: The next big event risk was COVID. ILFS was not an event event risk. ILFS was a liquidity side constraint, which means that we could, some of us could potentially lend less.
Speaker: But there wasn't a credit event in the market. It's not customers said, hey, ILFS is defaulting, let me default. ah Just for people who don't know what happened to ILFS, if you can just... Yeah, so essentially, ah know, there was a big default on part of a financial institution in the market.
Speaker: And when that happens, I explained to ah you earlier that we borrow from other banks and large and NBFCs. And large NBFCs also borrow part of their money from banks. Right? So if the perception of risk in this market goes up, then people don't want to lend to each other.
Speaker: Right? Which means we have less money to then be able to lend to MSMUs. okay so So there was an impact on the growth rate of businesses, but not necessarily on the end customer.
Speaker: Now, the next big event risk and the biggest one we have seen so far was COVID. Their customers were directly impacted. right Their businesses were shut down. right ah They lost family members. ah Customers weren't going going out and buying as much.
Speaker: right And that was a big event from a default escalation in the whole industry. So we went through it, our peers went through it. um I think some of the strengths of our model that kind of ah showed up at that time was A, our ability to monitor ah customers on a one-on-one basis.
Speaker: right So again, if I take the Swiggy example, if they if the cash flows of the restaurant are decreasing, I know it in real time. right Whereas if those customers, if i I don't have real-time visibility of data to those customers, then I'm trying to calibrate it at an industry segment level of saying, hey, restaurants are generally not doing good.
Speaker: right So that changes how you can handle the situation. I can go to every customer and say, hey pay me now. Or I can let 50% of them run their business because I have visibility that they are running their business is fine.
Speaker: And I can go help the businesses that are not doing fine. right So it made our actions a lot more granular than what is possible in a data-starved environment. i um As a result of that, while we ah went through an increase in our credit risk and our credit cost, we were still at the better end of the spectrum relative to the overall industry.
Speaker: So at that point in the worst vintages, ah you know, a lot of the industry players saw about 150 to 200 percent escalation in risk. ah we saw about 80% in our worst vintages. So we hurt.
Speaker: um And at the same time, we were learning you know as to what are the elements in our business model that can create more resilience and the hence you know build more capabilities in that area.
Speaker: The 24-25 cycle is a classic credit cycle. right Years 22-23 were very good credit performance years. A lot of money came into the market. over-leveraging happened. why Why did a lot of money come into the market? Because then the risk is very good. Everyone wants to make money, right? I told you this is a high-priced market.
Speaker: Right? So who doesn't want a 22% yield if the risk is only 2%? Like there was bounce back post-COVID. Yes. And a lot of lot of vulnerable businesses went out of business in COVID.
Speaker: So what you're left with is also a better food. Okay. Okay. You're talking to the survivors now. Right. Okay. Okay. Okay. um So over leveraging is what was the biggest factor here.
Speaker: ah You know, in a big market like India, it's hard to generalize, but you know, in this situation, I would suggest that the dominant cause was over leveraging. And the industry has gone through unwinding that ah over the last couple of years. So what would have happened to this player I spoke about is their risk would have gone up.
Speaker: Everyone's risk went up. Different players were also operating at different level of leverage. What that means is how much is the money that I have, my equity that I'm investing versus how much is the ah borrowed money that I'm doing.
Speaker: So remember that, you know, your size of the loan book is borrowed money plus your own money. But losses all go to your own money. you still have to you still have to return the money you borrowed.
Speaker: So if you have too much borrowings in relation to your own money, then the same amount of risk deterioration will hit your equity a lot more.
Speaker: So typically, I believe it's 1 is to 4 is the healthy… Depends on who you are talking to and when you are talking to them. In a good cycle, 1 is to 4 is great. In today's cycle, people will say 1 is to 4 is too much. I want to see more equity in the business. right So that also is cyclical in nature.
Speaker: But yeah, for a business like ours, 1 is to 4, which means 20% of the money going out is our own equity. I can take a 3-4% incremental credit rate. 3-4% I'm already building into the business model.
Speaker: But even if risk doubles, I can still bear that. ah so So that's where I think that this number kind of comes from.
Speaker: RBI's norms are 15%, right? So 1 is to 5, 1 is to 6 range. So the the moment your equity eroded because of bad debts, then your lenders will stop giving you any more money. Essentially, your business could come at a standstill unless you have an equity infusion. Yeah, or do you shrink the business.
Speaker: or you You can also shrink the business. right You can say, I'm not going to disburse more money right now. you I am collecting repayments. So that's a way to shrink the business. right So there are various things you can do. But just depends on how much time you have to handle that situation. How how deep is the issue? um So again, you know these are strategic trade-offs. What looks great in a good cycle can suddenly come back to bite.
Speaker: I don't think any of us have the recipe, perfect recipe on that. ah But what we have learned over time is that the bias to being cons conservative is okay, especially if you have got patience. like ah Then in a good cycle also, you exercise a bit of that patience and don't don't grow as fast as you can.
Speaker: So I think those are things that, again, this is the first lending business that I'm part of in operational capacity. ah We have a team now which obviously is all from the lending domain. My co-founder Siddharth was blue blood lending.
Speaker: And he helped instill some of this discipline in in the company. That ah controlling credit comes first. ah so So that is still kind of ah the culture in the company.
Speaker: How did you survive this cycle? So A, ah you know, in relation to our equity, we were not... ah You were not over leveraged. Okay. ah But B, our risk models also have worked better than the industry. So again, in this cycle, we have seen credit risk escalation anywhere in the 70-80% range at the industry level.
Speaker: Our credit risk escalation has more been in the 30% odd ballpark. So the strength of the digital credit rails is visible. Now, we obviously haven't gotten to a point where we don't suffer when a bad cycle comes.
Speaker: So we continue to kind of be very sensitive to that and conservative about that. But each of these events and cycles is also allowing us to build more intelligence into our own ah decisioning models.
Speaker: right So right now we are thinking about, hey, this is the first cycle we saw. When the next one comes, can we spot the cycle early. Okay. Right? Okay. ah So that's an interesting question for us because a objective we didn't have the data to be able to wrap our head around it. You know, now we have at least one cycle data to say, you know, how does the cycle express itself in the early stages? Remember when COVID was going on, all of us were drawing the exponential graphs and saying, at the early stage of the exponential, what does it look like?
Speaker: Right? Think about the same problem with the credit cycle. Like, for example, you could suddenly see your customers are taking on second, third loans. Yeah, that's that's that's that's an example of what you could see in the market, that defaults have not started creeping up, right? But ah leverage is starting to build up, right?
Speaker: Now, what are the thresholds of that, right? What do you want? What kind of signal do you want to quantify? those are Those are interesting questions. Okay. But this pair of yours is also digital lender. ah So...
Speaker: What made your digital ah risk assessment engine better that you had? That is hard to say because we don't have a white box into what our peers are doing.
Speaker: We only get to see the outcome ah of that. But you might have some hunches, right, that this is why my risk engine is good. So one of the things that worked well for us, right, even in this cycle, even as I say that we want to be able to spot cycles early, is related to the rest of the industry, whether digital or otherwise,
Speaker: We were perhaps the first to get to the action. So we saw the red button and we acted on it in September 2023.
Speaker: right No one was talking about, hey, I think we are hitting a credit cycle at that point in time. What does hitting the red button man mean? Is that we titled our credit screens fairly significantly. We stopped lending to about 30% of the people who we would have lent to in August 23.
Speaker: right In one stroke. So our growth suffered. right ah So that is something that we know um you know just as a matter of observation. So our monitoring systems were doing their job.
Speaker: And our organization culture was allowing us to listen to those signals. I think both of those are important. ah One is digital, one is not digital. ah So that is something we have observed.
Speaker: But as I said, ah you know this cycle has been punitive on us. And so the bias is much more to think about, you know, how do we become more and more resilient towards this than to celebrate a relative victory?
Speaker: I think the ah inherent defect of a founder is irrational optimism, right? Like, otherwise, you would never become an entrepreneur unless you are irrationally optimistic and you have wild dreams.
Speaker: ah How do you find the courage to... press the red button to say no to growth when everyone around you is continuing to grow. And, you know, it takes a lot of courage to take that stand. And ah how do you like, how do you build that courage?
Speaker: I think it takes a culture to build that stand more than individual courage. You see, we are ah we are a 700 people company. But you built the culture, right? like I did, but my co-founder did as well. right See, i I knew nothing of credit when when I started this business.
Speaker: right And i I would dare say that at this point that culture is fairly... right so we have now recovered for a year. Our credit performance actually better than what it was in 2022-2022 now. right But the team down to the runda down the line is still very, very cautious, conservative because their sense is that the market level this hasn't sorted itself out.
Speaker: Right. So, you know, when a credit manager, or head of credit, our head of risk analytics, when all of them are aligned to saying, you know, credit cost comes first, and within that set of constraints, we will find our growth.
Speaker: Right. We have a CEO who runs the business now. Right. He's fully aligned to the fact that our business is about credit management. Second, I think ah as a, as a organization, for better or worse, we are patient.
Speaker: So, for us the notion that, hey, we need to get to a finish line in three years time is ah flexible ah Were you ah deliberate about culture or did culture rev evolve?
Speaker: I think there are some things that we are deliberate about. right ah So for example, the risk culture is something that we've been fairly deliberate about. right um The innovation culture and the bias for technology is something that we are deliberate about because we believe that is our only edge.
Speaker: in an environment where my cost of fund compared to best in class is 10% apart.
Speaker: right So there is no other basis for me to win. right um So I think there are things of that nature you know that are ah deliberate.
Speaker: And what does being deliberate means? You encourage experimentation, you tolerate failures, right you you reward the good behavior. So it's not it's not complex.
Speaker: right But for example, you know the should we be 100% digital or we should have some parts of it which are non-digital? right That is not a ah red line.
Speaker: I've got 80 people on the ground collecting money.
Speaker: right so So there are things that you would think you know ah for a digital two first company like ours would also be red lines, but they are not.
Speaker: um But yeah, I think this culture is fairly core to us. The innovation and and tech bias for technology is fairly core to us. And our focus on the customer segment is fairly core, right? We don't want to kind of start doing, you know, multiple things because there's an opportunity out there.
Speaker: ah We think that we are building core assets in this space. And we are seeing signs that that is differentiating us. How did you, ah so you said today 50% of your AUM is through the aggregators. What was your diversification journey or product expansion journey?
Speaker: When we started the company, 100% of it was aggregators, right? Because we felt like for a new company, that was a safer part of the pool to jump in. You have more data data visibility, you have more cash flow visibility and so on.
Speaker: And which aggregators like Swiggy and who else? So our initial one was actually in the travel segment. Travel agents, Travel Boutique was a large partner for us. ah We went into some of the payment players after that.
Speaker: Then Swiggy, Flipkart, Amazon, and the e-commerce players came in. ah Now there's a much longer longer list um of partners that we work with. um In about 2018, we opened up our own direct channels of acquisition. So, acquiring customers online.
Speaker: Because in that two to three year window, ah we felt confident that our credit models had reached a point where they could, ah you know, handle open risk.
Speaker: Right? And we started to work with... ah what we call as affiliate partners. They are still partners, but they don't have data like Pesa Bazaar, right? So they originated for us, but they don't have transaction data flowing through them.
Speaker: and So we expanded our distribution channels to some of those. And what segments did you serve? So a bulk of what we do is, ah you know, the micro and small end of the MSME. Think about customers whose turnover might be 50 lakh to 10 crore annual turnover.
Speaker: But within this turnover, any kind of business? or So mostly on the distribution side of businesses, retailers, dealers. right We are not on the manufacturing side of the businesses as much. And not on services also? Services will be there. About 20% of our business will come from professional services. Like a CA firm or a dentist clinic? Not CA firm so much. they don't They don't need working capital. But yeah, dentist clinics will be part of that. Software companies who have receivables, contractors, those will be examples.
Speaker: Over the last three years, we have also opened ourselves up to the what is conventionally been the revenue-based financing market. right So startups who have revenue but not margins. right ah And ah what we have done is taken a slightly different approach to that market.
Speaker: So the products currently available there are venture debt and revenue-based financing, both of which, when you do the full math, are far more expensive than what we are. right There are warrants, ah right there is early collection in a revenue-based financing context.
Speaker: So we said, hey, we understand you know ah this risk. This is one market where we can be price competitive. right So we have built that into a clear customer segment, which we will today be about 10% of our business now.
Speaker: um And again, we index it to the cash rotation cycle of the business. So that is how we are kind of changing the product they get. You saying, hey, they don't make net profit right now, but they make money on every rotation of cash flow.
Speaker: And can we understand that cash flow rotation and finance that? Okay, okay. What is the... ah constraint to growth for you today? Is it access to funds or access to borrowers?
Speaker: So at this point, specifically speaking, it is more access to borrowers because our credit risk filters are fairly tight, given where we are coming from in the last couple of years. But these things can move very quickly, right? So a year back,
Speaker: ah borrowing was hard. right So it's very hard to kind of say what I said with any degree of permanence, even one quarter permanence.
Speaker: ah Things can change quite suddenly. Like, you know, when the LFS crisis happened, suddenly liquidity dried up. A year and a half back when two NBFCs, two MFI institutions got suspended ah because of regulatory concerns, ah you know, the liquidity window shut down.
Speaker: right So you have to kind of, you know, those are the two key drivers of scale and as you have to kind of watch both of them. How do you ah scale up access to borrowers? So, you know, larger part of our business is through partnerships.
Speaker: And so to be able to create ah new product offerings, expand our segment coverage through those partners is one key part of the rhythm. On the direct origination side, how can we expand our footprint?
Speaker: ah For certain kind of customers, does it make sense to for us to have a field team to close the loans out? right I think those are the kind of trade-offs that we're looking at, but you know largely one is channel expansion, sign up more partners, sign up more distribution channels.
Speaker: Second is within those distribution channels, convert the funnels better. right So optimize for customer experience, reduce friction ah in there.
Speaker: Third is, you know can you bring more product relevant products to the market that and improve your coverage of the customer segment? So I think both those would the three key categories. Okay, okay. You said you have about 700 headcount.
Speaker: How do... You know, how how do you actually run a company with 700 people and have everyone aligned and, you know, like outperform your peers and ah be profitable? Like, what what are some leadership principles which you have learned over the years that have helped you to manage a organization of this scale?
Speaker: Yeah, so I think um transparency and a high degree of participative leadership, I think, are important. Right. ah Transparency just ensures that everyone knows what's going on.
Speaker: And hence they understand the why of alignment and not just what they need to align. Right. Once people have understood, you know, why is it that we want to increase our co-lending business?
Speaker: Right. They are much like much more likely to take the right decisions rather than us telling them, hey, go increase the co-lending business. right ah So I think that that is an important part of it.
Speaker: I'm not saying that's something that differentiates us, but certainly something that we pay attention to. um
Speaker: The second thing is the participative element of it. right I think one key challenge that emerges as the companies grow large, and at 700 I think they are still relatively small in terms of headcount. right the Great companies being run at tens of thousands of people.
Speaker: But you need to kind of still be able to listen to the ground. right And that is something that your foot soldiers just bring in. right so So making sure that the reverse line of communication is flowing is important.
Speaker: ah Which means that you're not shooting the messenger. You're still finding time to go talk to people across levels.
Speaker: And they feel like it's their company and you know they can move the needle on it if they have an idea.
Speaker: So I think those are some of the things. um you know Startups normally do a good job of some of this. Right. um It's an open floor format. People can come speak to you.
Speaker: oh You know, hierarchies are, ah you know, less relevant ah because you haven't acquired, you know, 20,000 people to manage. ah So, yeah, you know, for us, the challenge will be that as we continue to scale, you know, how much of this can be preserved.
Speaker: You put a lot of emphasis on knowledge capturing. ah In the beginning, when I asked you as a VC, how do you evaluate businesses? You multiple times spoke about, are they able to capture the knowledge which they are getting from decision making? i heard another podcast in which you had also spoken a lot about organization knowledge base. ah what ah What's the way in which...
Speaker: this, can and like, what's the way in which a founder can be more deliberate about capturing knowledge? See, I think finally founders will establish systems. Okay.
Speaker: Now,
Speaker: let me let me just take examples rather than talk in abstract, right? So our credit models are one place where we would like to capture knowledge, right? Because that's a compounding asset. Okay.
Speaker: Now,
Speaker: are in any organization teams will be busy enough to do what they need to do on a daily basis. right Is someone in the team pressing enough to say, hey, but I need to understand what a cycle looks like because I know I'm going to hit a cycle again even though I'm out of this one.
Speaker: It has to happen down the line because you're not going to have all the good ideas. right Some of the ideas I've had, we've experimented with, have been terrible. and i so So I think it's more about creating that system where that gets rewarded. right So for example, every credit decision that we take, and there are humans involved in a credit decision.
Speaker: And this has been going on since we started the company, literally seven, eight years now. We codify each of those decisions.
Speaker: which means that the underwriter explains to the system why they have taken a particular decision in fair degree of granularity. okay And then our risk analytics team looks at it every so often to say, are underwriters seeing certain trends that the model is not seeing?
Speaker: Because model is saying, hey, I am predicting risk. I will only get to know what happens to real risk 12 months down the line. and i But the underwriter is seeing what is coming in today. i Now this is a system that came by you know, seven, eight years back when we were very small, when one could have argued that you can just talk to the five underwriters and figure out what they're seeing.
Speaker: Right. And now, for example, AI is changing all of that. Now AI is telling me that your end writers don't need to codify that input. Right. A bot listener can qua codify that input much better.
Speaker: Right. And so there is, you know, my tech and risk analytics team identified that opportunity, they are going behind and saying, you know, that conversation is still happening, but is there, you know, better insights that we can get out of that conversation than what we are able to get today.
Speaker: right um I think it comes back to what we were talking about earlier, when you were saying talking about setting a culture. A lot of that is about focusing on what elements of culture do you care about.
Speaker: right Sometimes culture looks like laundry lesson, it's hard to distinguish one from the other. right And then do you build a degree of experimentation, a degree of risk tolerance, reward people who are doing it when they demonstrate the right behaviors?
Speaker: So I think some of that ah
Speaker: is working in areas where we wanted to work. I guess if I had to kind of summarize Alok's philosophy of growth, it would have three pillars experiment, tech, and knowledge capture.
Speaker: Experiment so that you can continue to find growth avenues and knowledge capture to capture what worked, what didn't work. And tech, of course, is the backbone of all of this.
Speaker: Yeah, I think that is ah that's a fair encapsulation of the culture, and if I may. right Growth requires other mundane things to be get done. And we do those things 90% the time. right We are also a compliance-heavy business.
Speaker: There are places where I don't want to experiment. right Experimentation is not good at every function. So I think overall, this is a... you know Lending is a simple business model, but it's a complex business.
Speaker: And so I don't think... The recipe for growth is as simple. But yeah, you know, as a culture that would keep a company like Indyfee ahead, absolutely.
Speaker: And then for a different business model, there might be a different culture which is relevant to that. ah Let me kind of spend a little bit of time on your early journey. ah What made you become an entrepreneur?
Speaker: Ah, so 1993, was doing my third year engineering internship. I landed up interning with an entrepreneur. Right now, those days entrepreneurs were not called entrepreneurs.
Speaker: right They were called promoters, their starters were called schemes. So you used to have a scheme of a promoter. okay But nevertheless, this person ah had a small 10 people odd company in a basement in Greater Kalash.
Speaker: Used to do very high-end technology work. so as a Coincidence, I'm currently recording from Greater Kalash only. Maybe you know him. E535. Okay. Very work, electronic design automation.
Speaker: ah So I went in, I loved the kind of work that was happening. I loved the persona of the entrepreneur that I saw.
Speaker: But I hadn't experienced it before. right My father was in a government service. ah And so at that point I said this is what I want to be. And after I finished my studies, I realized that I had no business experience at all, not in the family and so on. So I worked for about three and a half years before a partner. Where did you work?
Speaker: A company called what what was then called Hue Software Systems, then became Erisyn. Okay. You were like a coder. Yeah. Yeah. Yeah. Even till my first startup, I was coding.
Speaker: Okay. And what was the first startup? It was called, eventually called zo Jobs Head. It was a recruiting board. So we brought employers and employees together, ah matchmaking business. And did you, was it a venture-backed business? Was it bootstrap? like It was a venture-backed business. Chris Capital was our investor there.
Speaker: So it was a venture-backed business. This is like early 2000s, right? So we started 1999.
Speaker: And we kind of, ah we didn't start with the Jobs Z idea. We, again, ah you know, experimented, launched some stuff, saw that this is what was gaining traction, doubled down on this. Experiment, technology, knowledge capture.
Speaker: Yeah, that was more business model experimentation. But yeah, we, we in in effect, we launched four businesses at the same time and saw that this one was working. and then completely focused on this.
Speaker: ah And we then exited that business in 2004 to Monster. How did, like, you know, a 20-something kid know that he has to raise funds? Because at that time, there was no...
Speaker: ah There were no role models of people who raised money, right? Like how how did that idea even come to your mind that I've... Yeah, yeah, yeah. No, so I had a partner. Kunit was my partner there. ah We knew each other from IIT.
Speaker: And he's from a business family, Dalmia Siemens. ah And he was far more business savvy than I was. I was a coder. ah And so, you know, he he kind of understood that equation better than I did.
Speaker: Okay, okay. And why choose to exit? Why not just build? I think somewhere we felt like we were optimizing an exit. I didn't think ah we had the vision ah to say that this can be, you know, 10x of what we are today.
Speaker: ah So yeah, I think that is the reason why we exited. At that point, it looked like a great outcome. That conviction and clarity you have for IndieFee that you are serving entrepreneurs, that conviction and clarity was not there for Jobs Head.
Speaker: I think how large can the business get? We could see the difference we are making, right? So we would get, you know, ah emails from job seekers in a second-tier town in Bihar saying, hey, you got me an interview with Maruti and, you know, thank you so much for changing my life.
Speaker: So we could see our impact on the ground. But it just wasn't evident to us as to, you know does this become $10 million dollars business? Does this become a $100 million dollar business? Or does it become a billion dollar business? right just the I think at some level, the role models for building very large venture-backed companies wasn't out there. at So you know many of us were kind of groping in the dark and saying, hey, you know how far does this go?
Speaker: So how how did you use the funds from that exit? That that must have been a life-changing amount. Yes, it was life-changing. was a small amount, but it was life-changing for me because, you know, I ah come from and I continue to maintain a modest lifestyle.
Speaker: So it was life-changing. ah You know, I funnily went to a wealth advisor. He told me, Alok, going to retire now. yeah my My best decision in life has has been not to take that advice. Also, there was no specific use of that money.
Speaker: ah you know, I don't think money at any stage has changed. on but But you started angel investing, right? When did you start angel investing? 2005. Yeah. Part of the wealth creation there was for were used for Indian investing.
Speaker: It was, it was, it was. ah But the bias wasn't as much, ah you know, the need to multiply wealth. ah Actually, at the JobZ exit party, I, you know, a couple of my mentors, investors, we were having this conversation because, you know, venture capital had come in India in 1999.
Speaker: But then with the dotcom bust, it had shrunk away. so So it was also a time when you know money wasn't available. Even when we sold the company, there was no venture capital out there. right So that was another constraint to how much you will grow and how fast.
Speaker: But we were having this conversation saying, hey, can we do something to back the entrepreneurs out there? ah and Interestingly, starting a fund was not on my list at that time.
Speaker: So we said, why don't we set up ah a group of angel investors? right And so that's how ah what is now Indian Angel Network got founded. We started to invest through that.
Speaker: And as irony would have it, in 12 months time, I was sitting in a venture capital firm. Okay. And how did you end up becoming a VC? Accidentally, i went to meet a friend in the VC industry, a PE industry.
Speaker: And literally the conversation was, while you're looking for your next startup idea, why don't you help us build the early stage investing piece? I said, fine. Two days later, I was in their office trying to build a practice for them.
Speaker: Didn't really work out very well. Six months down the line, I then got hired to build the India business for Canaan Partners. So it was it was very accidental. But it fun. It gave me a lot of bird's eye view, lot of perspective, opportunity to work with entrepreneurs that I would have otherwise not had.
Speaker: What is your way of evaluating a pitch? Because as both an angel investor at Indian Angel Network, as a VC, you must have seen thousands of pitches till day, I'm assuming. ah Do you look at business model? Do you look at the size of the market? Do you look at the founding team? Yeah, you know, so it's all of the work, right? But over time, what I've realized is what influences me the most is whether the founder or the founding team, have they done their groundwork and do they have they come up with non-trivial insights into the problem they're trying to solve.
Speaker: And that only comes when you're sitting in front of customers. right So, ah you know high level opportunities, ah you know when by the time they surface, you will have 50 teams running after it.
Speaker: Okay. But on-the-road insights is is something that appears to me. And then, of course, you look at whether the team looks good, whether the market looks good, right, all of that.
Speaker: So, for example, today I wired a check to a company, ah right, which is in a space that, at least in the face of it, has been shown not to work, right, in a venture-backed manner.
Speaker: I don't want to kind of point to the specific company, right ah But this founder has gone out, experimented, right? Come up with not such a venture-friendly business model, and right? And, you know, there's risk in early-stage investing, but those are the kind of founders where I feel like, hey, this is worth backing the founder.
Speaker: like Diligence appeals to you. Like someone who's done the homework? Being grounded and being in front of customers appears be. Right? Diligence can again, you know, someone who's doing secondary research on the desktop is also being delivered.
Speaker: So you're now, I believe like 52 or something like that, right? Do I have to disclose that? Yeah, 53. what What do you see as your legacy? like till what So maybe you have another decade, decade and a half of productive time to give.
Speaker: a what What would you like to see as your legacy that you would like to achieve in the next decade or so? One, I do think that I have 30, 40 years of productive time, not 10 years. Right.
Speaker: It is important, right? Because the way you live today depends on what the answer to that question is. True. ah So I think that is important. I'm not a legacy oriented person.
Speaker: I don't get excited by hey, what is my legacy going to be? I like to do stuff.
Speaker: I get happiness in solving problems. And so that is what I want to continue doing. you're You're more ritual-based rather than legacy-based. Your day-to-day rituals are more appealing to you, being able to have the freedom to choose what rituals you want to do, what how you want to spend your time.
Speaker: Yeah, I'm not sure whether I'll call them rituals. I'm not a very ritualistic person. But yeah, ah solving problems. is what gets me excited. ah you know Seeing impact on the ground gets me excited.
Speaker: i and know Helping others ah you know
Speaker: do the same for themselves ah you know gets me excited. You gave a very confident 30 to 40 year prediction. ah o like I'm assuming you're like 99% confident of this prediction that you have. It's not a question of confidence. It's a question of mindset.
Speaker: None of us can be confident. Right? To any degree of accuracy. You sounded fairly confident. I'm just wondering. No, no, no. So i'm not I'm not implying that you know I have cracked longevity or anything of that sort.
Speaker: ah You know, ah When I started Indie Fee, the first question that VCs would ask me is, well, look, what if you come under the bus? And my answer would be, it would be, you know, the company will be dead.
Speaker: Now, today I don't have the same answer, but, you know, when you start the company, that is the answer. So I don't think it is about confidence as much as about ah the mindset. Now, of course, things that I can control,
Speaker: I'm controlling that to make sure that I stay productive for a long period of time. What are those things that you control? What are your ah rituals for achieving?
Speaker: Exercise, diet, sleep. my My belief is if you've done those three, then you've done most of the things that are under yoga drawer. Is there something you do which I wouldn't have heard of in common?
Speaker: Like some things are common knowledge, right? So I also experiment a lot on this field, on staying healthy and longevity. So have you captured that knowledge somewhere? If you're experimenting, then I'm sure you've captured the knowledge. I have captured that knowledge because my friends were asking me or saying, hey, ah tell me what to do. And I said, why don't I put a two-pager? It's literally a two-pager. It's the synthesis of... Can I include a link to that two-pager in the show notes of this podcast? No. That's just for my friends. I can send it to you, but not for... okay Because of a part of the reason being that I'm sure we made errors in there.
Speaker: It's not authentic. And tell me about Plaksha. What drove you to and launch that and... Lakshya is interesting right because ah siflow so fundamentally at a motivational level, I describe entrepreneurship as big motivation for me, not just my own entrepreneurship but what I see there.
Speaker: Education is the second one. and right I firmly believe that I would not have been where I am if my father didn't invest in my education. And the background we come from, that was a choice, that was not a given.
Speaker: ah So Plaksha in some sense resonates from that standpoint. But really what got me to move was a a few of my other friends who had already committed to it.
Speaker: And I believed in them. right It was very hard for me to, I'm not a vision guy, it was very hard for me to envision what Plaksha would look at look like in 10 years, which is kind of how far we are into the Plaksha journey.
Speaker: ah But the set of people who you know are early founders there, ah ah you know I just kind of believed in them and their vision and their ability to get it done. So I'm a follower in Plaksha.
Speaker: Okay. ah yeah I'm going to kind of end with a very generic question. But considering the number of founders you meet and evaluate pitches of, you know is there something that you want to tell to founders which is ah advice applicable in 2026 years? Yeah, you know, I kind of ah mentioned the first part of that earlier, which is stay close to the customer.
Speaker: Right. And that's the only source of truth. I think the second one, which is relevant, which has always been relevant, but even more relevant to today is stay away from the buzzwords. So many of the pitches that I'm seeing today are just driven by what is hot.
Speaker: And someone else's notion of where the world is heading. Like every pitch will have agentic AI in it or something like that. Yes, every pitch will have a gigantic AI in them. um Every VC is going after deep tech.
Speaker: ah right So the power of narratives is something which in my mind is counter to ah you know what an early stage founder wants to do.
Speaker: ah You do want to put the power of narrative to your company.
Speaker: But that is different from yourself getting driven by the buzz and not by your customers. What's the right reason for someone to want to become an entrepreneur? I think there are multiple right reasons and I think all of them are okay.
Speaker: Right? Wealth creation. ah Being your own boss. Finding a problem that you feel passionately about. ah Doing something which will be fun to do with friends.
Speaker: I've seen all of those flavors. ah right I think I do apply a certain values filter to entrepreneurship. right I don't want us to get back to a place where entrepreneurship is a promoter with a scheme.
Speaker: So I do think all of us you know carry a bit of that torch. ah But other than that, I don't place a lot of constraints to what should entrepreneurs be motivated by.
Speaker: Thank you so much for your time, Alok. really enjoyed this chat. Thank you, Akshay.
