Why Lendingkart lost appetite for risk and switched

game plans
the-captable.com/2022/04/why-lendingkart-lost-appetite-for-risk-nbfc-rbi-fintech-lending

7 April 2022

After being a full-fledged digital lender for 7 years, the company plans to slim down its
loan book and act as a technology partner of banks and NBFCs. The founder believes this
shift will reverse its Covid-linked decline. The plans look good on paper, but may be tough
to pull off

By

Pratik Bhakta

April 07, 2022

8 Min Read

Digital lending startups, which were trying to create a new order in the credit business,
have taken some of the hardest knocks in the current macroeconomic conditions. The
ones with exposure to small and medium enterprises are particularly beaten down by the
challenges, mainly a bad debt pile-up.

A prime example is Ahmedabad-based Lendingkart. Founded by Harshvardhan Lunia

and Mukul Sachan in 2014, it rode the early fintech wave to become one of the largest
online players in the country. In seven years, it has disbursed loans of more than Rs
10,000 crore.

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Lendingkart used tech to underwrite small or midsized businesses, a base banks and
traditional NBFCs overlook, and extend term loans. The approach appeared solid until it
wasn’t: in the last financial year, the startup suffered huge losses of Rs 177 crore and
restructured almost 17% of its loan portfolio because of Covid-19’s impact.

Lunia is now rethinking its business strategies, though he remains optimistic about a new
age of finance. “Through 2010-20, NBFCs changed the way consumers borrowed. In the
next 10 years, fintechs will drive disruptions; concepts like embedded finance and on-the-
go credit will dictate this decade,” he told The CapTable.

THE UPSHOT
Lendingkart has been scaling up its co-lending book over the past three financial years
and has set a target of Rs 4,000 crore for the current year. The question is, will these
figures translate into a significant change in its bottom line?

In many ways, Lendingkart’s problems are symptomatic of the funk in the larger
ecosystem of non-banking lending. We wrote aboutthese trends in December last year.
Lendingkart intends to bounce back by positioning itself more as a technology player
helping banks, the credit game’s old guard, source business loans digitally. Essentially, it
will fetch new clients for them.

“There will be a gradual slowdown of the core NBFC business and the focus will shift
towards leveraging the technology platform for SME loans,” said a senior fintech
executive aware of the company’s strategy.

This seems like a workable idea if one considers how the industry is moving towards co-
lending, the new buzzword in fintech and banking circles. There are two reasons for this.
First, public-sector banks are looking for ways to deploy the huge deposits they are sitting
on and second, RBI is prodding them to form co-lending partnerships with fintechs.

Industry insiders told The CapTable that the likes of Punjab National Bank, Canara
Bank, Bank of Maharashtra are warming up to such tie-ups across the spectrum.

Lendingkart’s total assets stood at Rs 2,644 crore ($348 million) as of FY21, up 6.7% from
Rs 2,477 crore ($326 million) in FY20, according to a credit note issued by ICRA in June
last year. The growth in 2021, however, was much slower compared to the year before,
when its asset base climbed by 45% from Rs 1,706 crore ($224 million) in FY19.

Instead of being in the business of net interest margins by taking direct and full exposure,
it will now look to earn commissions, technology fees and small interest on the fraction of
the exposure it might have on its books.

Lendingkart is not the only startup switching strategies. CapitalFloat, its closest rival,
moved into the ‘buy now, pay later’ business last year. We reported it here. Even Indifi,
another SME-focused player, is going deeper into co-lending and gradually scaling down
its loan book.

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Graphics: Winona Laisram

Riding Out The Storm

As a sourcing platform, Lendingkart will have a different target market and reduced
business margins. How will it justify the valuation of over $250 million it last received in
such a scenario?

The alternative perspective is that this valuation and the money the company raised in a
few back-to-back funding rounds before the pandemic may act as a lifeline going forward.
The larger equity market is almost closed to digital lending startups, so some cash saved
up can come in handy.

To date, Lendingkart has raised around Rs 1,090 crore ($143 million) , as per Tracxn’s
data. It counts deep-pocketed investors like Fullerton and Bertelsmann among its
backers.

“The new model that Lendingkart is getting into will help it preserve capital.
Consequently, the runway [available cash] also gets longer,” said the senior executive
quoted anonymously earlier in the article.

As of December 2021, banks had aggregated deposits of Rs 166 lakh crore (over $2
trillion) , according to RBI’s data. They are exploring ways to deploy the funds as retail
credit, and the likes of Lendingkart can play an important role here.

“The branch-led model of business is becoming less and less scalable. Banks, however, are
still slow to get into technology-led customer acquisition, and this is an area where we can
partner with them,” Lunia told The CapTable.

The company wants to avoid using its equity to finance borrowers and instead channel
public-sector banks’ funds to the over 130,000 customers who have been doing business
with it for the past seven years. It will charge a certain percentage as a fee for these
services.

In this arrangement, borrowers will get a lower interest rate and a credit line from a bank,
which will improve their creditworthiness.

Currently, Lendingkart has a credit line of around Rs 3,000 crore ($400 million) from 16
lenders, including some of the largest banks and NBFCs.

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Graphics: Winona Laisram

Why Risk It?

In the past few years, fintechs have realised that they are better off managing risks than
independently building a large loan book. Recently, The CapTable reported onhow
Rupeek was slimming down its NBFC business and increasingly becoming a
technology partner for banks.

“There was no way we could have matched the (lower) cost of funds enjoyed by banks and
NBFCs. The overall cost of doing business is going up every day, and in such a situation, it
makes more sense to work with large lenders as partners,” said the chief executive of a
digital loan provider that competes with Lendingkart.

With interest rates becoming competitive, traditional and highly rated lenders have an
added advantage. That said, they lack a relationship with a young generation of
consumers who transact on Ola, Google Pay, Swiggy, Zomato and other apps. Online
players like Lendingkart can act as a bridge here, bringing them closer.

“There will be sachetisation, personalisation and specialisation in financial services, and

we at Lendingkart are striving towards that,” Lunia said.

The company’s co-lending book has grown quickly over the past three financial years. In
FY22, it reported loan disbursals of about Rs 1,000 crore ($131 million) through this
route. Lunia said the FY23 target for the same was Rs 4,000 crore ($500 million).

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In February, it issued loans of Rs 320 crore ($42 million), of which, Rs 230 crore ($30
million) was given out through the partnership route. About 70% of the company’s
business, in fact, is now co-lending, he added. This share was around 20% in FY20 and
10% in 2019.

Lendingkart’s target audience is shop owners, kiranas, small factories, sweet sellers and
restaurants, among others. The ticket size will range from Rs 50,000 ($650) to Rs 1 crore
($130,000). “Amounts of up to Rs 10 lakh ($13,000) are Mudra loans. We are now
playing a significant role in sourcing priority-sector loans for banks,” Lunia said.

Graphics: Winona Laisram

The Valuation Downside

In 2017-18, the thinking was that startups would source and process loans on their books
and manage delinquencies by using technology. But this view changed after the IL&FS
crisis, problems involving Chinese lenders and Covid-19.

“When we pitch to equity investors now, they suggest that we should work with traditional
lenders for credit and concentrate only on the tech play,” said the chief executive quoted
earlier in the article.

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But startups know how the topline will look in interest spread versus commission.
Lendingkart’s revenues have stagnated in the past two years. Till September 2021, it
reported a total interest income of Rs 260 crore ($34 million) compared to Rs 253 crore
($33 million) in the year-ago period.

Lunia, however, is confident that commissions will offset the interest-income margin he
will lose out on. He expects Lendingkart to earn a 4-5% margin on every loan sanctioned.

For example, on a monthly disbursal run rate of Rs 300 crore ($40 million), Lendingkart
could make a sharp Rs 12 crore ($1.6 million), which will translate into annual revenues of
more than Rs 120 crore ($16 million). This calculation looks nice on an Excel sheet, but
the Indian market is highly competitive. Tech players will face the real test when banks
form multiple partnerships and squeeze fintechs on margins.

According to a senior venture investor, who has evaluated the fintech space, there is no
moat in this business. Banks cannot be forced into exclusive arrangements and the
revenue share of the platform will be restricted.

“The entire game will have to be played out on a commission basis, which is much less
compared to interest income reported by a lender,” he said.

By narrowing its focus area, Lendingkart is limiting the scope of its business. But at the
same time, it is building strong data and analytics capabilities. Moreover, it could use
learnings from its collaborations with legacy organisations to scale up its core game once
the market stabilises.

If you survive now, you can plan for the next battle. That seems to be the company’s
current mantra.

Edited by Harsh Vora

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