Bengaluru-based digital lending major Capital Float has raised $15 million (approximately Rs 107 crore) from its investors, including Sequoia Capital, Ribbit Capital, Amazon and Saif Partners, in an internal funding round, according to two people in the know of the matter.
The funding, which comes after talks with external investors failed in 2019, could have happened at a reduced valuation, said one of the sources.
Tech2 could not independently verify the valuation at which the deal happened but the five-year-old digital lender seems to have come out of 2019 bruised but wiser and is looking to put the lessons learned into streamlining its business.
"For now, we will concentrate on two factors: good economics and how to build customer lifetime value," said Sashank Rishyasringa, who, along with co-founder Gaurav Hinduja, shared his plans with Tech2. They, however, refused to comment on the fundraising.
The Amazon-backed startup was seeking a $500-million value when it was talking to PayU to lead the round last year. Questions about the asset quality of its loan book and, in turn, valuation could be the reason for the collapse of negotiations, the source said.
When IL&FS defaulted on its credit obligations in September 2018, it was a huge blow to India’s shadow banking sector. Banks tightened credit flows to non-banking financial companies (NBFCs) which had a ripple effect through the larger economy.
Fintech lenders saw credit dry up and in few cases where banks were still lending, they were asking for a higher rate of interest. The overall cost of capital shot up between 150 to 200 basis points for these companies. This, in turn, worsened their asset quality.
Capital Float, one of the largest digital lending startups in the country, was no exception. Its asset quality came under stress, mainly due to certain lines of business such as loans for education that grew exponentially but repayments faltered.
Two years after starting as a lender for small businesses, Capital Float in 2017 included street-corner small shops within its ambit as well primarily lending on the basis of cash flow gauged from their digital transactions. It was in 2018 it made a major shift to add consumer- lending to its portfolio. It also acquired Pune-based Walnut for $30 million, mainly to tap into consumer finance and chase personal loans.
It entered into multiple partnerships with major platforms such as Paytm, Amazon, Metro Cash and Carry, Payworld and others to source data about small merchants and extend credit to them based on their cash flow.
Betting big on the edtech, the company joined hands with Byju’s to extend loans to its customers as well. This business line has been in the news recently for issues around miss-selling, bad assets, etc.
Hinduja did not specifically talk about the tie-up with Byju’s but did say edtech was one part of the business they were planning to exit.
The loan book had grown to almost Rs 700 crore in this sector within 15 months, with non-performing assets (NPAs) at Rs 30 crore, Hinduja added.
Less is more
Given the tight liquidity conditions, the startup wants to conserve capital and deploy it where growth will be sustainable.
"Do lesser things but do them better, that is our theme going forward into 2020," said Hinduja.
To meet the goal, they have a two-pronged strategy in place. One is to lend to small businesses in small towns that are credit-starved and second is to offer loans to consumers through strong channel partners and its Walnut app.
"We have found out that small merchants, individual proprietors, family businesses looking for funding between Rs 2 to Rs 20 lakh is our sweet spot, we want to lend aggressively to these customers in small towns," said Rishyasringa. "They might have a secured credit line from a public sector bank, but need unsecured growth capital which we can provide."
For consumers, it has a profile ready: between 25 to 35 years of age, living digitally, professional or self-employed, who can be evaluated easily and can use their credit line to buy products on Amazon or MakeMyTrip.
Tough market conditions meant startups had to realign their business models. Capital Float is making changes as well. It is going to push for more co-lending with bank and NBFC partners and will cross-sell products such as insurance to generate more revenue out of every customer.
It is already distributing insurance for products protecting life, fire, stocks, etc, for small businesses. In next year it intends to foray into selling insurance for consumers as well.
"One major thing that has grown for us is co-lending, from less than 18% of our total loans before IL&FS happened, now we have around 55% of our book on co-lending," said Rishyasringa.
Capital Float is in the process of tying up with one large regional bank, a private sector lender, one large NBFC and even a public sector bank is expected to come on board in the next few months.
The founders hope to become capital-efficient through these partnerships and also lend to the right set of customers.
While 2019 was a reality check for these new-age lending players, it also will be remembered for realignment of business verticals.
If the first wave in fintech lending was about creating technology and assets, the second wave was about partnerships, the third wave is going to be around the digitisation of collections. After all, as bankers always say, it is not a lending business, it is a collections game.
"Initially, the hypothesis was if we lent to the right people, collections will happen automatically but the reality is very different. Now we have seen even if the intent is right, in many cases people cannot repay because of external factors," said Rishyasringa.
The company is building a full-stack collections engine, with people at the core and digitised systems to make processes efficient.
It is working on the basics such as ensuring it has all modes of repayment across cards, UPI, net banking and even cash.
It has partnered with Axis Bank to allow its agent network to accept cash repayments from borrowers. Another small bit is bringing in regional languages for collection conversations, the founders feel these small innovations have served them well.