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Quick Take | Why Ola wants to hail an NBFC license

Cab aggregators are looking to diversify as business growth is slowing down. Softbank-backed Ola already does transactions and an NBFC licence will help it diversify into allied segments for growth.

January 24, 2019 / 05:59 PM IST

Sounak Mitra

Cab aggregator Ola has applied for a licence to launch a non-banking finance company (NBFC) as part of its diversification plans. An entry into financial services may be a far cry from ferrying passengers across cities but for Ola it could be a logical step. Here’s why.

Firstly, with an NBFC licence, Ola can venture into the insurance business. At present, the insurance for its cars and drivers are with insurance companies. Besides, Ola has been experimenting with trip insurance for riders for some time in arrangements with pure-play insurance firms. Once it gets a licence to operate an NBFC, it could start offering insurance either on its own or through a joint venture. Insurance can be considered as allied to its core travel business. Insurance could help the company scale up substantially.

Secondly, an NBFC license can be used to deepen its foray into credit. The company has been experimenting with Ola Credit – a service that allows Ola’s loyal users to take multiple rides and club the payment at the end of cycle, which it can make a full form service and expand to a regular post-paid service. A full-fledged credit service will help Ola expand and retain regular users and corporate users.

But consumer financing is one segment that NBFCs operate in and it’s not clear if Ola will want to get into others, such as mortgages or infrastructure lending. But consumer financing does tie in with Ola’s plans to deliver medicines and enter online ticketing, among others.

Thirdly, Ola already helps drivers to get loans for their vehicles. But that happens through Ola’s arrangements with banks and other financial institutions. If it becomes an NBFC, it could take this business on its own books, adding an additional revenue stream.

Having an NBFC licence will also help Ola raise funds. In November, the Reserve Bank of India (RBI) allowed high-street lenders to support bonds sold by NBFCs to ease fund raising concerns for NBFCs (besides their regular sources, including the debt market), according to a report by the Economic Times. Ola has been raising money from private fund houses to fulfil its ever expanding need for capital.

An NBFC wing may help it in raising fresh funds as well, as the sector’s potential may convince investors to part with money. NBFCs are growing faster than the banking sector in India. According to a report by PwC, financial assets of NBFC’s grew at a compounded rate of 19 percent during the past few years, compared with around 13 percent for banking sector.

Finally, the motivation for Ola’s need to diversify may stem from its core cab ride hailing business witnessing slower growth. According to a September report in the Economic Times, Ola and its rival Uber together had 20 percent growth in total number of rides per day in 2018, compared with 57 percent in 2017 and 90 percent in 2016. For Ola, the growth rate will be slower in future because Ola already has presence across 110 cities in India, compare with 31 of Uber.

But, if Ola gets an NBFC licence, other consumer internet startups may also follow suit. That may then result in a crowded market, where everybody is trying to cross sell on their platform. But the financial services market is not an easy one to crack. Many may fail in this attempt. While Ola faces the same risks that they do, the back of a financial powerhouse like Softbank gives it an edge.

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Sounak Mitra
Sounak Mitra is an Associate Editor, Moneycontrol. He has been writing on corporate issues and policy for more than 15 years, having previously worked with Mint, Business Standard, Mergermarket, The Telegraph and The Times of India.
first published: Jan 24, 2019 05:56 pm