Parked banking dreams for now; focus is on stabilising lending business: Navi founder Sachin Bansal

Fintechs’ impact on the ecosystem is quite large from service delivery as well as the customer mindset change point of view. Given the context of this growth, how do you see the recent regulatory action in multiple areas as well as on a few companies?

I would say digital finance or in general digitisation of finance as a theme is something that is here to stay. Regulators know that this is the most efficient way to deliver finance to the masses. So, I think it will become larger and larger.

I would not like to comment on specific players. But if you see the trend from the last couple of years, there was this credit card model that was looked at. Then there was the first loss default guarantee (FLDG) model, where fintechs paid lenders a fixed sum when customers defaulted, that was looked at. Then digital lending guidelines were brought in. Then there was this MeitY (Ministry of Electronics and Information Technology) issue that happened. So, if you see the sequence and then this, I think it is just maturing of the ecosystem. I think the regulator is trying to get a grip on how to regulate this space. And as their understanding is becoming deeper and deeper, their actions are becoming firmer. There are parallels with the microfinance industry and what happened over there. It took years to settle down.

Do you believe that regulation here is tougher for startups compared to other geographies?

Frankly, I don't have direct operations experience in other geographies. But people who know, and who have seen both Indian and other geographies, say that it’s more regulated outside India. The financial services space is quite highly regulated in the US, Europe and UK and those mature geographies. India is on the path to becoming more mature in every aspect of finance.

Coming to Navi, we are talking at a time when you've kicked off your third non-convertible debentures (NCD) issue. How will you utilise it? How have you been performing?

We have grown quite nicely. This is our third issuance. The first two were big successes. I think we have been increasing the size of issuance every time. And the company has grown as well. Our ratings have improved since the last time and profitability has improved. And our, of course, scale is much bigger as well, at around Rs 7,500 crore AUM as of September.

In the September and December quarters, we made about Rs 35-40 crore of profit after tax each quarter. The demand in NCDs is very good but demand outside of NCDs is also very good for us, even after the recent change in risk-weighted assets that the RBI did for unsecured loans, because most of our business is unsecured.

So, what's the proportion of home loans?

Our home loan business has been growing as per our expectations. Close to 10 percent of our book today is home loans. We are building this business for the long term. So, we know that in the short term, our cost of capital is slightly higher, and because of that we are taking it a little slow. But that's a deliberate decision. Of course, we can go fast, but as I said, the cost of capital must match up. Eventually, our cost of capital will come down, so we will become more competitive. As of now, we are getting into some co-lending arrangements for home loans.

Is that a double-edged sword situation, when you do have co-lending partnerships? I mean, how do you see that on a long-term basis?

We have co-lending partnerships even in our personal loan business and that's going very well. And that is a programme that we run with multiple partners. We have six partners, and we are in the process of onboarding four more. It has been very profitable. I think our partners are very happy with the results so far, and we are also very happy with the results, because co-lending releases capital for us and makes us more capital efficient.

Who does the underwriting in your co-lending partnerships? 

It's a joint underwriting. Both partners must do it.

Is it because you focus on big-ticket loans, unlike a lot of fintechs, which mostly play in the small-ticket category, so it doesn't make sense for them to acquire at a very high cost? 

Again, I can't comment on others, but we have taken a view that we want to serve the middle-income population in the country, which we believe is going to be the largest population and which is a sweet spot—they have good incomes, they have good credit scores, and they are still not getting access to credit easily. So that's like a very nice, sweet spot that we have got. Extremely well, like high creditworthy customers, just that access to finance has not reached there yet.

Is this also why you got out of microfinance? 

No. I think microfinance was an amazing business. I loved it. But at the end, post our bank license was declined, it did not work well for our business model. It was a strategic investment which fitted into our bank license aspirations. So, post that, what we are doing is it then became a great financial investment, right, and not a strategic fit for us eventually.

Have you given up on your banking dreams? 

Not really. For now, I would say we have parked them, until we see that it is a possibility again in the future. Then we will pick up again when there's some green light from the regulator at the right time.

But this time when you apply, you will not have a vehicle like Chaitanya (in the microfinance business), right? So, how will you go about it?

Hopefully, by that time we will have a good history of our own. So, I think Navi, on its own, should be able to apply for a licence at the right time.

What was your learning from not getting a banking licence?

I think we have to wait for the regulator to come and say, "Yes, we are open to it. We are looking to issue more licenses." I think that's what we need. I think that's what we probably, in hindsight, mistimed, that we didn't read the regulator's mood properly.

But the lending segment that you mentioned, the middle income segment, isn't it the same segment that almost everyone is going after, including, HDFC Bank and ICICI Bank…

The intention is there. But do they have the mechanisms to reach there? Our belief is that building a very large feet-on-street salesforce to reach these customers and then doing lots of paper KYCs and paper underwriting and collection of documents and everything is an extremely costly affair.

I mean, eventually, they pass on these costs to the customer in the form of an interest rate or processing fee or something like that. But now, people want to do everything on their phone. They don't want to visit branches and take out printouts.

So you mentioned going outside of this. Are you focusing more on tier 2 cities?

Two-thirds of our business comes from outside the top 10 cities, which is big. And we go to tier 3, tier 4 cities as well. So, tier 2, tier 3, tier 4 is kind of almost two-thirds of our business. Collections are going very well in these areas as well.

So, what's your ideal target ticket size?

Our median is between Rs 50,000 to Rs 1 lakh. That's where we are operating.

But how will you make money on this?

We are profitable. I think we can make money because we are digital. We have cut out paperwork. We spend very little on marketing. We don't have agents doing feet on street.

So how do you reach these people?

At the start, we did a lot of marketing a couple of years ago, but now we have completely stopped. More than 75 percent of our business is organic. I think our app is one of the top six apps in the Play store in the finance section.

We are now just going to start our marketing on UPI.

But that is not necessarily for payments, right? It is mostly for buying or repayment of loans on your platform?

No, it's not just like that.

And UPI is now a duopoly, right? 

I think UPI still, market share-wise, looks like a duopoly kind of thing. But we believe there's new stuff to be done over there. We will announce it when it comes. We believe we can bring a new angle to UPI, which we will try. Give us a few months, we have some things we're doing and we are hoping it will work.

What else is in your product pipeline?

I think most of my focus is to stabilise the lending business. Lending is one of the hardest businesses, especially when you are doing it digitally. I think my complete focus is to make sure that we get the collections right, we get the credit cost right, we get the partnerships right, and of course funding right, through this bond issuance that we are doing. So, we've been setting this engine in place, so that it becomes self-sustaining and starts churning out cash.

You're still the 100% owner of Navi?

97 percent.

Are you not planning to bring on other investors?

No. We will keep talking to people. At the right time, we will get somebody on board.

And you will revive plans for an IPO?

We tried a year ago. The timing was bad, I think. So, I am hoping that in a few months, once we are ready, we will…

Is Navi’s growth something that you imagined or is it slower? The way Flipkart scaled in 10 years, was unimaginable. How did you recalibrate that in your mind?

No. I think the recalibration was slightly on the other side, which is that of the customer: how do you think about customers? Because here, a transaction lasts years. So, if you give out a loan, it's a two-year loan on average. If you sell a health insurance policy, it's a minimum four or five years with the customer. So, you're taking on risk essentially with a transaction. So, you have to be very, very carefully calibrated and careful about every transaction.

Even in Flipkart, when we started, we didn't really have any expectation that we'll grow as fast as we can and as fast as we should.

Are you already using AI in your business, in your workforce?

We just started using generative AI in a few areas. And it's giving decent results. I think customer support is an obvious one where it lends itself very well.

I think, in general, the other areas that will apply in, for example, data annotation work, it's able to do it much faster. We started using copilot (Microsoft) for coding. That's also going very well. And I think over time, even things like fraud detection—we just started using it for fraud detection—and other things, and underwriting as well.

Will it help in underwriting in terms of tracking the historical patterns of potential customers?

I think traditional data science models are much better at doing that. Where these generative AI models will help is extracting data from videos and images.

What’s your view on the surround sound around startups from a governance standpoint?

The premium for good governance will be very high now. I think we took governance for granted.

I mean, I am saying myself, as an operator in the startup space, and as a small-time investor, I kind of took governance mostly for granted—that most of the founders are from good backgrounds. But I think it has to be something that has to be put in place deliberately.

Have your thoughts about work-from-home, and work-from-office changed?

No. We were very clear that we want to be work-from-office. Work from home was a temporary phenomenon in my mind. It was never a permanent one. We are 100 percent work from office. Zero work from home.

Have you stopped being an angel investor?

Yeah, I have completely stopped. I am completely immersed here. Spending a lot of time in office, almost weekends also. Sometimes people hate me for that. First is there is no work from home and then you must come on weekends also, but yeah, I am spending like 80-100 hours a week.

I mean, I don't expect others to do it, but I am myself spending a lot of time. Because business is such an exciting space right now. It requires a lot of attention to small details.