One life and three ventures with two successful exits define the entrepreneurial journey of Piyush Khaitan, founder of a digital lending start-up and NBFC NeoGrowth. Not many in the start-up world would be aware that Khaitan has been playing in the FinTech space much before it became a thing a few years ago. His tryst with the area began in 1996 with Venture Infotek, a company that he founded along with his brother D K Khaitan. The company was into processing merchant transactions for acquiring banks as well as managing credit cards and large loyalty programs. Venture Infotek, which was the first company to bring PoS machines in the country, was acquired by global player Atos in 2010, and by that time it was a market leader in e-payments processing having a 40% share of all India card volumes. Simultaneously, he started another business called DEI, which was again into providing cards and fulfillment services to the banking and loyalty industry. Meanwhile, another idea was also brewing up with NeoGrowth, a venture that lends to SMEs on PoS data. The Mumbai-headquartered lender aims to create a $1 billion loan book in the next 5 years. Khaitan speaks with IBS Intelligence on the genesis of NeoGrowth and the future of lending.
What led to the idea behind starting NeoGrowth?
NeoGrowth was founded in 2005. But before that, we had this company called Venture Infotech and we were the first transaction processing company in India for retail consumer payments. So we actually brought automation for credit card usage in India way back in 1995. At that time, there were no debit cards but only 200,000- 300,000 credit cards that were accepted at only 4000 locations across India.
So fast-forwarding to 2010, the card (both debit and credit) acceptance had grown from 4,000 to 500,000 locations with a 40% market share, which at the time was over 1.5% of India’s GDP being processed through our systems. Our competition was with banks such as HDFC Bank and ICICI Bank, who were doing some in-house card transactions. We had big clients such as Axis Bank and some large petroleum companies. It was during that time a European multinational company wanted to enter India and we sold 100% of our venture to Atos in 2010 in an all-cash deal and 65% IRR. Venture Infotek then was renamed as Worldline and it continues to be India’s number one third-party processor for payment cards. While working with these merchants we realized that it availing loans was a challenge for them as they did not have a credit score. So that’s how the idea of NeoGrowth was born.
What were the challenges in front of you?
We had no idea of how to lend, how to score the borrowers or recover loans from them. It’s very easy to give money but how do you get it back is what we were asking ourselves. So the one thing that we knew in India was digital payments, understanding card transactions because for 15 years we were vetting on merchants from a risk perspective, whom to accept or not accept as a customer, vetting of transactions every single day from a risk perspective and settling of millions of rupees everyday between banks and merchants. So we analyzed and thought of using the card transaction data to lend to small businesses and that’s how NeoGrowth came into existence in the early part of 2013.
How is the underwriting done?
So the PoS data helped us get better insights into their business whether it was growing or declining or was steady. For example, the sales of ethnic apparel increase up to 70% between October to February they do 70% but a petrol pump does a stable business every month. So we used these data for underwriting.
What was the penetration of PoS machines then?
So when we sold Venture Infotek, there were 500,000 PoS machines in the country. But by the time of demonetization in November 2016, it has grown up to 1.6 million growing by 15% y-o-y. However, the significant catalyst for NewGrowth was demonetization. The statistics for digital payments went through the roof. The 1.6 million PoS numbers in 2016 November is at 4.2 million today and is likely to hit 6 million by the end of next year. We are seeing 35%-40% CAGR on digital payments in the country.
It was also the time when merchants used to charge 1%-2% on card transactions from customers. Was that a deterrent for you? How did you make that work?
Yes, it was very common. So, we were targeting only the merchants who accepted. They were 500,000 in number in 2013 but things started to change. Gradually, merchants began to realize that they were losing business by not accepting cards. So I am not saying that challenge has been eliminated entirely, but NeoGrowth focuses on those businesses that accept cards.
What is the growth opportunity?
There are 40 million SMEs in the country and only 4.2 million PoS machines, of which 1 million would be in the SME sector, which is our target and this is growing at 35% to 40%, as per RBI data.
How are you solving the collection problem?
For small businesses paying monthly EMI is very difficult as they have to pay for rent, salaries, electricity bills, etc too. So we realized that a grocery, pharmacy, gas station, have customers coming to the shop every day and created a daily repayment model without even physically going to collect the amount. So we created a strategy of deducting money out of the card transactions itself. The merchant is required to give a mandate to the bank that issued the PoS terminal saying that he has taken a loan from NeoGrowth and that the bank needs to pay the loan interest to NeoGrowth daily. So my repayment is literally like TDS.
Did you pioneer this model of loan collection?
The technical expression is called split funding. The acquiring bank splits the money on an everyday basis of our share and pays the rest of the funds to the merchant. And that comes directly comes into NeoGrowth’s bank account. So we offered loans digitally and collected digitally. Remember, all this was before the word FinTech was invented or became fashionable. So we were a FinTech without knowing that we were a FinTech.
Having said that even today we don’t call ourselves FinTech but Touch-and-Tech, which means that we also do doorstep onboarding and lending and documentation. We also have a proper customer care service and not depending on Robots.
So what are the other documents you require before disbursing a loan? What is the ticket size?
Bank statements for the last 12 months. PoS machine data for 12 months and PAN card for KYC and civil report data. INR 200,000 to INR 7.5 million. Of this, loans below INR 1 million would be around 75%-80%.
The economy is slowing down, and many NBFCs are already feeling the heat. How has this impacted NeoGrowth’s business?
I think it’s very important to clarify that there is a slowdown in the rate of growth in GDP. It’s not that the economy is slowing down but merely growing at a slower pace. Earlier we were talking 7%-6% now the estimates are at 5% but it’s still growth.
However, there is some slowdown in sectors such as real estate and housing and automobile there is no doubt about it. This impacts industry which is dependent upon real-estate and housing, which means steel cement, transportation, manufacturing and some the industrial segments. And on the finance side, housing finance companies, mainly banks and NBFCs that have exposure to developers are affected. If I look at it from a NeoGrowth’s perspective, we are not in any of that business.
How do you de-risk?
We monitor our portfolio from a risk perspective regularly. We keep tweaking our policies, as and when the market situation changes. For example with the slowdown in automobiles, we used to lend money to automobile dealers as they also did servicing vehicles. We found that because the automobile sales are down, the dealerships are distressed. So we reduce our exposure in that portfolio and substitute it with something else.
How do you de-risk your business?
The second thing is the credit situation crisis. We have been very fortunate and have proactively been raising debt from several sources. So we continue to find very strong interest, both on the equity and the debt provider side to invest in NeoGrowth. Even today, as we speak of debt, the equity ratio is around two, so we have ample headroom on debt side. Similarly, capital adequacy where RBI says a minimum of 15%, we are north of 30%. So we are extremely well capitalized and keep raising equity well in advance. So we feel reasonably comfortable.
What are your growth targets?
Our AUM is at INR 12 billion at present and we hope to cross INR 14 billion by March this year and INR 20 billion by March 2021. So we have a reasonably good pipeline both on equity and debt side. Our growth will not slow down for a shortage of money. In the next five years, we would definitely have a $1 billion (INR 70 billion) balance sheet.
What about disbursals and NPAs?
Total disbursals will be INR 15 billion this year. Our gross non-performing assets are around 5%.
You are talking about 5% GNPA at a time; other online lenders talk about defaults at 0% to a maximum 1%. Do we see a problem here?
So the question is, can you predict it and price it and can you stay with it? So if I say the model is a 2% GNPA model, and end up with three, I am in trouble because I am building my model on 2% and building my pricing cross structure, everything on 2% and I end up at three. The ROA comes down, and that’s dangerous. However, if I can predict a 3% GNPA and price it according to that then I have no problem. Our segment is a 5% default segment, and we have priced it accordingly.
What has been the trend right now with slower growth of the economy?
We are not increasing our default. We have to work harder. What I mean by that is, let’s say if I have to do INR 10 billion loan disbursal in a month earlier, I had to source 2000 loan applications at a 50% conversion from loan application to disbursals. But with a slowdown, we have tightened our credit policy to maintain the same 5% default rate. We realized we have to be more stringent. So now, to do the same thousand loans, I have to source 2500 applications. So my conversion rate has dropped from 50 to 40.
What are the other data you look for lending?
We gather tons of other data but primarily lend on card data. But as a part of our social impact strategy, we have started to give to first-time borrowers with a strong footprint of the card transaction. We help them build their credit score so that one day he can walk into a bank for a loan.
What’s the vision for NeoGrowth in the coming years? Do you want to become a digital bank?
We are happy that we are focused since the beginning. We are not like a 10 product company doing everything. We know exactly who we are, what you see today is what we are, and this is what we want to remain. We want to meet the financing needs of SME businesses. And that’s what we will do. The market is so big; the demand is so huge, you know we talked about 4.2 million PoS terminals. We have 800,000 potential customers today, growing at 30% compounded year on year. Of that, only 13,000 are unique customers at present. We want to lead NeoGrowth as the biggest lender using PoS data.
You rely heavily on PoS data, but do you see that as a threat with UPI dominating payments?
I think you’re right. So really, when we define our business it is any non-cash payment system that gives me a digital footprint. Historically, it is a credit/debit card. But even UPI is a non-cash based payment system. So we are happy to lend against UPI, which we have started doing too. Over time, you may find that it may become a more significant percentage because it’s growing at a much faster pace. You may also find that it would open up new categories. For example, a vegetable vendor on the road may have a PoS machine and accept cards, but certainly has a mobile phone and can accept UPI. So I can start giving sub INR 100,000 loans in the coming days and increase the volume game. UPI is again a perfect place where you get digital data, it’s a digital payment system, and we lend against it. Currently, UPI would be 5% of a merchant’s digital payments and has the potential to become 10% in the next two years.
What is your view on the cards ecosystem? Is it dwindling?
Not at all. The spending on cards, continue to grow at 35 to 40% CAGR year on year. The Indian consumer spent $500 million every day on credit card, debit card. It is growing, but more importantly, what we see is newer, and newer payment systems will emerge and co-exist.
Any funding plans?
We have raised about INR 5 billion equity so far. And it’s a finance business every 18 to 24 months you go o the market to raise some more equity, and that will continue. We are also profitable.
What role does a regulator play in strengthening the lending ecosystem?
This business needs stringent regulation. Finally, we are dealing with money. We need a potent regulator, and we know it is working on data privacy and information security. We already have a regulatory sandbox. What we also need is a benchmarking practice with a global player