Modern lending In India, with Praveen Sinha and Amit Pandey

Powered by a growing middle class and a more connected rural population, the Indian consumer credit economy is carrying a lot of momentum, as is the market for MSME loans. And where most fast-growing markets are small, this is obviously not the case with India, where 1.4 billion people and nearly 50 million SMEs live.

Add to that, a history of digitalisation and innovation and it’s market you really shouldn’t ignore. Albeit, until now, I largely have, barring a couple of years where I had a passing oversight of some loan portfolios there.

So, to get me up to speed, I speak to Praveen Sinha, serial entrepreneur and co-founder of PinCap, and Amit Pandey, CEO of PinCap.

We spoke broadly about fintech in India, about alternative data for consumer and MSME loans, and about super-charged growth segments.

If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.

Regards,

Brendan

You can read the full transcript with timestamps here:

Praveen Sinha 0:00

So once you have been in a flight, which has gone at a certain speed, you won't enjoy your life at a lower speed! So, with this background, I would say FinTech also has a very, very huge potential of growth.

Brendan Le Grange 0:41

Welcome back to How to Lend Money to Strangers, the podcast about lending strategies around the world and across the credit lifecycle. I'm your host, Brendan le Grange and in 2007, an MBA project of mine won me a trip to San Francisco to pitch at a social entrepreneurship competition that was being held by the University of California, Berkeley. I didn't win, but I did meet Praveen Sinha, one of today's guests. I don't think Praveen won either, to be honest, but judging on his career since then, he probably should have. Praveen went on to be a serial entrepreneur with successes in multiple industries, ranging from online fashion retail to PinCap, his latest venture in finance, and the reason we're here today. We have the added pleasure of being joined by the CEO of PinCap, Mr. Amit Pandey.

Amit, Praveen, and I speak about the state of FinTech in India, and the state of consumer credit in general, looking at how pin cap is bringing access to credit to small business owners and individuals, both directly and via partners who may otherwise have been left out of the financial system. I met Praveen pen cap, we're going to talk about the business model in detail later on. But maybe if you could both start by introducing yourselves, your background, what brought you to where you are today, and maybe a little bit of context for Penn cap.

Praveen Sinha 2:10

Thank you for inviting us Brendan, it has been long that we interacted so it's a good opportunity on both levels. I'll quickly give you my background. So I am an engineer by qualification, I have worked with automotive companies and I also worked in a tech company (Microsoft) and I did my MBA and then joined McKinsey. However, my long term dream was always to start my own business. And I jumped in with my first venture, which was into IoT and AI enabled water management systems. So that was my first venture. And then I started an e-commerce company, which did really well and it became one of the largest fashion e-commerce portals in India. While exiting that business, I was looking for another area that I should work on. And that's how PinCap was formed.

And the reason was that India is still developing in terms of credit reach and credit data. So a large corporate can easily get a loan, but for a small business, it's very difficult for them to reach out. The second aspect was that if you see globally, factoring or invoice discounting is a large chunk of working capital funding, globally, but in India, it was a very, very small percentage. Those were the two areas that we started PinCap with. So we started with lending to businesses and then we entered into factoring. And we have to take licence to enter into this space and we were successful in getting a factoring licence as well. The banking system is regulated by the Reserve Bank of India. Now to Amit...

Amit Pandey 3:48

Thank you, Brendan, thank you for inviting both of us. Fortunately or unfortunately, I'm also an engineer. Started with the automotive companies, started with the Maruti Suzuki and then I went to Honda cars - more of a chemical engineers, so I started more with the so-called 'painting' a car. That's how we started our career, and then I moved from a so-called the technical profile to the commercial profile. I started with the strategic sourcing to the procurement/ supply chain domain and the first move which has happened from automotive to Indian telecom industry. So I moved from Honda to Airtel and then a start-up company - Tikona, based out of Mumbai. After that to Exicom which is again a proper solution company. And last year, joined Advesh Tripathi to scale up the PinCap business.

So that's how the journey has been. So far, pretty exciting, a lot of things have happened - and we all used to say that we have got much more than what we could have deserved, coming from the smaller towns or locations or family backgrounds, too. We also work a lot in terms of giving it back to the society. That's what is our objective that every business. or every kind of venture we create, it should have the first objective as giving it back to the society and solving some or other problem for the people.

Brendan Le Grange 5:15

Yeah, thanks so much. We'll, I think maybe finished with a little bit more of that, but I think that small business, probably in India more than many countries, it's such an important part of the economy, and, you know, work to improve that is, as you said, as vital to the country as a whole. And actually, maybe I'm going to start with something a little bit related to that.

Certainly from an outsider's point of view, India always had this reputation of being incredibly bureaucratic. And even through those first few waves of digitalization, where the BPO industry was taking off, I was working for a big bank at the time that had an Indian operation and still to roll out a new product, it involve many steps, you had to go city by city, and it was really very complicated. And there was even maybe only 10 - 15 years ago. But now it seems like it's really a rapid move towards, I guess we could call it FinTech, speeding up all these processes and smoothing away the bureaucracy. So what is the current state of financial services? And how is this move to FinTech, this move to digital, shaking up the industry as a whole.

Praveen Sinha 6:31

So Brendan, very fair observation. And I also felt a very significant change in terms of the way our country's evolving, it has still not caught up the stage where it is fully without friction. However, what we saw that earlier, most of the approach was towards the restriction. Now the approach has changed from restrictions to interaction to ensure enablement. So, if you see the kind of transition that is happening, not only in FinTech, if you see the policies are coming very, very progressive in thinking much ahead of many other countries.

Now coming to FinTech space, the approach has been about control. The control still stays, because it has to be regulated, however, if you see the cryptocurrency, so cryptocurrency was banned earlier, but then people went to the Supreme Court and then they voted relief - so finally, the balance plays out.

Now, having said that, both from a business perspective and consumer perspective, a lot of changes have happened, which has moved the needle towards more acceptance and more credit dispersion... and in fact, more robust process of how those dispersal happens. So all the fundamental level aspects are being taken care of. However, we have not yet reached the stage where we will say that it has become hassle free. For example, our contract system compared to let's say, other parts of the world, and if there is a conflict and if there is a litigation, then it takes slightly longer time and for banking, etc, that creates an issue. However, for nimble fintechs, it is a great experimental playground.

For example, there is a pay later, you buy something and pay later - people cannot afford credit card but you can have this app. Similarly on business side there is a factoring/ bill discounting app. Now government and RBI has enabled an invoice trading platform, so a lot of changes but stabilisation and maturity, I think, it will take some more time. Having said that, it is an amazing playground for even global FinTech companies with their vast knowledge and data. It will have some unique situations, like in e commerce, cash on delivery, which many countries have not heard of, was the major source of payment, here. 90% of the payment used to come through cash. Now it is shifting, now it is almost 8 to 10 years and now it is almost 50%, or even less if you're restrict it.

What I'm sharing with you is that from consumer perspective, it has significantly changed, for business perspective, it has changed but it has not yet stabilised and matured.

Brendan Le Grange 9:20

Maybe the consumer doesn't see, but you've still got to contract, you've still got to go to courts and things. And Amit, I know that you're quite involved, as well, in FinTech in general, not just with PinCap. If we look at the state of the Indian FinTech scene at the moment, what are your thoughts on how we would describe that?

Amit Pandey 9:38

I think if you see the overall I think the ecosystem from industry perspective, the post COVID situation a lot of companies are struggling, and the end consumers' spending power has gone down a little bit, or maybe to a large extent. The entire supply chain from our end customer to the primary organisation and then getting back to the entire supply ecosystems, everybody has gone through some kind of a tight working capital world. In the current situation, I think trying to solve the entire ecosystem lending to all the companies who are having a good capability to scale up their business, is, I think huge opportunity, in especially in a country like India, you know, solving the problems of the people, be it as a part of like NBFC, a FinTech and all these organisations

Brendan Le Grange 10:29

Praveen, you've come from the ecommerce world. And in e commerce, we know that the new challengers are perfectly capable of wiping out the big established names. That's also very driven by customer experience, everybody's out there to provide the best customer experience, are we seeing customers demand that same level of service in the financial space? Or are Indian consumers still a little bit more forgiving for banks and willing to put up with a bit more than they might in a an e commerce interaction?

Praveen Sinha 10:58

So what I've learned in my limited time here, consumers are never forgiving! Feedback has to be taken seriously and to be worked on.

Having said that, here we can actually segregate. And the reason I say segregate is there are two... in fact, I would say there are three buckets that are identified. The first bucket is where you have the consumer has a lot of credit worthiness data, which the conventional bank assesses. So he has very superior power compared to others. If his credit is not exhausted, everyone will be willing to give him a loan.

Second one is where he or she does not have that credit data, but they have alternative credit data. So example payment gateway, etc, purchasing pattern, and there are other footprints that we can measure indirectly, where we can have some sense. So they are also in demand, but not the way the first cluster was.

And then comes the third cluster, where probably they don't even have those financial footprints. So one, they might not have a very advanced smartphone, or two, even if they have they don't use it for purchase, they still use cash.

So these three clusters have a different demand supply gap. So third, there is a lot of demand but no supply. Second matching. And first, there is an oversupply of credit. FinTech is also to a large extent playing in the middle segment, because it is a tech driven digital arena. So the third layer, which is also being worked upon is a hybrid model for someone who is digital savvy, but also has a offline interaction. But to summarise your answer, first segment, of course, they are the king. Second, they are going to be the king. So they are the prince. And the third is, you know, the Slumdog Millionaire story... who will get lucky?

Brendan Le Grange 12:57

Lovely, yeah, and I think we can maybe pick up on that, and then dive into your own business now. Do you want to talk a bit about what PinCap do and how you've gone to find the data you need to issue SMEs, the loans,

Praveen Sinha 13:13

So we do SME loan, but we also do personal loan through digital medium. But having said that, our majority business is more towards the business.

So let's take a SME who does not have a Bureau Report, because he or she is new to credit. So what happens is that we try to see the footprint in terms of their payment on other channels, they don't have their own credit data, but they will have a payment gateway to receive payment from customer. Now in India, there are physical swipe machines and also there are collection agencies who can go and collect on behalf of the client - once consumer has paid, that data gets digitised. So that is one. Second is, now many of the government portals has a tax payment scheme. So there also we can get a digital footprint. Third is similar in this direction, is the utility bill payment.

So there are multiple points where we can consider and then we see how much collection happens. So for example, we don't know the being capacity, but we have a sense of the average balance and when they collect the cash through this point of sale, that data we capture and based on that data, we start providing them immediate loan. So for example, we will have a prediction in terms of how the flow will look like and then 7 day or a month advance and then we collect 10% every day or something, it's a very flexible model that we can create.

On a personal level, there is a lot of regulation on privacy data, etc. So we have to tread very carefully, but generally the way it happens is the app gets installed the individual phone. Now the way we operate is generally we find a FinTech partner who specialises in certain kind of product. So let's say someone and a very good team, now they came out with an idea that if someone is salaried, and he needs a payment, so if I can have a tie-up with a corporate based on their salary level, I can pay a salary loans. So there they will have a data of their salary payments through corporate, and they will have their spending pattern of the consumer through their mobile phone, so that they would only read debit credit messages, so that they know whether they're spending more than they're earning. Though now there are more restrictions to those accessibility even on SMS. They also had an handle of mapping. So for example, earlier, when we used to give slightly large amount, we would send our person for physical verification, because it is very prone to fraud here. So that now indirectly gets checked through GPS. So if he or she says this is my office address, and if he or she is not going everyday - now, it is a different norm, work from home - but earlier, this could be used to check that whether someone is going to office! Again, certain aspects of privacy, so that needs to be addressed.

As an NBFC, we generally take full responsibility of credit assessment, and any of our partners don't breach the guidelines given by the regulators. So those two aspects, for example, this FinTech, that I talked about, that app is not developed by us, currently we are working with more than four or five search partners. So it is like a screening if you like the founders, if you like their solution, as an NBFC we enable them to be compliant and also provide them lending. So that's how we operate

Brendan Le Grange 16:51

If we take the consumer point of view maybe, and we talk about before and after, what does it look like today to open up alone with with PinCap compared to how you might have had to open a loan just 10 years ago?

Praveen Sinha 17:07

So Brendan, I think 10 years back I would not have even considered entering this space. So, it would have been a very different model. Similar to ecommerce I would never have entered into fashion if the supply chain was not made easier first.

So part of this digital is that you can become a national brand, you can reach out to all the consumers if you have created the system and the process in the right way. So now, even RBI enables this digital lending under certain guidelines so that it is accessible.

So for example, in India, the requirement of the loan that I was talking about which falls into a third category, or cluster, was always there. And the way it was solved was through group lending systems. So 10 women or 10 men would come together and lend. Because if my person goes offline and have to set up an office, at 10,000 rupees, roughly it's USD150 loan, it will not make sense, because my cost of distribution will be too high. So it is not possible. So 10 of you come together, at least you will have $1,000 then I can afford as a business viability. Now digital has just disrupted that. I don't need 10 people, even if you are alone, and I have a way to measure your creditworthiness, and your ability and intent to pay, I can give you a loan. And we are able to scale very, very significantly.

Brendan, we can scale very fast, we have been conservative and careful. But with the right partners, we are able to scale very, very, very fast. And I'll just take a different lens to look at the same problem. So the way we had illiteracy long time back, people were not able to read and write - that's not a problem anymore. It has been solved. But it is credit and finance education now. So let's say they are earning 15,000 rupees, which is a decent amount in India, but they don't have any credit footprint where they will be able to take loan, they were not taught, they are not allowed to enter those schemes. This system will help them follow their aspiration. For example, multiple innovations are happening which is helping the ecosystem and I'll just take a simple example. In India there is a huge development on e commerce, food delivery etc. So millions of youth have got employment as a delivery person, not every person in India can have a two wheeler. Now two wheeler costs roughly 400 US dollars, where he can work and a bicycle will cost him $100, not even that, $50 maybe. So now that person based on the family background is coming from cannot afford. But as soon as he affords he gets a job which is continuously paying a decent amount So one ecosystem on supply chain is developing on creating employment and second is to provide capital to so that he becomes a micro entrepreneur. And I think within 10 - 15 years, the way illiteracy problem was solved, the financial worthiness creditworthiness problem will also be solved by many such FinTech companies. Many of those FinTech companies will give us enough data points to showcase once he takes money off certain size he can repay in that one that is a good enough data point for us to assess how much loan can be given to.

Brendan Le Grange 20:32

And I think, Amit, this speaks back to to your introduction, where you'll often see negative headlines, particularly by things like buy now pay later and it's causing too much consumerism, but actually, this is, is really investment lending, to build up individuals to build up very small businesses, things that are going to power growth. It used to be, as you said, Praveen, mechanic's excluded people whereas now we have digital tools that can make the loans if we think about a clever way, if we take a few risks, if we build the business models. And now you're doing that, you're giving people the ability instead of working maybe 10 years saving a little bit until you can buy a two wheeler, buy it upfront, get that growth going sooner, likewise in a business.

And Amit, you've done quite a lot of speaking in that entrepreneur space. What does this mean for these sorts of micro entrepreneurs is the small business owners?

Amit Pandey 21:26

Yeah, so that's a bit different activity more like driving a passion, getting into more like a leadership coaching, happiness coaching and basically what we all believe that you know, we should live our life rather than passing another day. So there are ways we can define that are you change your mindset, from so-called negativity-attracting personality to positivity-attracting personality, I would say I've been lucky from last seven, eight years been to more than 200 corporates, colleges, guest lecture sessions and motivational speeches and all this stuff.

But what I think the best part, especially in a country like India, you see more than 50% population belongs to less than 24 years of age. And that is what I think the best thing from each perspective any country can have. At the same time, a lot of new things just come up in last one or two decades, and especially the technology... internet in our hand. I think there is a lot of zeal and passion, especially in the youth. But at the same time, I've seen globally, this is a problem that people are becoming more tech savvy, more virtual, rather than physical, having a real conversation rather than the virtual conversion.

So on the entrepreneurship model, basically what we try to build more as a part like, it's not about looking at the business viability of the business case and trying to get into an idea or conceptualising an idea and getting into the execution of that. I think it's it's much more than that. And that much more than that is the mindset. One has to be mentally very, very strong in terms of understanding, especialty when we see the small and medium enterprises, people who are not generating a lot of revenue or the scale is not becoming that big but at the same time, there is a lot of fluctuation and a lot of variations, which are happening from a customer side to the ordering to execution to payment problems to the supplier, they need to build up the mindset that, you know, we need to stand strong, that okay, you know, ups and downs are the part of the life and that you believe that people think that controlling is leadership, which is not people thought the management is leadership, which is not, it's a completely different ballgame, but people need to learn from a leadership perspective.

So getting into the business side of these SMEs, I think, apart from all other problems, what we try to solve this is one of the key areas that we need to address to the people in terms of making them grow individually. And an end of the day grow as a country.

Brendan Le Grange 24:13

Well, speaking of growing as a country it's probably worth talking a little bit about scale, my exposure to the Indian credit economy was on the formal side, bigger/ medium, more formal banks - and even in that space, the sort of dulll part of the economy, 20% year over year growth in credit balances is the norm. So what are we talking about in terms of scope, when we look at the market, how fast are you seeing growth? Not necessarily just PinCap, you may not want to share that, but this sort of market, how big and how fast is it growing?

Praveen Sinha 24:48

We have been into spaces which is very, very accelerated in growth. So once you have been in a flight or in a car which has run at a certain speed, you won't enjoy your life if it is at a lower speed!

So, Brendan, I'll just try to summarise an Indian market system because most of your audience will not be from here. So Indian FinTech is divided in terms of regulatory environment into two parts. One is the technology, and onboarding, etc, That is fairly unregulated. The only aspect that they have to regulate is the data privacy. The second aspect is anything financial in nature - it can be borrowing, it can be disbursal, it can be trading. So all these are regulated by certain regulatory agency. So for example, lending, borrowing etc, is regulated by RBI. So any FinTech that wants to enter our country has to think of those two aspects.

Where we play a role, is we have both, we have a NBFC licence, so we can provide that now. And second is the guidance, technology and the knowledge know-how which the team brings. But it can be plug and play. So even if they don't have all the resources to enter a country, but if they think they have a solution, which will fit and we have a huge market, market size is - other than China, I think we are there.

With this background, I would say FinTech also has a very, very huge potential of growth. And I'll have to break again in terms of two parts one is the conventional bank. Now, some of the large banks, very huge size banks in India, keep growing at the rate that you have already mentioned 20 - 25%. So that's one part where conventional businesses where they are not trying to innovate or use alternative methods to grow they are growing at that level. If they can grow at that level, fintechs have no base, they have the potential to grow... even 100%, 200% is very easy. And you will see a lot of such startups with those kinds of numbers.

So, this is a space which has a huge play. For example, I will take two cases, one was in India 7 - 10 years back, there was a scheme of loan based on gold as collateral. So that was not taken by conventional banks initially, and then they just kept growing like 300% a year, then banks also started entering. So what will happen in our space, we'll grow very fast. Once we become large enough, then banks will try to enter and eat the pie of that created market.

Gold was first example, second example was white goods loan. So for example, if you go to a mall or a big shopping complex, you're buying a refrigerator, a washing machine or television, whatever you're buying which is slightly expensive. That was again started by an NBFC, similar to what we are, and they are very highly valued companies. I'm not naming them, but those are in public domain. So you will find that those businesses, if executed well, has a potential to grow not in terms of percentage, but in terms of multiples. So what we can do today, we can just triple next year, and that we can do, our constraints will be on capital. So you'll see a lot of 100 - 500 million funding in FinTech space in India. Those are generally in the payment gateway space, in the lending space it also has happened, but numbers are less, if you see the last one and half year, there has been significant investment because debt will not be given by the conventional banks, because we are doing what not been done. So lending is not available. And equity is not that easy, though things are changing very positively. So growth is hindered by the availability of capital rather than the potential and possibility so that overall even during COVID times, and even today, we always have to say no to our clients, rather than we don't have clients or we can't grow.

Brendan Le Grange 29:14

Sitting here looking at the future. What are the main trends that you've got your eye on?

Praveen Sinha 29:21

Let me take the first cut, and then Amit can add. So one, two years, Brendan, I think what we have done, we will refine and will further scale it up. And we will also look forward to Indian enterpreneurs and foreign founders who would like to explore and experiment here. Having said that, if I take a slightly longer horizon, let's say three to five years, I also see a lot of possibilities how this blockchain technology will merge in terms of lending. So if you see the challenge was in terms of volatility and stability of that currency, but it seems that it is there to stay. So if it is there to stay, then the ecosystem, the full financial ecosystem, will also evolve in that direction. And lending can also happen in that currency. So I think that we'll have to have an eye on and what is the possible entry point for us? We are not doing it because of regulation uncertainty is too high for us. So when that also I see is a future possibility, a company within crypto currency can provide loan anywhere in the world because that is traded.

Brendan Le Grange 30:26

Thanks, Praveen, and Amit just to close up, what are you looking at the next year... okay, well, let's say the next five years?

Amit Pandey 30:34

I think a lot of things are changing. If I see from, you know, five years down the line, a short term or a middle term perspective, I think there is a huge opportunity, which is going to be there from a lending perspective, because everybody has seen post-COVID, the last two years has been like ups and downs for the countries as well as for the, for the people also, people need to come back spending their money rather than saving their money. And so I see that as a huge opportunity in next five years.

Brendan Le Grange 31:07

Great. Well, thank you very much. It's been really interesting. Thanks for both of you for joining me. And thank you for listening. If you're enjoying the content, please do remember to subscribe. It really helps the show a lot. And share it with your friends and colleagues. Because it's been How to Lend Money to Strangers, the podcast about lending strategies around the world and across the credit lifecycle. I'll be back with a new episode next Thursday.

Praveen Sinha 31:53

And I think you now know why I've got Amit, he is photogenic is full of awards!