That was 3 February 2020. In two months, the world slipped into the quagmire of covid-19, trapping both lives and economic activity. It didn’t quite turn out to be the year of lending.
But 2022 seems a tad different even with rising interest rates and all the nightmares around sky-high inflation. Indian banks don’t expect lending behaviour to change much—many lenders have projected a double-digit loan growth.
That’s comforting for Paytm, India’s best-known payments company that has now diversified into financial services, among other things. Indeed, 2022 may well turn out to be its year of lending. There is hope in numbers.
For the full year 2021-22, Paytm’s revenues from financial services jumped 240% compared to the previous year to ₹437 crore; the number of loans disbursed through its platform rocketed 478% to 15.2 million; the value of loans disbursed grew 441% to ₹7,623 crore.
While nearly 69% of the company’s revenues today are generated from payments services to both consumers and merchants, lending is quickly emerging to be a rather bright spot. Paytm does not underwrite loans. It acts as a loan distribution and collection platform for non-banking financial companies (NBFCs) such as Aditya Birla Capital, Hero Fincorp and Fullerton India and earns through commissions.
In many ways, the payments business feeds into the lending arm. More than 75% of the value of loans disbursed in the fourth quarter was to merchants with a Paytm payments device. Devices include Soundbox and point of sale (PoS) machines. Soundbox is a battery-operated device that provides voice-based confirmation of QR code payments to merchants.
“I believe that credit, which is in its infancy, has started showing that it is a long-term sustainable space, and is going to become a pretty large business for us. Our bet is payment. Our bet is distributing credit, leveraging payments, data and access that we have," Sharma told analysts during the company’s March quarter earnings call on 21 May.
Why is lending so important for Sharma? One, it is probably the only business within its financial services universe that is showing the promise of scale. Insurance and mutual funds—the two other important verticals in financial services—aren’t growing this fast. Two, lending is a high margin business and scale here would be crucial for the company’s path to profitability. In 2021-22, Paytm’s losses widened to ₹2,396 crore from ₹1,701 crore in the previous fiscal.
“Paytm’s lending business has been scaling up well, while maintaining good credit metrics, which should further help allay investor concerns," Goldman Sachs stated in its earnings review report. “Faster-than-expected scale up of the lending business, resulting in improving profit profile and approvals for an SFB (small finance bank) license" are among the key catalysts for Paytm, the report further added.
Paytm is expected to approach the Reserve Bank of India (RBI), India’s central banker, to allow its payments bank to be converted into a SFB. That would enable Paytm to extend loans from its books, a more profitable proposition than the distribution model. More of this later.
The company, nonetheless, faces many headwinds. Lending is increasingly becoming a crowded marketplace, where both traditional lenders and large fintech vie for customers. To achieve scale, Paytm would have to tap the next set of quality customers, up the income pyramid. Even if it manages the SFB licence, the branch requirement norms may be a challenge for a digital-first businesses that Paytm has thus far followed. Also, aggressive lending is and will translate into expensive hires, adding to the already high people costs. The company’s employee costs more than doubled to ₹2,432 crore in 2021-22, from ₹1,185 crore the previous year—that’s 46% of its revenues during the year.
Paytm did not respond to a detailed questionnaire from Mint but we pieced together its possible strategy, going ahead.
The resource push
Sharma, as of now, appears to be pumping in as much resource as he can into scaling the lending arm. “Currently, a huge team at Paytm is working on lending. Vijay wants to double down on lending," a former Paytm executive who didn’t want to be identified said.
The lending business is headed by Bhavesh Gupta, a banking industry veteran. In December last year, he also took charge of offline payments. “The offline payments business is reporting to Bhavesh now because Vijay wants payments to work as a lending support," said another former Paytm executive.
He informs that Gupta has hired people from other NBFCs and banks at a higher pay compared to industry standards. Many have joined from IndusInd Bank, ICICI Bank and Clix Capital.
Depending on the volume, Paytm plays on commissions. “The company tells lenders it can get a ₹400-500 crore loan book for them. Paytm gets to make somewhere between 2.5-3% at the portfolio level and it makes beyond that depending on the quality of customers, etc," the former employee quoted above said.
Paytm, thus far, has recorded good growth across all its three product lines in lending—postpaid (buy-now-pay-later), personal loans and merchant loans. In postpaid, the average ticket size is about ₹4,000. Ticket sizes range between ₹85,000 and ₹95,000 for personal loans and between ₹130,000 and ₹150,000 for merchant loans. Repeat loans, the company disclosed, “have seen a healthy take up, with over 50% of total value disbursed last quarter being to merchants who have taken a loan earlier".
Merchant loans is where Paytm has an edge— its best bet to take lending to the next level. Why is that?
The merchant loan edge
Lending, like we mentioned earlier, is a crowded battlefield. The personal loan space even more so. Here, there is little loyalty.
Postpaid, meanwhile, is a small ticket size product seen as an entry point or hook to get customer. There is less money to be made—during the third quarter earnings call, Gupta said that take rates (commission) in Postpaid are around 3 to 3.2%. But merchant lending is different. The commissions are higher at 4.5-5%.
“Merchant side can be a good business because that’s largely an untapped market. Paytm started with enabling merchants with QR code and now has devices. That’s where they have a great lead," Parijat Garg, a former CRIF India official, who is now a digital lending consultant, said. CRIF is a credit bureau.
“I think one of their biggest successes is Soundbox. Paytm has access to information on merchants using QR code and point of sale (PoS) which nobody has and that could be great lending moat," Garg added.
Gupta, during the same call mentioned above, had stated that Paytm’s paper QR merchants upgrade to a Soundbox, and then their throughput is between five to seven times more. Hence, “they become lendable and very, very profitable to us".
Paytm’s closest rival in the merchant space is BharatPe. Already, the company has entered the SFB game through a joint venture—in October 2021, the RBI issued a SFB licence to a consortium of Centrum Financial Services and BharatPe.
BharatPe claims about ₹800 crore in merchant loan disbursements on a monthly basis and about ₹400 crore in consumer loans thus far.
Paytm claims a merchant base of about 26.7 million. The company cobbled together 38,000 merchant loans during the fourth quarter, and about 1.02 lakh loans in 2021-22.
SFB aspirations
Over the years, the market positioning of Paytm has shifted. It started out as a wallet company. From mobile payments, the company diversified into payments bank, e-commerce and now financial services. Some of its bets, like e-commerce, didn’t pay off.
In its core payments business, the company has been losing market share to UPI apps such as Google Pay and PhonePe. “If Paytm Mall (the e-commerce business) had taken off, then it would have created a PhonePe-Flipkart kind of synergy. That never happened. The gameplan for Paytm now will be to wait out for the small finance bank licence," Garg said.
Paytm received a payments bank licence in 2015—such banks can offer savings and current accounts, besides debit cards. It cannot lend. Paytm Payments Bank will complete five years of operations in June 2022, and as per RBI guidelines, will become eligible to apply for a conversion to a SFB, which would enable it to extend loans. Some experts say this may not come easy because of regulatory hurdles and questions around the Chinese ownership of One97 Communications, the parent organization. As of March 2022, Chinese conglomerate Alibaba and Ant Financial together hold 31.15% in One97.
With SFB in mind, Paytm’s management is evaluating two possibilities. One, the company can move the entire lending team to the SFB. Two, the Paytm SFB could remain a distinct entity, another banking partner that Paytm’s lending business will work with as a distributor.
Can it cover losses?
Now, the moot question. Will the company’s lending revenues, going ahead, be enough to cover the cost? What scale will be good enough? Is that even achievable amid rising competition?
The answers seem difficult at the moment. Some analysts aren’t that hopeful.
Macquarie, an Australian financial services company, in its note reviewing Paytm’s fourth quarter earnings, said that Ebitda (earnings before interest, taxes, depreciation, and amortization) breakeven is “still elusive especially after considering competitive risks from UPI’s wallet challenger (UPI Lite) and regulatory risks". The financial services business, it added, is “still sub-scale and core business model uncertainties remain".
To cover for the losses Paytm makes in its payments business, it needs to achieve a very high-volume in lending, said one of the former employees quoted earlier. “To achieve that high volume is a double-edged sword. You can ramp up lending but then the quality of the asset book will suffer," he added.
Many experts are already questioning the quality of customers Paytm may be targeting. While Cred, a fintech company founded in 2018 by Kunal Shah, targets prime customers (those with higher Cibil score), Paytm’s target segment could be less prime and new-to-credit customers or the first-time borrowers where default rates are usually higher.
Lending chief Bhavesh Gupta denies this notion. During the company’s fourth quarter earnings call, he reiterated that Paytm’s lending portfolio is not new-to-credit customers or bottom of the pyramid. “Our customers in personal loan business come in prime range by banks, which is generally between 700-725 Cibil scrore. A very small percentage of our customer is new-to-credit," he said.
Whatever be that percentage now, the task before Vijay Shekhar Sharma and his executives is clear. They have to grow the lending business multiple times and in quick time.
While the company has enough critics, there are also those who say that Paytm is in a good spot with the sort of customer base it has managed to stitch over the last many years. The fact that it has about $1billion-$1.5 billion in the bank helps.
“So, if you assume that Vijay has to reset the whole past, then it is doable," another former Paytm employee said. “For now, all we know is that he has given a free hand to Bhavesh. He really wants to make lending work for Paytm."
