Daybreak - How lenders like Navi resort to extreme borrower surveillance to keep their A game on

Episode Date: November 20, 2024

If you’ve ever taken a loan from a non bank or an NBFC, the EMI is usually auto-debited from your account every month. But if you missed a payment, you know what usually goes down. You are inundated with phone calls from your lender and maybe agents even start visiting your home. Not an ideal situation for you or your lender.But now, your lender can just monitor your account and deduct the money as soon as it comes into your account…all thanks to that auto-debit permission you granted. Earlier, only a bank could do this when it lent money to its account holder. But now non-banks can do it, too. A fintech executive told The Ken that this tool will soon become business as usual in every lender’s tool box. But things are still not there yet since the banks are not predictably sharing the statement data or their servers are down.And here’s where account aggregators come into the picture. These aggregators are a newly-created class of licensed companies by the Reserve Bank of India. They basically help businesses exchange financial information about a user after taking the user’s consent. Meanwhile, Navi Finserv, a four-year-old non-bank, was quite particular about how fast it could help its users take out a loan. Navi’s co-founder and CEO Sachin Bansal—who previously co-founded the Flipkart —believes “banking should be as easy as going on Swiggy and ordering food”. So to amp up both disbursals and collections, Navi and others like it are counting on account aggregators. But being able to access a borrower’s bank statement at any given time is a powerful collection tool.And the problem is how Navi has been using this power.Tune in. Subscribe here to listen to the full episode of Two by TwoListen to the free version of Two by Two here: AppleSpotifyDaybreak is now on WhatsApp at [phone]. Text us and tell us what you thought of the episode!Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Raman Ganesh, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first studio recording, episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. If you've ever taken a loan from a non-bank or an NBFC, the EMI is usually auto-debate from your account every month. But if you miss a payment, you know what usually goes down. You're inundated with phone calls from your lender.

and maybe agents even start visiting your house. Not an ideal situation for you or for your lender. But now, your lender can just monitor your account and deduct the money as soon as it comes into it, all thanks to the auto-debit permission that you granted. You see, earlier, only a bank could do this when it lent money to its account holder. But now, non-banks can do it too.

A fintech executive told again that this tool will soon become business as usual in every lender's toolbox. But things are still not there yet since the banks are not predictably sharing the statement data or their servers are down. And here is where account aggregators come into the picture. These aggregators are a newly created class of licensed companies by the Reserve Bank of India. They basically help businesses exchange financial information about a user after taking the user's consent. Like Navi Finnserve, a 4-year-old non-bank was quite particular about how fast it could help its users take out a loan. Navi's co-founder and CEO Sachin Bansel, who previously co-founded Flipcott, believes that banking should be as easy as going on Swiggy and ordering food. So, to amp up both dispersals and collections, Navi and others like it started counting on account

aggregators. But being able to access a borrower's bank statement at any given time is a really powerful collection tool. And the problem was how Navi had been using this power. In fact, just last month, the RBI banned Navi from dispersing any new loans. The reason was not this, But the banking regulator cited unfair lending practices, which included high interest rates, unfair and hidden charges, and evergreening of loans. So in this episode, we did deeper into how Navi has been using this data from its loan customers. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nidha Sharma, and I Don't Chase the News Cycle.

Instead, every day of the week, my colleague, Ryan, Rahal Philippos and I will come to you with one business story that is worth understanding and worth your time. Today is Thursday, the 21st of November. To make loans easy and quick, Navi wants access to some of its borrowers' bank statements. Which sounds fair until you find out that they want this access on an everyday basis. This is way more than what other lenders have been asking for, more than what is recommended. In fact, it is more than what is really necessary for monitoring loans. And it does come across as a bit aggressive to many.

But for Sachin Ban Sal, it is plain ambition, especially after Navi was denied a banking license by the Reserve Bank of India. Also, not to forget, the failed IPO. He has a point to prove. So, he's tweaking, fussing, experimenting and doubling down on any metric that has has the potential to grow. Anything that will take the company to grow from its $1.3 billion plus loan book of mostly personal loans.

And for this, Navi is counting on account aggregators. Since these aggregators went live back in 2021, they saw very slow growth. But lately, they seem to have started picking up with more than 500 financial institutions becoming a part of it. In June 2024, a total of 16 aggregators, which includes the likes of One Money and Anumati, generated over 88 million consents from borrowers on behalf of various financial institutions such as lenders, personal finance management companies and investment advisors. This was seven times more compared to last year.

Lenders like Bajaj finance, HGFC Bank and IIFL are of course among the top users of these account aggregators because of their size. But Navi, despite having a much smaller loan book comparatively, also sits among the top five users of these aggregators. If you look at the consent form for a loan on Navi, you will see that Navi seeks to keep your bank statement data for as long as eight years when you're applying for a loan. And if you do get a loan, it wants to monitor it every single day for those eight years.

A senior account aggregator executive told my colleague Arundati Ramanathan that this is just excessive. Another even went a step ahead and called it unethical. They said just because someone needs money, lenders are exploiting them by taking more data than they need. A former Navi employee told us that lenders can also get away with it easily because most borrowers just weren't alone. They don't care about permissions that are being sought or what they do with the data. Now, Navi's overuse of this tool to hoard data is actually etched into its DNA. Details on collections, dispersals, costs, efficiency and more hit the Slack channel every morning at half-past five. Within an hour, Sachin Ban Sal is already looking for answers and hunting down drop-off rates at every step.

Things move really quickly in the company. A former employee told us that saying no is not an option to Sachin. If you say something will need five weeks to complete, he will push for it to be done in two weeks. He believes in putting everything behind it. This high-pressure environment at Navi makes sense when you think about how Bansal, who owns 97% stake in the company, has pumped in nearly $500 million of the money from his 2018 Flipcott exit into it. The idea was for a stock market debut and a banking license.

That way, the non-bank could have raised funds through public markets and also gained access to low-cost deposits. Both of these plans failed. Demart is synonymous with discounts. Its stores are packed on most weekends like there is a festival going on. But despite all of this, the listed company has been in a bit of a slumber for. some time now. So my colleagues, Rohan Dharma Kumar and Praveen Kopalakrishnan, decided to investigate the forces that are making D-Mart, take a pause and decide what its strategy is to defend its

position. Stay tuned to hear what they and their really interesting guests had to say at the end of this episode. And now back to daybreak. You see, from the lender's perspective, income statements are a useful resource for underwriting and also important to monitor loans. But getting them reliably is a constant issue for these lenders. In fact, once like Bajaj did not even ask for these statements, and that is because it is a painstaking process for lenders when they are giving out a loan offline. Plus, when borrowers themselves upload their bank statements, they often do not meet the lender's standards.

is where account aggregators turn out to be very useful. They help these lenders pull bank statements and adjust the monitoring period and frequency the way that they want. All they need is the borrower's consent to make it happen, which in most cases comes quite easily. For example, a source close to Bajarge Finance told us that since integrating with aggregators in mid-20203, nearly half of borrowers gave their consent to a large lender like Bajajic finance. But look what happened to Finvoo, a puny-based aggregator which was working with lenders like Navi. It actually got barred by SBI earlier this year. Finvu was allowing lenders like Navi to pull borrowers bank statements multiple times in a day.

This is way more than the once-per-day limit that Navi now wants. So it was because of these over-frequent pings enabled by Finvoo that SBI barred it. An aggregator told again that banks are finding the high frequency of pulls are putting a strain on their servers. They are also upset that their customer is being taken away by another lender. All of this has enabled the push within the industry to check both lenders and aggregators and stop them from asking for more consent for data than necessary. For instance, since May, Sehmati, which is an alliance of account aggregators, banks, lenders and other financial institutions within the account aggregation ecosystem,

has been recommending that specific limits should be incorporated while seeking consent for various use cases. B.G. Mahesh, the CEO of Seymati, told us, and I'm quoting, SBI is an active participant in Seymati's participatory government forums along with other stakeholders. We are all aware of SBI's concerns on this and are confident that this can be resolved with consensus among those in the ecosystem. He also said that because account aggregator usage is on a rise, Seymati is developing technical solutions to detect deviations all in the interest of protecting consumers. About whether or not they launched Demarch Ready to defend their existing business, right? We need to understand when I think Demart Ready was launched in 2017, 2018, but it was more of a pilot.

Before COVID. Yeah, but it gathered steam during the pandemic. Yeah, yeah. They were still doing pilots. By then, Big Basket had been operational for what, eight years, right? And Big Basket is also a value retailer, e-tailer. Yes. You get really good discounts on Big Basket.

because at that point, it was only next day delivery. Correct. So you could wait for a day and get a 20%, 30% discount in your overall basket. So Big Basket was already there and Geomart launched April or May 2020. And that's when Demart started to take this business seriously. So it's not that customers didn't have, and GeoMart was free delivery, regardless of the order value. right so demart reddy was not the first to do this so they were clearly trying to protect their customers from being poached and it hasn't worked at that point it did seem counterintuitive like rohan said you know you know blinket and zeto they've shown that you can indeed get customers to pay for delivery at that point everyone was doing free delivery and dimar said sorry it was 50 to 80 bucks then yes right but now you're telling me to come to your store uh and

and pick up, not even a store, it's a kiosk. Absolutely. Right? And your CEO's talking about how they want to move everything to same-day delivery when refrigerators and TVs are being delivered in 15 minutes and 20 minutes. Okay, that's an exaggeration. We haven't been there yet. We probably will.

No, you can, I just check Bigbasket. You can get a microwave oven in 10 minutes. From Chrome. Yeah, from Chroma. So Big Basket, just to tell you, last three deliveries that I got from them were six hours delayed. And they were booked for a 24-hour slot, not even quick commerce. So, Big Baza, it is just not reaching.

The Big Baskett is, I think, far away. And if you look at what valuation they got, when they sold to Tata, is actually a clear proof as well, you know, as to, so the blinkets, etc. are getting far, far superior valuation, in my opinion, vis-a-vis what their business model is and what their profitability can be. I don't think they can ever meet the profitability that Demart is delivering. But that's, sorry, that's the nub of the argument, right? Yes, yes.

The game that we've been like, you know, or at least DMART and legacy retailers have been playing is that, hey, the only thing that matters is profits. You're a business. You exist to make profits. And investors and markets will look at how fast you're growing and how much profits you're generating and they'll value you based on that. In comes this quick commerce trend where suddenly, that's no longer the objective and its valuations, right?

So now, you know, the choice that is, you know, I mean, I can imagine DMAT is faced with is that how do you, is this a passing storm? Like, can we just hope and close our eyes and hope that in three years or four years, most of this will burn away because everyone will realize? But if you do that, how much of your business do you have to sacrifice in the short term because of these VC-funded, Giants, which, I mean, many of them are now, I mean, Zomato is listed, Swiggy is listed, will continue to, or one is backed by Tata, will continue to chop away or like, you know, take away your, you know, customers. And so you lose on valuation.

So, I mean, I was just thinking there's a very famous thing, right? Like, you know, in the context of stock markets, that markets can remain irrational longer than you can remain solvent. Right? So in some senses, this is like the large company retailer version of it, right? Yeah. Yeah. What do you call? Venture funded valuation bubbles can remain inflated longer than you can hope to run a sustainable and profitable business.

And therefore, what does it do? So I think pre-quickcomers, I think the choices were very clear. They were binary for DMART, right? Just focus on brick and mortar retail, make a lot of money. or do e-commerce and lose money because that was no e-tailer was profitable then. Amazon FlipCard, they still aren't. And Big Basket, which was the one big grocery only retailer.

Big Basket wasn't making money either. But now you can't make the same argument because Blinket is on the verge of breaking even. And Instamart, Swiggy will also break even enough in a few quarters. I don't know about Zepto. And this is partly because they are charging customers 30 bucks, 15 bucks, 30 bucks, right? So you can no longer make that argument to analysts and investors.

We won't do this because we are a very frugal company. We want to make money, right? You can't say that anymore. But it's not in your DNA to do quick commerce the way we understand quick commerce. You just listened to was a small part of the discussion that Rohan and Praveen had on the Ken's premium podcast, 2x2, which was also handpicked as, one of their favorite podcasts of the year by Apple Podcasts. You can listen to the full episode with a premium subscription to the Ken or on Apple Podcasts

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newsletters and podcast extras. To subscribe, head to the ken.com and click on the red subscribe button on top of the Ken website. Today's episode was hosted by Snigna Sharma and edited by Rajiv Siyah.