Daybreak - How Paisabazaar is spoiling PB Fintech’s profitability party

Episode Date: July 10, 2024

Things were going really well for Paisabazaar, until the Reserve Bank of India stepped in and hit it where it hurts. The RBI told banks to clamp down on the unsecured loan segment – which happens to be Paisabazaar’s bread and butter.  The regulator has discouraged lenders from small-ticket collateral free loans. And of course lenders know better than to ignore the RBI’s directive. So for Paisabazaar that meant its lending partners started shying away from unsecured loan leads. After a dream run, growth started slowing down. The company knew it had to do something and fast. Tune in 

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 Ganeshan, 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. episode, please follow intermission on Spotify and Apple Podcasts 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. Things were going really well for Paisa Bazaar. But that was until the Reserve Bank of India stepped in and hit it where it hurts. You see, the RBI has told banks to clamp down on the unsecured loan segment, which happens to be Paisapazars, bread and butter. For close to a decade, the company has primarily been dealing in unsecured loan products.

So credit cards, personal loans, microloans, that sort of thing. For context, unsecured loans, as the name suggests, are loans offered without the borrower pledging some sort of asset as collateral. Which works out great for companies like Paisa Pazar because no collateral means significantly higher interest rates. So it would find borrowers and link them up with its numerous lending partners like HDFC, Access Bank or State Bank of India. And for nearly a decade, this strategy worked out great for Pesa Bazaar. It was cruising along with double-digit growth in quarterly revenue.

That was until the RBI stepped in and spoiled the company's party. You see, the regulator has discouraged lenders from small-ticket collateral-free loans. And of course, lenders know better. than to ignore the RBI's directive. So for Paisa Bazaar, that meant its lending partner started shying away from unsecured loan leads. So after a dream run,

growth eventually started slowing down. The company knew it had to do something and do it fast. Its solution? Moving from unsecured loans to secured loans. We're talking big ticket home loans, loans against property, and much, much more.

And when you think about it, it does sound like the logical next step for the company, right? If you can't do enough unsecured loans, you do more secured loans. Except it isn't that simple, because that transition comes with some Herculean challenges. The thing is, if you wanted to take a high-value loan,

wouldn't you much rather go to the lender directly? Paysa Bazaar actually recognizes this mindset, and it's pulling out all the, stops to change it. It's hired some of the best bankers in the business, and they all have one common KRA, expanding the share of loans that come with collaterals. So, secured loans.

But at the moment, secured loans contribute merely 5% to the fintech's revenue. Basically, the bottom line is unsecured loans are still where the money is at. So where does that leave things for Paisa Bazaar? Welcome to Daybreak, a business point. from the Ken. I'm your host Rahal Philippos, and every week my co-host, Nygda Sharma and I

will bring you one business story that is worth understanding and worth your time. Today is Wednesday, the 10th of July. Creating as a marketplace mainly for collateral-free loans from a variety of lending partners

in return for a commission has served Pesa Bazaar pretty well. It's also served its parent company, PBFintech, very well since the beginning. It actually contributes nearly 25% to its parents' topline, ranking significantly higher than its sister insurance technology platform policy

bazaar. In fact, in March this year, PBFintech posted its first ever annual profit, partly thanks to the credit marketplaces focus on unsecured loans. So what does Pesha Bazaar's more focused foray into the secured loans category mean for the company and its parent? Well, first and foremost, it has hampered the company's growth prospects. In the last financials, the last financials, the company's, year, its annualized credit disbursement or the amount of money dispersed as loans fell by 11%. So now it is trying to figure out how to make secured loans work just as well as unsecured loans have this far. For starters, Pesa Bazaar is investing heavily in the offline segment, with ticket sizes starting at 25 lakh rupees. Now, this is a big switch up from the company's usual strategy,

because so far, it's mainly generated online leads. The issue here is that with secured loans, that just won't work. Because when it's dozens of lax in question, a customer would much rather go to a physical bank branch. So to smoothen the transition, the fintech is training its on-ground staff to act like insurance agents. So they show up at places where they are likely to find a ton of potential customers. For instance, they approach buyers at,

say, under construction properties, knowing that most of them will have to take home loans to buy a house. The company has also changed the way its teams are structured. So up until now, it's had a team of about 55 to 65 employees for unsecured loans. The secured loans team on the other hand has less than 40 executives across business and analytics teams. But the gap is very quickly narrowing. Pesa Bazaar has been hiring senior executives from prominent banks to double down on its secured lending efforts. And it isn't just senior positions. It's been advertising openings at mid and junior levels too.

But that doesn't solve its other big problem. Getting people to take a loan via its platform versus going to the lender directly. More on that in the next segment. To better understand borrower behavior, the Ken reached out to a bunch of Pesa Bazaar users. They ranged from chartered accountants to YouTube content creators. All of them had used.

used Paysa Bazaar to take unsecured loans in the past, but none said they would opt for a home loan through the platform. Like Sachin Dhume, a Kolkata-based CA put it, home buying involves emotions. Usually it is a person's largest expenditure, so small things like having a physical place to go to and an actual person to talk to makes all the difference. But this is still uncharted territory for Paisa Bazaar.

You see, until now, the typical user behaviour has been for users to land on the website through search engines and compare interest rates, eligibility criteria, etc. A fraction of that user traffic then goes on to apply for a loan through the platform. Of these leads, 96% are for unsecured loans. Like I mentioned earlier, now that it's going all out in the secured loan category,

it's shifting focus to offline channels. And hypothetically, if it's able to convince people to take a loan from its platform, its problems still don't end here. Even if its sales executives tactfully finds secured loan borrowers, maintaining a flow of leads is difficult because there are no repeat borrowers.

A home loan is usually a once-in-a-lifetime advance. Every time a new user has to be acquired, customer acquisition efforts have to start from scratch, as opposed to with collateral-free loans, where one user can be sold several different products. In fact, for the year ended March 2020, Pesa Bazaar dispersed 75% of its loans to existing customers. Now, Pesa Bazaar's leadership is cognizant of these issues.

According to them, the solution is building a portfolio of more innovative products. The Ken has learned that one such product is loans against securities. An executive actually told the Ken that the scope for this sort of product is huge, particularly because of the sheer number of people that have entered the equity market post-pandemic. But what about the lenders themselves? The company's concerted efforts to win over its banking partners, potential customers, should alarm lenders, right? Except the lenders seem to be indifferent.

That's because the borrower ultimately reaches them despite the on-ground competition between its own sales executives and that of Paisabazaar. Either way, it's B. Fintech that will really feel the jitters. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippo's produced by me, Snigda Sharma, and edited by Rajiv Sien.