Daybreak - Paytm's left the market divided with its turnaround hack

Episode Date: July 4, 2023

Since November 2022, when Paytm shares dropped to an all-time low, the fintech giant has been on a steady recovery path. If all goes well, its share price may cross Rs 1000 soon.But what's even more interesting is the sharp jump in its loan distributions in FY23. In the March quarter of the same year, Paytm distributed nearly 12 million loans worth over 1.5 billion dollars.And last Friday, Paytm’s parent company even announced a partnership with Shriram Finance, an NBFC that's known for its deep understanding of risk and more importantly, its collections capabilities.  What's driving this prolific growth and how is Paytm growing its loan business in the post-FLDG era?Tune in.**Paytm founder Vijay Shekhar Sharma is an investor in The Ken  RecommendationPaytm’s results hint at a turnaround. But loan-collection hacks drive it by Gaurav Noronha, Arundhati RamanathanPaytm IPO tells, and tells a lot, but doesn’t show by Arundhati RamanathanDaybreak 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 video. 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. In November last year, the share price of Ptm's parent company, 197 communications, hit an all-time low. It was at $438.35. But ever since, slowly and steadily, it has been on a recovery path. And now, it's jumped by 90%. In fact, experts think that if all goes well and once it crosses the $900-R-mark, which looks like it can happen any time

now, the share price of pay-tm may hit $1,000 apiece. Now, 60% of pay-tm's revenue comes from its payments business. But there's something very interesting happening on a another PTAM platform. You see, in 2017, Ptm's founder, Vijayshikar Sharma, who is known for his long-term vision, decided to invest in a loan collection platform. This was despite Ptm, not being in the loan distribution business. Less than a year had passed since demonetization, and I'm sure you remember those full front-page Ptm ads and newspapers featuring the Prime Minister Narendram Modi around then. So the payments giant invested in a loan platform called credit made. And you know what? At the time, it did not even have regulatory approval for lending

money. Two years later, in 2019, it started offering Ptm Postpaid, which was a buy now pay later or BNPL loan product. Ever since, it's been building a steady stream of users with up to four years of credit history. Now, it is using this customer base to sell personal loans to users and merchant loans to more than 7 million merchants who accept payments through Ptm's payment devices. By 2021, Ptm went ahead and acquired credit mate. And this year, when the March quarter ended, Paytm saw a 250% jump in the total loan amount from a year ago. It distributed nearly 12 million loans worth over $1.5 billion. And that is not all.

20203 is a landmark year for Ptm because it managed to achieve operating profitability. So how did Ptm pull this off? And more importantly, what is the role that this loan business is playing in this dramatic turnaround? Welcome to Daybreak, a business. podcast from the Ken. I'm your host, Nickda Sharma, and I Don't Chase the News Cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Wednesday, the 5th of July. The team's performance in the March quarter has left even some of its most sharpest critics,

take a step back and notice. For example, Macquarie Research, which is a brokerage firm. Just in January last year, it had cut down PTAM's revenue projections. Guess why? Because at the time, it thought that the scaling capacity of Ptm's merchant loan distribution business was limited. So in February 2023, just before the March quarter ended, McCory was left quite astonished. It even admitted it. It said that it was positively surprised by the distribution of the first.

financial service revenue. And wait, there's an even bigger U-turn here. Just this month, McCory concluded that Paytm's loan distribution business is in fact a key driver of the fintech's operational profitability. This growth in its loan business pushed Ptm's revenue up by over 60% to more than $960 million. Well, well, well, how the tables have turned. But seriously, how did they turn it? Stay tuned to find out. As of now, everyone in the market wants credit, meaning there is no shortage of demand for credit. But after the Reserve Bank of India or RBI imposed strict rules on default guarantees,

lending practices in the country have changed. What RBI basically did was that it banned lenders from sharing the credit risk with loan service providers who distributed the loans. This made the roles of regulated and non-regulated entities very clear. It gave more clarity to regulated entities such as NBFCs or non-banking financial companies when entering into loan partnerships. But again, it also ended the FLDG or first lost default guarantee model that lenders have been using while partnering with loan. loan distributors. But again, it also ended the first loss default guarantee or FLDG model that lenders had been using while partnering with loan distributors. FLDG is essentially an arrangement

where a third party agrees to cover the initial or first loss that is incurred by the lender if the borrower defaults on their loan. It is designed to mitigate or cut down the risk that is associated with lending and to enhance the creditworthiness of the borrower in the eyes of the lender. But with FLDG gone now, the loan landscape saw a bit of an upheaval. But Paytm managed to find a way around it.

And that is what has changed the whole game for Paytm. The Ken spoke to an employee of one of Paytm's lending partners and they said that what worked was PTAM's proposal of collection services in these agreements. They told us that the Fintech made a commitment to attain a certain level of collection on the loans that it had distributed on behalf of the lending partner. So basically, if Ptm fails to fulfil this commitment, it would give up on a portion of its fee that it would earn from the loan distribution. This has helped reassure Ptm's lending partners.

As great as it all sounds and has actually turned out to be, dear listeners, this is risky business. I will tell you why in the next segment. So to quickly remind you of what I told you earlier, I said that Ptm's loan business is working because of the collection services that it's offering. And as we all know, collection lies at the core of lending in general.

Now, before the RBI banned FLTG, what was happening was that the lending service provider would tell the lender, you know what, I guarantee that I will compensate you for any credit loss that you suffer because of me. But now, this cushion is gone and this has made lenders reduce the fee that they were paying to these lending service providers. But like I told, you, Paytm found a way around it by saying it would definitely get a certain amount of collection. And on failing to do so, it would give up a part of its fee that it would earn from the loan distribution. An executive close to Paytm told us that now all the lenders that Ptm works with count on it to not only distribute their loans but to also collect them.

And just to make this collection offer more enticing, Ptm has added more to the money. mix. It's to do with structuring of what it earns as a collection performance bonus. The executive explained it to us. So if a lender expects a 2% loss on a portfolio, paytm tells them to account for only 1.5%. And if Ptm actually manages to recover the other 0.5%, it gets a share of it. But if Ptm fails to fail to, to stop the credit loss at 1.5%, then not only does it lose out on the revenue share, but also the lender will not have to pay it even a part of the sourcing fee. Sounds like a great deal, right?

But I'm sure you can also see that it does come with a substantial risk. But this practice is gaining popularity among other loan service providers, such as Credit B, Navi and Lending Cart. The market, meanwhile, is on the fence about this practice that is being followed by non-regulated entities. Three co-founders of Fintechs raised concerns that this model of guaranteeing collection involves sharing the risk with the lender. But remember what RBI did?

By doing away with FLDG, it wants the lender to take all the credit risk. Now, just last Friday, Ptam's parent company announced a partnership with Shrearam Finance, which is an NBFC. The company, which is also in the lending business, is known for its good geographical reach, its deep understanding of risk, and most importantly, its collection capabilities. So to conclude, let's remember that in lending, profits come before losses. What we'll have to wait and see is if Ptm, can go through this cycle without getting into any trouble with the regulator RBI.

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, subscriber-only apps and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. site. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.