Prime Venture Partners Podcast

Fintech Startup Ideas for 50 Crore Indians with a $500 Billion Dollar Opportunity!

• Prime Venture Partners: Early Stage VC Fund • Season 1 • Episode 150

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In this #fintech special episode, we dive deep into the world of lending - our in-house investors Sanjay Swamy and Shivani Kulkarni discuss the massive $500 Billion Dollar Credit opportunity for entrepreneurs to leverage. 

Why Lending?

- #india is the 3rd largest Fintech ecosystem in the world (behind US, China); We have 10,000 fintech startups, in this pure-play lending startups are 2500 (25%)!

- Emergence of Co-lending as a business model will be a game-changer

- Digital public infrastructure like #aadhaar , #upi will help Indian entrepreneurs build large 

- AI will enable new verticals to create several #unicorn like healthcare, travel, agriculture and many more

Listen/watch the podcast to learn more about:

0:00 - Opportunities and Challenges in Lending

7:43 - The Digital Infrastructure Revolution in India

15:33 - Segmentation and Opportunities in Fintech

26:29 - The Evolution of Co-Lending in India

34:16 - Opportunities in Lending and Finance

46:23 - Revolutionizing Fintech Infrastructure and Automation

Whether you're a fintech enthusiast, an entrepreneur, or just curious about how lending is evolving, this episode is packed with valuable insights you won't want to miss!

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Sanjay Swamy:

Into entrepreneurs. We are looking at a lot of co-lending opportunities.

Shivani Kulkarni:

India is not just one India, but there are several Indias in it, right so?

Sanjay Swamy:

you can pick any segment of users, and there's 100 million of them available for you to target.

Shivani Kulkarni:

Top 10 listed companies in India today. Three of them are financial services.

Sanjay Swamy:

It's not like people are not credit worthy, it's just that you don't know that they are credit worthy.

Shivani Kulkarni:

There are just 40 million people who have credit cards 530 billion dollars of you know credit gap.

Sanjay Swamy:

That's there. You know you can't throw money at the problem and say I'm just going to get a big fast I think banks are very keen to do co-lending collections.

Shivani Kulkarni:

There is an intent issue and an ability issue so banks lend out to nbfcs, nbfcs in turn may lend out to fintechs, and fintechs eventually reach the customer.

Sanjay Swamy:

We don't have audacious enough founders.

Shivani Kulkarni:

Hello and welcome to Prime Venture Partners podcast. I'm your host, shivani Kulkarni, and today I have with me our partner, sanjay Swami, and we are going to talk about all things lending. Welcome, sanjay, to the podcast, and how should we start?

Sanjay Swamy:

Well, it's great to be welcomed back to our own podcast. But yeah, on a serious note, maybe I'll start with a question for you, shivani, and it's been a couple of years now for you here at Prime and, of course, you've been an investor in Flipkart and earlier worked at Evendus as well, so you've seen this industry a lot. You know, as they say, certainly in fintech and particularly in lending. You know, a lot of people ask is lending the only business model? You know, are all businesses really just lending businesses? And so, just curious, you know, as you've been spending a lot of time with founders now of late as well, and looking at policy, looking at opportunities around co-lending and whatnot, what are your views on? Where are some of the opportunities in the space? And, you know, maybe just paint a little landscape of the space itself.

Shivani Kulkarni:

Sure, I mean happy to. So maybe let me take a step back before I get into FinTech itself. Right, and let me just talk about financial services in India, because that, of course, is the backbone, large opportunity. I mean, if you just see the top 10 listed companies in India today, three of them are financial services, or rather banks. So HDFC, icici, sbi, together, I think top three, I think in the top five, these are one or three of them and growing right, like most of them grow at 30-40% year on year. So you can just see how large the underlying opportunity is.

Shivani Kulkarni:

And yet when you just maybe dig deeper, you will see that there is still so much under penetration. I mean, I'll just throw some numbers, I'll try to give some context as well. But SME credit 500 billion plus of credit gap, like this is how much you can actually lend to the SMEs, but they are not getting access to that credit. If you talk from a consumer perspective, there are just 40 million people who have credit cards. Maybe there are people like you and me who might have like five, six credit cards. Maybe there are people like you and me who might have like five, six credit cards. Okay, you don't have, I have three, four, but yeah, I mean we have access to a lot of these things, right, but if you take the 1.4 billion today that we have in India, only 40 million have access to credit cards. Similarly, personal loans and other products also only scratch the top surface. So I think there's tremendous opportunity here to build right and I think fintechs over the last 10-15 years have captured some amount of it. I would say they are also still scratching the surface. There's lots to do. But if you just take from a numbers perspective again, india is the third largest fintech ecosystem today in the world world after US and China, of course and there are close to 10,000 startups. Now you asked like is credit the business model or not? So of these, 2,500 are pure play lending startups and rest everybody, I think, while lending may not be the primary monetization model, but they do find their ways and come to lending, but 2500 are pure play lending. Now maybe I can also get into the various aspects or various business models before we get into specific questions on this podcast.

Shivani Kulkarni:

In lending itself, I think two broad categories in which people are building today. One is on the consumer lending side. So, again, people like you and me or people, general consumers, right, that kind of credit products you can use to service this segment. So that forms one broad category and the second broad category is on the sme side, that's on the business side. Now, both these categories you can service through secured and unsecured lending products. Secured just for our viewers to throw some light. It's whenever a bank gives you a loan against an asset or you use something like maybe your property or an asset as a collateral. That's when it's called secured lending or or a vehicle, for example.

Shivani Kulkarni:

Vehicle, for example, like auto does. So that is one form, which is secured lending. And then there is unsecured, where the customer, based on the data itself, is getting underwritten. So yeah, I mean just because you asked me the landscape, right? These are the broad two categories and I think today we see startups building across these segments. So there are opportunities in each of these. Maybe, as we go deeper, we can explore some of this yeah, I was just going to say that.

Sanjay Swamy:

You know, when you were rattling off those numbers around 40 million credit cards and so on I've been a fintech entrepreneur and later, you know, worked on adhar, and then worked on india stack, and, and, and then, of course, been more of a VC over the last decade or so.

Sanjay Swamy:

Those numbers just don't seem to have changed, although we know we ourselves have got probably 15, 20 companies in our portfolio who are doing phenomenally well and, of course, there has been a lot of penetration of at least digital financial services UPI of course being pervasive of at least digital financial services UPI of course being pervasive. From a demand gap perspective, it really doesn't seem like we've moved the needle that much and it's also a reflection of the fact that there is a lot more need for credit and a lot more opportunity to deploy credit. But I think if you're an entrepreneur looking at this space, I would say there's never going to be a winner takes all in this particular space and opportunity. I wouldn't say there are too many opportunities that have been spoken for entirely and there will always be opportunities, even now, for companies to come in.

Shivani Kulkarni:

One aspect that I wanted to touch upon, right, and when you talk about needle moving things, I think this has been a key enabler for this particular ecosystem, and you have worked on the digital public infrastructure yourself, right, so would love to understand from your perspective, what is the impact that some of these things like Aadhaar, upi, what is it that you have seen? What has been your experience on the impact that they have had on not only financial services, but the larger ecosystem as well?

Sanjay Swamy:

maybe we can start there yeah look, I was a fintech entrepreneur before all this existed. Right, and part of the reason struggle to be a successful entrepreneur was, amongst other things, it was impossible to open a bank account. It took three, four weeks for from filling an application form to getting it approved, not to mention it was a process that was fraught with the use of paper and probably a lot of mistakes as well, right, and therefore very expensive. Fast forward to five years later, you know, and that was part of the motivation to sort of be a player in the part of the Aadhaar team. You know, india suddenly had, you know, the foundations and, of course, has grown, has built on it quite a bit, which is something that most people around the world would be envious of, and I think our entrepreneurs don't really realize in some ways, because, you know, most of the youngsters today have grown up in the post-Aadhaar world, don't really realize the luxury that we have of this incredible digital public infrastructure starting-Aadhaar world, don't really realize the luxury that we have of this incredible digital public infrastructure, starting with Aadhaar, to do, you know, authentication, as well as electronic KYC e-sign for documents, which is accepted, you know, in the court of law, digilocker as a framework for, you know, storage of documents, retrieval of authentic documents, so to speak. Of course, we'll talk in more detail later about account aggregator, the consent framework, all of which are, you know, really very important topics in themselves. And India we've got, you know, state of the art and probably you know, thought leadership in this space, thought leadership in this space and using these as the foundational blocks. If you layer on top of it, whether it's an ODAM ID for small businesses, whether it is GST for understanding their business flows or the cash flows and, last but not least, on a monster scale, upi, which makes movement of money extremely straightforward, right? So all of these infrastructure elements did not exist 12 years ago, right, and today they're here. You know, we can't think of life without them.

Sanjay Swamy:

Just to give you some context, you know KYC. I talked about paper. One study that I had done at the time was you know, the telcos are, at the time, doing about 1.5, 1.6 million kycs a day. Uh, which translates to about 20 per second in a in a workday. Right, it's one the time you snap your fingers. 20 people in india got a new sim connection, but also, in the process, they sadly cut down, you know, about a thousand trees a day doing that, because the tree gives you about 80,000 sheets of paper if you do the math. It's pretty scary actually as a million trees in three years that were being destroyed just doing telecom KYC right.

Sanjay Swamy:

So today you know, not only do we have a better and more accurate solution, right, it's also ultra low cost and it has helped bring a lot of people into the financial system and be able to serve them. Just one other quick anecdote for mutual funds, for example, the commission used to be half percent, but the cost of KYC was 1500 rupees, which meant that unless you invest 3 lakh rupees, the commission is not paid off. Now 4 million households in India can afford to invest 3 lakh rupees. The commission is not paid off right. Now 4 million households in India can afford to invest 3 lakh rupees a year.

Sanjay Swamy:

But now with Aadhaar and with eKYC, all of a sudden you know the cost of KYC is zero. Suddenly a 10,000 rupee mutual fund investment is a very viable product, right? So the sort of saccharization that we saw the HULs doing with shampoos and things like that is really the biggest opportunity facing financial services and I don't think we have tapped that yet. We're still sort of just trying to take the existing opportunities and make them more digital and try to make them more accessible. But you know, picture Abhi Baaki.

Shivani Kulkarni:

I think there's's a lot to be done yeah, I think even on the payment side, right, like just upi being there, and with upi, auto pay and few of these innovations, I mean, if you think of just the lending flow itself, disbursement and collections is so much more easier today.

Shivani Kulkarni:

I mean, a customer in a rural area may not have or may not know net banking, cannot operate it, but with UPI and just the amazing job that phone pays, google pays of the world have done with the user interfaces, it's so easy to just set up an auto pay and just get the customer to pay on time.

Shivani Kulkarni:

One aspect that you talked about, the KYC aspect.

Shivani Kulkarni:

But the second aspect that comes when actually in the lending product specifically, is underwriting and the availability of data easily, and I think account aggregator today is doing at least has started to show some cost cutting there in terms of efficiencies there, because account aggregator, if you think about it, what it does is it connects all the banks, mutual fund houses, pf, your PF accounts, your LIC policies and the data can be fetched if you are an FIU or FIP and there are nuances there, right, but all this data can be fetched very easily. And think about it. If you go to suppose, say tomorrow, any of the fintech and want to apply for a loan, the fintech can easily fetch all these details with your consent, and underwriting becomes that much more easier. So I think it's like you said it's just the beginning right. I think KYC was solved. Now payments is solved with UPI, and I think this will also solve, to a certain extent, underwriting or data issues as well yeah, so I think, if anything, that part has been a little underwhelming in terms of progress.

Sanjay Swamy:

However, I think, from a startup perspective, it's important to see that you know if you just have access to the same data that everybody else has got to me that doesn't feel like a competitive advantage, right.

Sanjay Swamy:

So I feel startups have to try and figure out some proprietary modes.

Sanjay Swamy:

It's either access to proprietary data that, when coupled with all the other data that exists, will help them underwrite better. It's perhaps better distribution that will allow them to access customers at a lower cost access customers with not just a lower cost, but also with some proprietary information about them, and I think that's what startups should strive to do. Right, if everybody's going to try to do the same thing, at some point the banks will win, because they do have the muscle and the. You know, if there is nothing proprietary about a startup, then and that's actually where I think we struggle a lot when we look at companies probably getting a little ahead of ourselves is what are the proprietary modes that companies have built that, layered on top of the open, interoperable rails that are there, will give them an opportunity to grow really, really fast, and and that's what I would like entrepreneurs to think about maybe just building on that right, like when a founder, maybe say a 25, 30 year old, starts, he may not have access to proprietary data or distribution, right.

Shivani Kulkarni:

So how do you think an entrepreneur in this segment should think about creating some of these modes?

Sanjay Swamy:

because clearly, the simple answer entrepreneurs wait till they're 50 years old. Somebody would have created the mode. So it's the wrong answer, I guess, of course no, but how do you start thinking about like?

Shivani Kulkarni:

you start somewhere, right? Uh? How do you, I think, uh?

Sanjay Swamy:

first of all, you know, yes, we have 1.4 billion people, but startups need to figure out how are they going to get to the first customer, the first, you know, if you're talking consumers, uh, the first hundred thousand customers, the first, maybe one million customers, right, and and turn them into borrowers for a particular product. And if you start thinking in along those lines, then you can start thinking of what they call, you know, riches and niches. Right, there are huge profit pools solving one problem for a very small subsegment of the larger population and because you do that, actually very few people are trying to solve the same problem and you're likely to win a disproportionate piece of that market, right. And when that happens, that becomes the foundation for how you subsequently can become a larger company, right, and by then expanding perhaps to adjacencies and so on, right.

Sanjay Swamy:

So I kind of cringe when founders come and say well, who's your customer? Everybody can be my customer, right, that's the wrong answer. It's true in all businesses nothing to do with fintech, right. So segmentation becomes very important and when you're focused on a very homogeneous segment, then you'll start finding a lot of sources for proprietary data. You'll find a lot of you know commonality about that segment where you can go and, you know, build some patterns around them because you're targeting them very in a very laser focused manner.

Sanjay Swamy:

So that, I think, is going to be important now the same thing, the other thing that goes with that is, even your go-to market becomes very interesting, because you don't have to be doing million dollar ipl ads and you know sponsoring all the teams because your customers are, you know, very well understood by you, you know where they are, you know who they are literally and and you know who, you know how to reach them. So I think these are things that startups have to do. None of this is specific to lending or to fintech, but the moment you can segment and and if you have a good, sizable segment that is very homogeneous, a lot of these opportunities will arise got it.

Shivani Kulkarni:

And uh, also, there are different types like uh, I think Kishore Biani says this often right Like, india is not just one India, but there are several India's Bharats in it. Right Like, there are the top 10 million, then there are like, say, maybe 200, 300 million, and then there is the rest of India. So most of the fintechs, at least in the last three, four years that I have come across, tend to, most of them, tend to target the top 10 million and, as a result, I think some stats I can share. Right Like, consumer credit has been like this has been a customer the top 10 million that has been over-linked. You will see in terms of the DPDs that they have, the number of loans that they carry.

Shivani Kulkarni:

This has been a segment that has credit cards, loans and 10 other type of loans. So what would be your advice to founders then, given that this, obviously this segment is very attractive, they earn a lot, have the spending capability, should you go after that or do you then target the lower segments? But then distribution and a few other things might become slightly more tricky? So what would I mean?

Sanjay Swamy:

it's not one size fit all, but, if anything, that you can suggest or yeah, I think you know, as we have discussed several times here, shivani, you know the the opportunity that has been created through this digital public infrastructure that we've got is really to be able to reach, and the fact that we have now what 700-800 million Indians with smartphones some huge number like that all of whom have Aadhaar, all of whom can be technically KYC'd and issued a loan instantaneously from any part of the country or to any part of the country, instantaneously from any part of the country or to any part of the country. That's actually what has created the opportunity, right, so you can pick any segment of users, and there's 100 million of them available for you to target Right now. Every segment of users has got good people there, and you know, the thing in India is, you actually have a problem of a thin file, right, because there isn't information. It's not like people are not credit worthy, it's just that you don't know that they are credit worthy, and now you need to find other proxies, right? So, yes, it's easy to lend to the the upper 10 million, but, frankly, that segment is not just over lend to, they're also fed up, right, so they're not even looking for new products, and you know the number of spam calls that we all get you know, offering us car loans when we don't even have cars. Um, you know, these are things that uh, you know, I think this segment is done with right now.

Sanjay Swamy:

There will be an occasional, you know innovator that will come out and do something cute and you know uh thing. But if you are a startup starting out, I think there's no novelty in doing that. I always tell founders, you know, it's great to not succeed. I hate to use the word failure, but you know, if you're not successful attempting to solve something that nobody has ever done, that's forgivable. But imagine failing at something that five people have shown you the right way to succeed at right. So I think, pick a problem that is meaningful, where the outcomes are going to have, you know, a very strong upside, and build moats around it.

Sanjay Swamy:

Right, it's not meant to be easy being an entrepreneur and solving these problems, but if you solve the right problems for customers for whom you're the first one solving them, you know they will be loyal to you.

Sanjay Swamy:

They're going're going to be, you know, and you can move up the chain very quickly. They will talk about your, your product, to other peers of theirs who they know probably better than you, then I think there are tremendous opportunities here and I think, if you look at some of our portfolio companies have all done that right, whether it is auto looking at leasing of two wheelers, which is a huge segment but the leasing product never existed. Or whether it's Finac going to small, medium retailers small retailers, and you know, getting them in a working capital or cashflow lending based on their business track record. Companies like you know, navda, normata, finn, which is doing solar rooftop financing for msmes, you know, moving them directly from diesel to electric. They're solving real problems for those customers and the financial services are kind of incidental to the business problem that they're solving for the user and I think most of these apply to non-fintech companies or non-lending companies as well.

Shivani Kulkarni:

Right, but when you specifically come to lending companies, there might be certain things like collections, maybe supply of supply of capital. So any advice that you have for founders about how do they go about these things like collections?

Sanjay Swamy:

yeah, so, first of all, you know when you're dealing with money, particularly other people's money, you're in a regulated space. Right now there may be uh the the law allows for fintechs to probably do five percent as fldg and partner with an nbfc or a bank and things like that. But make no mistake, you're in the business of managing uh money and from a governance and compliance perspective, this company is no different from if you were regulated, right. I think that has to be the mindset and, as we've talked many times, you know, we always say there's no concept of a gray area in this business, right. So conveniently interpreting the fact that the regulator was silent about something to say, okay, they didn't say we cannot do it is a wrong way to go about building a business. Right, we have to look at it and say, okay, if they have not said that you can do it, it's probably not allowed, right. And so if you take the approach of in the scale of black, white and gray in between, the only thing that you can do in the financial services or fintech plays is it explicitly white. Otherwise there's no gray area, it's just black, right. If you have that discipline, then it's harder, but it's actually easier because there's no guesswork here, right? So you clearly know what is allowed, what is not allowed and you stick within the rails. As you mentioned right at the beginning, 530 billion dollars of you know credit gap, that's there.

Sanjay Swamy:

One doesn't have to do a lot of magic to become a big company here. One has to just be consistent, diligent and not try to grow faster. You know you can't throw money at the problem and say I'm just going to get a big fast. You have to actually put in the hard yards and you know build up. You have to see the cycles. You have to see put in the hard yards and you know build up. You have to see the cycles. You have to see the like auto, for example. You know it's a three-year leasing product. You know you can't say that this thing is working until you've seen a few customers complete the three years. Right. So you can't just blindly scale it in the first two years saying, oh yeah, you know this model is going to work, so things like that will make for a well thought out business. Founders have to be patient, whether in your 20s or in your 50s, and you need to follow the rules. Right now.

Sanjay Swamy:

The regulator. You know, for all the cynicism that the startup ecosystem sometimes throws at them, this regulator is actually very forward thinking. Of course they're first and foremost, they have to protect the. They have to make sure that things don't fall off the rails. Secondly, they protect the customer, because it's their money that we're talking about and safeguarding. But outside of that, pretty much the primary goal that the regulator has in mind is inclusive growth.

Sanjay Swamy:

Can we bring more people in a structured manner into the formal economy? Can we bring more people in a structured manner into the formal economy? You know, during the IndiaStack launch days, we used to have this character called Rajini, who was a lady making pakodas, who would borrow 900 rupees at the start of the day and return 1,000 rupees at the end of the day and along the way, probably make like 200 rupees of profit. Right, that's an outrageous you know, whatever. What about 3600 percent of interest that she was paying? But she didn't realize it.

Sanjay Swamy:

But with adhar and ekic and esign and digilocker and upi, for the entire part of the disbursement, for payment collection from customers and for repayment, now, all of a sudden, in a completely digital, this person could be eligible for, you know, maybe not 8%, but certainly a 15 to 18% rate of interest loan and in the formal economy, and you can imagine what an impact that would have to such a person, right? So that's the big opportunity, that and the dream that we've all been working towards, and I think we're still only getting started here.

Shivani Kulkarni:

And I think, just on the regulatory aspect right, I think they have been like, while they have encouraged renovation I mean there have been so many sandboxes, so many new concepts coming from the regulator itself right they are also very vigilant because, just like I was talking about the consumer credit example, right, like the recent regulations on increasing the risk weights, I think is directed towards the right end, like the end goal that they have in mind is more step.

Sanjay Swamy:

Can you elaborate a bit on that? I think it's also an area that a lot of you've done some work researching it, but be great for you to talk about that.

Shivani Kulkarni:

Yeah, so I mean just to give some numbers. There again, right, I think retail credit, especially personal loan, and credit cards there again, right, I think retail credit, especially personal loan and credit cards have the overall outstanding amount. If you see balance outstanding, that has grown 30 40 percent year on year over the last two, three years. Now, what that this has resulted into is, again, like the top 40, 50 million customers have access to it. But if you think about their earning potential and how much they can repay per month, right, their repayments have sometimes exceeded the earning potential and RBI has constantly seen this. Like you can see that, okay, this customer has overdue. Like it reflects on your credit score, right, it comes in your credit report. So if the customer has an overdue and somebody else is going and giving this customer another loan, then that's not a good sign. It's obviously not a sign of a stable economy. So that's where I think they started noticing some of these signs.

Shivani Kulkarni:

Last year, in September, october and in November they took the decision to increase the risk weights. What that essentially means is that banks typically sources of capital today in India are banks. So banks lend out to NBFCs. Nbfcs in turn may lend out to fintechs, and fintechs eventually reach the customer right, unless the fintech itself is an NBFC.

Shivani Kulkarni:

So in this particular chain, given that banks are at the top, what they said was that, okay, if you're lending out 100 rupees to an NBFC, you need to have certain reserves to protect against any scenarios where which can cause instability. Right, so you need to. The amount that you need to have as a reserve is going to increase by 25 percent. So if you were to save 10 rupees, you're going to now save 12.5 rupees. So that is why the interest rates will then go up, because on this 12.5, the bank is not earning anything, right? So that's how they tried to control the overall scenario, and it's a very nuanced way of doing it, like slowly sucking out liquidity from the market, instead of doing it overnight or, you know, not allowing certain type of models.

Sanjay Swamy:

So I think they have the responsible thing to do is correct.

Shivani Kulkarni:

Exactly, it's a responsible thing to do. It's a very responsible thing to do and over time, obviously things will cool down and you know these customers who have been over lent they'll also come to a certain uh equilibrium and then you can again start the growth Very good.

Sanjay Swamy:

So one area you and I have been working on and maybe it'd be good for you to sort of explain to the audience, is this whole space of co-lending right? I mean, we have both Night FinTech in our portfolio, which is sort of at the infrastructure level, enabling this for banks and NBFCs, and then, of course, we have know navdhan and metafin, that are nbfcs in our portfolio, that are, uh, leveraging co-lending be you know, as a huge trend moving forward. Be good for you to uh, you know, since you've researched this at a more fundamental level, you know structurally what has changed and why is it so significant got it.

Shivani Kulkarni:

So yeah, I think the into entrepreneurs.

Sanjay Swamy:

We are looking at a lot of co-lending options yeah, we are.

Shivani Kulkarni:

Uh, so, in case you're building, you know where to come. Uh, so, yeah, just elaborating on that, right? Um, so there is this common misconception that NBFCs get valued on their books, right, and they have only whatever a certain amount of capital that they can have access to. So if you have raised 100 crores in equity, you can probably raise, say, 200 crores in debt and lend out a total of 300 crores, right, I mean, I'm just doing some quick, simple math here. But when you use co-lending, this entire constraint gets opened up. Like you can actually lend a lot more and build a lot bigger books. You can service a lot more customer segments without taking necessarily the risk on your own books.

Shivani Kulkarni:

So here the way it works is that you have banks at the backend who become your partners in this, and co-lending is essentially a risk sharing model. So you take 20% of the risk and the bank takes 80% of the risk. So in this way, if you put in, say, 100 bucks, the bank will put in 400 bucks and overall you can create a pool of 500 and lend to the customer. So this is how it like even the classic fldg models. Like, like earlier, before the again regulation came in, people used to have 10 20 in fldg and, like, we used to be okay with it, given that you know this is some sort of skin in the game for the startup. And then obviously, banks and nbfc's at the back end come lend. This is no different than a classic fldg model and here again, you are putting in 20 and the banks are putting in 80, right, so you can actually go out and build a large, scalable company without essentially raising too much equity. So that's how co-lending works and that is a mechanism right now.

Sanjay Swamy:

This segment for this is the big nuance. Difference, of course, is fldg is sort of a default guarantee, whereas in co-lending you are putting up 20 percent of the money as a part of the loan and the bank is putting in 80 percent, whereas in the past it used to be you have to raise that money as equity capital and put up the entire 100% right. So suddenly for an NBFC you're saying they don't have to raise a lot of equity for them to be able to serve the customer. Now, obviously they'll be getting lesser ROE on the 80%, but they'll be getting their full ROE on the 20%.

Shivani Kulkarni:

Correct, but then ROE actually will be higher, because then it is actually ROE will be higher because return on equity or equity basis remaining the same, but you're making some money on the 80% that the bank is lending because you are taking care of, say, distribution collections. So you're providing a service to the bank, right, and obviously there is a tech layer, with somebody like a night fintech today is doing so. Yeah, and one more thing here uh, I think if in the priority sector, right, like that's the sme, women entrepreneurs, I think banks are very keen to do co-lending, because for them as well, they want to enable this particular segment and they necessarily don't have their distribution reach all the time, right, and some of the fintechs can specifically, like you said, like take a niche and solve something for them, so the fintechs can actually solve for this segment and the banks will be more than happy to partner. So I think it's a very, uh, very attractive area for somebody to build?

Sanjay Swamy:

wonderful? No, because I think, uh, historically we used to always wonder about whether nbfs were venture fundable. But suddenly, with the co-lending model, especially if you can leverage one is to three or one is to five at some point all of a sudden it becomes a very attractive value proposition. And the other nice thing about it is you're now a first class citizen with a regulator. You are yourself regulated, you are yourself regulated, and so there's no sort of overhang of. Will the give routine come down someday and chop off my business right? What are some of the? We talked a little bit about IndiaStack.

Sanjay Swamy:

I was looking at some numbers I think it is extraordinary to think about. I was there when the first Aadhaar was distributed and the first authentication was done and obviously we were in the first upi transaction was done and you know it felt like, oh my gosh, this thing is actually working and the excitement of almost being like an entrepreneur and seeing some of this stuff. But today we are talking about, you know, hundreds of millions of authentications being done every day, literally on adhar. You know billions of. You know 10, 12 billion upi transactions a month going on india's leapfrog.

Sanjay Swamy:

I remember as a founder of one of the first mobile payments companies you know well, before paytm actually. Uh, it felt like, you know, we are so far behind china, we should read about alipay and you know, vay and all these things going on, and all of a sudden we've leapfrogged everyone, right. So, as the younger crowd you know, who sort of grew up in this environment, right, and really you probably don't have too many memories of a pre-Aadhaar or pre-digital India world. How do the younger population look at some of these things? Here and when you travel overseas, you know, and and visit and see the crazy use of cash over there compared to India, right, what? What does it mean for Indians to to look at this infrastructure we've got? And you know any. Any comments on that?

Shivani Kulkarni:

both I get at an emotional level as well as a practical level yeah, I'll tell you one thing that that you know I am always very happy about. So I have these friends and so I did my engineering from Peset, bangalore, right, and so we were there from 2012. Back then, aadhar I mean sorry, upi was not that prevalent UPI was 2016 correct.

Shivani Kulkarni:

So then we graduated in 2016, so most of these guys just went off to us and now they visit uh every year in summers or sometime, when they come and we are at a restaurant and the bill comes and I just open my app, I pay using upi and they have to then uh, like while going back home. They have to then, like, while going back home, they have to literally count the cash that has to be given to the auto dealer because the UPA doesn't work for them, which, by the way, we are solving currently. I think there is a. So, guys, next time you come to India, there is a solution for you.

Sanjay Swamy:

By the way, if you are building a solution we are looking to fund also.

Shivani Kulkarni:

Yeah, as an entrepreneur here, or if you guys want to come back to India and solve the problem, yeah, talk to Shivani, yeah, but I mean I'm just very happy to see when I probably just use UPI and it's so seamless, and these guys say, oh wow, we don't have anything like this in the place that we stay. I think it's just a proud, proud moment and it's just ubiquitous, right Like everywhere, right From a paanwala to the biggest high-end restaurant, everybody has it and everybody's using it. So, yeah, I think just pride and hopefully, given that now we are taking UPI global, which I think you can share a bit more about, hopefully we'll be able to go out and also pay with these instruments.

Sanjay Swamy:

Yeah, absolutely. I think in the first phase it's sort of UPI for Indians being accepted and interconnected with, you know, systems like NETS and you know, in the UAE and in France and things like that. But I think what would be really powerful is if other countries adopt UPI right, just as they adopted the card system from Visa and MasterCard and so on, system from Visa and MasterCard and so on. If UPI itself becomes the backbone, and you know that might hopefully create a lot of opportunity for the Indian technology companies, for the companies that have actually built on top of these rails, to be able to just take it and port it into other parts of the world.

Sanjay Swamy:

So you know, I remember when I mean I guess I'm young enough to remember when Maruti first came into India, long before most of you were born, and you know, at that time the Japanese brought everything. They brought their paint company, they brought their tire company, they brought their, you know, speedometer company, brought the whole works. That was the whole. Kiritsu gets exported to other parts of the world and creates more than just sort of diplomatic opportunities for us and actually creates business opportunities as well. But talking about opportunities, right, let's talk a little bit about some of the segments that you're excited about, where you see opportunities and if you're entrepreneurs listening where you see opportunities and you know if if your entrepreneurs listening to the show what. What are the areas that are still sort of largely untapped?

Shivani Kulkarni:

one space that I have been very excited about and not I haven't necessarily seen too many companies, though is again in the is the whole secured lending space itself, but the infrastructure and, of course, distribution layer of it, which is the lending against property and lending against security. I mean lending against any asset. Now think about it Today there are so many people who have DMAT accounts, who have mutual fund accounts. The deposits in India are actually going down because there's so much money that's flowing into the mutual fund industry. The deposits in India are actually going down because there's so much money that's flowing into the mutual fund industry, the equity markets. So how do you tap into that to actually improve, like increase the number of people you can lend to, to improve inclusion?

Shivani Kulkarni:

So I think it's what is required is just the rails to first understand and get the information about what are the assets that the person owns and also create awareness, education about this particular product. So if a customer today is thin file or a new to credit customer, right, he may not get loan set, or at least unsecured loans at lower rates, but instead if he says that, ok, I am new to credit, but I have been investing in stocks or mutual funds for the last three years and I have this corpus and I can pledge that right at least for the first credit card or the first loan. Then the rates that he'll get will also be less. This will help build his file and I think in general is much better for the customer as well, right? So just creating those rails and enabling distribution I think is a big opportunity.

Sanjay Swamy:

Actually, in the US it's called a home equity line of credit right for if you're borrowing against houses, and that's a huge business, and so it's. I mean, we've seen a few startups here and there trying to solve this problem, but I think, yeah, it's still largely an unsolved problem. I think. What else?

Shivani Kulkarni:

No, I think the same, extending to exactly right like LAP, which is loan against property. I think land records are getting digitized now, so that will, like several states right Andhra, karnataka are at the forefront, tamil Nadu, so once and this process is going to happen all over the country. So what are the opportunities that come up? It's largely how do you like? Once a property is online, it's digital. Once the records are digital, you can easily pledge it, the banks can verify it, value it and it unlocks a whole other cash flow, right For SMEs specifically. I think this is huge. So somebody who's again creating that infrastructure definitely is another trend which I briefly touched upon, and this is not really related to lending directly, but is related to the fixed income market, which is in the bond side.

Shivani Kulkarni:

So one thing that banks are very concerned about is that they are not getting deposits again because the money is flowing elsewhere. But people are investing in bonds. People are investing in corporate bonds. They are investing in even some of the startup bonds, right, like oxizo and a few others. Uh, how do you democratize this like? How do you again educate people and get distribution? For this, you may have to partner with the brokers you may have to partner with others, but somebody who can build in this layer. I think over the next 10 years. It's a big, big opportunity because banks will want to work with you. Either you get them deposits or you just work, uh, and get like bond issuances can be done right, like bond ncds etc can be issued. So how do you democratize? This is another big opportunity that I think I'm very excited about.

Sanjay Swamy:

Cool, cool, but those are still opportunities that are like the top of the pyramid, focused right for the most part, before you actually see the ability to come down. But they are, I guess you know, untapped opportunities for sure.

Shivani Kulkarni:

Now on, but they are, I guess you know, untapped opportunities for sure. Now, on the lap and last side, though, it is not just the top 10 million, right, because they anyways have the access I think it will lead to a lot more people in the middle. What I'm saying is if you're a homeowner.

Sanjay Swamy:

Yeah, right now, then you're in a fairly that that where you can borrow against your home. It's a small correct? Uh, it is definitely the top 100 million, right? May not be the top 10 million, you're right there.

Shivani Kulkarni:

But I think there is one more.

Sanjay Swamy:

I think you have a lot of, so I'm very passionate about a different segment Correct which I think has got to be brought into the system, and every time I look at MyGate, which is a company that we backed a while back. You know they were in 20 gated communities at the time. They're now in 25,000 gated communities, so seeing like thousand X growth is like phenomenal. One of the things the founder had shown us on the day when we first met them was the digitization of the attendance records of everybody that worked in the community and in Mumbai. I was told later that there is a segment called the ABCD segment, which is I Abide Cook Driver, iibuy CokeDriver, and I've been longing to leverage this data to try to build credit to the segment, and I just not met anybody that really does a great job of it. There are a few companies.

Sanjay Swamy:

Almost everyone seems to insist that the right thing to do is to go open market, and there the cost of credit and, you know, lack of proprietary data becomes a challenge, whereas here we have an opportunity with probably about 7, 8 million domestic people on the platform, probably at least a couple of million active on a daily basis who you know, for whom. We have, you know, very high quality attendance information, and attendance is just a proxy for credit worthiness in many ways, because attendance leads means that you're working, which means you're going to get paid. You know broadly the by zip code or pin code. You probably know what the median salaries are in the segment and there is actually probably an employer is willing to even vouch for this person. That probably even is a money lender already to the segment, right. So I think this is one spectacular opportunity that we would love to see any entrepreneurs reach out to us for.

Sanjay Swamy:

But this is just one example. There's the whole manufacturing segment. People are working in that segment. There's the logistics segment, where there are millions of people that drive around that just don't get access to fair credit and that can be transformative of lives. It's one of these few situations where I feel you can make money by doing good and improving people's lives and livelihoods. So this alignment of the heart and the brain, as I call it. So these are some opportunities that I think that are still completely untapped and waiting to be grabbed.

Shivani Kulkarni:

Yeah, I agree, and I think, just building on the logistics part, the manufacturing part, right, I think, each of these verticals, you can just go deeper like just taking health care as an example right, if you get into a hospital, you can start catering to the vendors, to the pharma supply chain there. If you, I think in building intelligence or proprietary data, when you're serving a vertical, itself becomes a correct mode and and.

Sanjay Swamy:

And this is where uh, you know I was just going to say that you know we talked about proprietary data and modes. This is exactly what that comes. And now, if you bring on top of it, you know the whole ai layer, that's coming about right. Uh, this is yet another, you know, huge glutton for data. The compute power is getting really extraordinary now and I think the combination you know we now have sort of this perfect storm situation right where the government rails or the public infrastructure rails of identity and KYC and things like that, are very robust, very mature. Moving money around is essentially free and it is programmable money in that sense.

Sanjay Swamy:

And now, as we see these streams of data coming in, the compute power that's there to do the analysis of the data and the whole generative AI segment where we are going to move from this industry history of being one size fits all right, you have a bank account, I have a bank account. The UX is going to look exactly the same it doesn't matter what you do with your bank account or what I do with mine To a one size fits one, which is like ultra personalization. There is no need for all of us to have fifth of the month as our repayment date. If I get paid on the seventh of the month, maybe the eighth of the month should be my repayment date. Right, this flexibility in the infrastructure that's there, the personalization and hyper personalization, I think, is going to create massive opportunities here and I think that's the really exciting part of where we are going to reap the benefits of the last 10, 15 years and, uh, sort of help leaprog.

Shivani Kulkarni:

I think one interesting thing that, like as you were saying that I was just reflecting, I think India, at least in the fintech and I think you have, like we have discussed this once India in the fintech space specifically, is looked at the as a premier place, right like where people know how to build, people have built, like large, scalable businesses, infrastructures. So I think, with AI coming in, there is a lot of opportunity to export and sorry, this is not at the lending level, but this is at an infrastructure, software level thing that we can do right, build a lot, build for verticals which are large, not only in India but globally, and you'll be able to sell software elsewhere. Like you'll be able to sell software elsewhere, you'll be able to give solutions elsewhere. So I think this is again an opportunity, specifically in fintech infra, that founders can definitely explore.

Sanjay Swamy:

Yeah, absolutely, I think.

Sanjay Swamy:

Another related area we didn't talk much about, collections, which I personally am a little cynical about, because I feel, with all of the access to digital payments and the freedom to move money around, collections, there is an intent issue and an ability issue.

Sanjay Swamy:

Right, if you don't have the ability to repay, then you're not going to repay, even if you, you know, even if you intended to right and intent to me, you know, I think, once to right and intent to me, you know, I think once people are educated enough to realize that paying on time is to their benefit, not paying on time is to their detriment from a future borrowing perspective, right, right now, we might be in this transitory phase where people are touching credit for the first time and thinking, oh, I can run away with it, right, but once they realize that they have more to gain back to the being good citizens and repaying, then I think this collections problem goes away, because then the only people who won't be repaying are either people who are forgetful or people who don't have the ability to repay. Right, so that that is my view on it. I could be completely wrong and I know there are large companies being built as we speak, but the the other one, that is that is interesting here is sort of this new age of completely personalized conversational, you know, doing things on whatsapp and things like that and and really sort of tailoring the, the experiences as well. Um, what are some things you have seen in this space?

Shivani Kulkarni:

so I think two, three uh examples right like one is obviously just the customer experience side, uh, like how can you give hyper personalized experience to the customer? They I mean whatever they ask, you know what they're saying and give the responses appropriate to that. But the second thing which is I'm personally very excited about is on the RPA side, that is, process automation side, collections as an example. In insurance it is again claims processing as an example. It requires a lot of just probably reading an email, reading an SMS and filling up some data and some software right, and these are processes that take like seven, eight days. Like if you ever have claimed insurance, you know that it takes time, because the guy will ask you to send 10 documents on email, then some of it will be PDF, some of it will be just screenshots and then he has to go sit and print it out in triplicate.

Shivani Kulkarni:

Yeah, then I mean, with ai coming in, I think this entire process itself can get digitized. Like they can read, it can read emails, it can just extract whatever information it requires from the image. Fill out the thing. The entire workflow can be obviously automated, so a lot of efficiencies come in right.

Sanjay Swamy:

Uh, and the second thing that I have efficiencies with compliance actually so you need to make the job of the regulator uh, and a lot easier the ability for a provider to be compliant and the ability for the regulator to verify that they are indeed compliant.

Shivani Kulkarni:

Right that correct compliance is a big part of it, right. And the second one, I think even on the underwriting side right, like while people have tons of data but the models etc get uh, I mean get fine-tuned over years. But here I think, with now, uh, chat, gpt and you can create your own models on top of it, all you have to be careful a bit about is data privacy and just security.

Sanjay Swamy:

But apart from that, I think these are all solved problems, but you have to be vigilant about them.

Shivani Kulkarni:

Just be vigilant about it, but the potential is immense. So I think, underwriting process automation and, obviously, customer experience, these three are at least my picks.

Sanjay Swamy:

Awesome. So let me ask you one last question, an out-of question. If you're going to sit here in three, five years and say, man, we all completely missed the opportunity. It was such a great opportunity and it just never happened, right what? What would have happened between now and then? Wow I told you it was an out of syllabus question. I don't know the answer. That's why I happily asked the question Should we take to a commercial break? Yeah, we should do a commercial break here.

Shivani Kulkarni:

Can you repeat the question?

Sanjay Swamy:

No, I'm just saying, look, this is such an obvious, monstrous opportunity here, right? And yet you know, it might not happen over the next five years, we may just, you know, solve 1% of this opportunity or 5% of this opportunity, right, which would be a shame, right? And so I was just sort of brainstorming here. I didn't have an answer myself, so I thought I'll just ask you To me, I think it will be if we don't have audacious enough founders, right, I think people solving incremental and not thinking about the opportunities that we have here, uh, and, and you know, not being stuck in the snapshot of saying, okay, a chat, gpd4 does this and let me build on top of this, right, because those infrastructure platforms are going to grow by leaps and bounds.

Sanjay Swamy:

We've just seen what has happened in the last 12 months or 15 months. Can you imagine how it's going to look five years from now? And people, I think people are. We've seen many times in this industry, people tend to think incremental, but I think we have an opportunity to think revolutionary. And I think that's my first thought of where, even if you're not aiming and cannot visualize something, then you know you will never achieve it, right? So that that was what was coming to my mind, but I'm sure you have some thoughts as well.

Shivani Kulkarni:

Would be great to hear yeah, I think for me right, I think one key lever, like if you see the adoption curves right, like obviously there are smartphones, there are, there is internet to certain extent and payments maybe, say, media, all of it is slightly lagging behind.

Shivani Kulkarni:

I think, if we can, if that curve doesn't follow the entire smartphone adoption, digital adoption, a lot of the assumptions that we are making today in terms of cost to serve on like data that we can have on these customers, to underwrite, because for me, if you are to truly succeed in the next five years, it needs to be with, like, say, 200, 300 million people having like complete access to credit, at least at the bare minimum. And for that to happen, I think it's just the penetration, I mean just the adoption, has to be keep up with that pace. And there were months or years where we saw, given the economy and the place we are in, it's growing brilliantly. But I think if it just continues the growth, it will happen. Uh, but yeah, I think for me that is the variable that is most important I think related to that too.

Sanjay Swamy:

You know, it feels like if the incumbents don't adopt the technology at the pace that the startups are attempting to do, because the startups will still be a very small piece one in 25, one in 50 might actually succeed to get to a large scale, right, but really it's about how the incumbents also leverage this new infrastructure and technology stacks that are coming out, that I'm just before this meeting actually, I had to go and some, you know, re-kyc had to be done for one of our corporate bank accounts and all of us four people, signatories had to do like seven, 26 signatures each on paper, right, and I was cringing, saying, okay, why can't all of this just be one electronic signature and with one electronic document?

Sanjay Swamy:

I was just counting. Going back to counting the trees, in fact I told our admin let's make one donation today for one tree, because we just cut that tree today doing signatures. So I think it just does bother me that the incumbents have in theory accepted and enabled, but they've really not adopted wholeheartedly and I think that that will be a risk in the, in this ecosystem. So hopefully the next five years will be quite different in that, uh, from from the past five years yeah, I think we have seen adoption right like with night wind tech itself.

Sanjay Swamy:

There are at least on the lending a lot of the public sector banks, interestingly, have been thought leaders here, so hopefully that trend continues.

Shivani Kulkarni:

Great thanks, sanjay. Thank you so much. It was wonderful chatting with you and again thanking you for being on your own podcast and hey, entrepreneurs, you know, reach out to us, we love to chat with you.

Sanjay Swamy:

Uh and uh, you know, looking for people who are continuously looking to solve these monster opportunities that we've got in india.

Prime Venture Partners:

So reach out to us and uh, all the best cheers dear listeners, thank you for listening to this episode of the podcast. Subscribe now on your Thank you. You get your podcasts. Then hit subscribe and if you have enjoyed the show, we would be really grateful if you leave us a review on Apple podcast. To read the full transcript, find the link in the show notes.