How FlexiLoans grew quickly yet profitably

“If you’re delivering great numbers, there is no winter,” chimes in Manish Lunia, 42, co-founder of FlexiLoans who studied with Deepak at the ISB back in 2008 and then went on to work in the M&A division of the Aditya Birla Group. And it has been delivering—consider how FlexiLoans’ assets under management (AUM) grew from Rs 500 crore in June 2022 when it last raised funds to Rs 1,000 crore in April 2023. It aims to hit Rs 10,000 crore in AUM by 2025. Moreover, operating leveraging has been consistently improving. So much so that FlexiLoans in September reported its first full year of profitability in FY23 with a PAT of Rs 7 crore on revenues of Rs 110 crore.

 

“We’ve been profitable at a relatively early AUM compared to our peers due to our high operating leverage built on a frugal business model,” says Deepak.

 

But it’s also the ability to say no that has seen FlexiLoans grow so big, so fast. At the end of every month Deepak, Lunia and third co-founder Ritesh Jain, 43, have a several hours-long meeting with key team members to review the numbers of the month gone by—disbursals, collection rates and NPAs of every customer segment. They make tweaks where necessary, even shutting down customer segments that aren’t delivering. [Fourth co-founder Abhishek Kothari recently exited the company].

 

“Companies do this exercise every quarter but it’s rare for a company to do it every month,” says Deepak. “This is what has kept our NPAs below two percent even through Covid,” he adds. The industry average for NBFCs lending to the MSME sector ranges from 4-7 percent.

 

India has traditionally been a “jaan-pehchaan-based borrowing model,” says Lunia, whose cousin Harshvardhan Lunia runs Lendingkart, another popular digital lender to MSMEs. “I know the bank manager; the bank manager knows a friend and so I’ll get a loan. With FlexiLoans we’ve tried to disrupt that. So a small business owner in Panipat, for example, can get a Rs 2 lakh loan by simply downloading our app, inputting the necessary information and uploading his documents. Within two days he’ll get the money in his account,” says Lunia.

 

So far FlexiLoans has disbursed 70,000 loans worth Rs 3,400 crore across more than 2,000 cities and 25,000 pin codes in India—all digitally. FlexiLoans’ Mumbai headquarters is its sole office; it has no branches in other parts of the country. “We’ve done all this sitting out of a single office,” says Deepak.

Also read: Unsecured loans surge but no default risks, yet

 

Every month FlexiLoans attracts 100,000 applications but grants only 2,000-3,000 loans, disbursing a total of Rs 115 crore ($14 million) in loans per month. Fifty-three percent of all loans are to MSMEs borrowing for the first time; 47 percent of loans are to MSMEs in Tier 2 and Tier 3 cities, and 25 percent are to female entrepreneurs.

 

FlexiLoans had last raised Rs 150 crore through a mix of debt and equity in a funding round led by Nayar’s family office in October 2020. Prior to that in December 2017 the platform had raised Rs 45 crore in debt from a handful of financial institutions.

 

“The only winter we know of is when the IL&FS crisis came to light in 2018,” says Deepak. “That’s when the four of us [at the time] ensured that the fundamentals of the business were super strong. All that work came of good use when Covid struck in March 2020 because we were 100 percent digital-ready by then and could grow in an asset light manner. So, despite Covid, we grew at a great pace,” he says.

 

But large NBFCs like Bajaj Finance and several scale-ups including Lendingkart, ProgCap, NeoGrowth, Indify, SME Corner, and Oxyzo among others, are also focused on giving loans to small businesses. So what makes FlexiLoans different? Why should an MSME come to FlexiLoans for a loan?

 

“That’s a question we asked ourselves when we started the company 5-6 years ago,” says Deepak. At the time the “micro-SME market”, which is the sub-Rs 10 lakh loan market, was underserved.

 

“It was so underserved that when I went to the CEO of a bank and asked for a business loan product, they said they didn’t have one which was less than Rs 10 lakh. Anything less than Rs 10 lakh was called a personal loan—not a business loan. It was that bad,” he recalls.

 

So, the first step was to cater to fill this massive white space. Here Deepak’s background helped. His father was a jeweller and money lender in Mumbai’s Kalyan area; growing up Deepak saw customers come into his father’s shop and pawn their jewellery for Rs 3 lakh loans at rates as high as 36 percent per annum.

 

“They would come into the shop; we would check their ornaments and give them the cash—all this happened in 30-40 minutes. Compare this with a bank loan—the customer would first have to go to his CA because the list of documents for a Rs 3 lakh, Rs 30 lakh and Rs 3 crore loan is the same. I saw first-hand how small entrepreneurs struggled to get financing in this country,” recalls Deepak.

 

Much later when he was pursuing his MBA at ISB, Deepak got intrigued by the digital lending models that were at play in the US for small businesses such as Lending Club and On Deck. “I studied them in detail and knew there was scope to build something like that for India and make finance more accessible, affordable and transparent for MSMEs,” Deepak says. In 2016 when FlexiLoans set up shop, Capital Float (now Axio, which only focuses on consumer lending) was a three-year-old startup, while Lendingkart was a couple of years old—so a workable model existed as did a market for digitally originated loans.

 

Next, FlexiLoans built out its customer scorecard by leveraging alternate, off-beat data points to assess the credit worthiness of this underserved MSME customer. Kothari, the fourth co-founder who has now exited FlexiLoans, was a techie at Fractal Analytics helping Fortune 500 companies improve their decision-making using Artificial Intelligence. He was responsible for building out the algorithm.

 

For example, besides trawling a total of 10,000 data points such as mobile numbers, addresses, PAN numbers and bank statements, FlexiLoans’ algorithm is trained to look at the number of times a business owner has changed his address. “Most people will look at a business’ address, but they won’t look at how many times the address has changed. If a business owner keeps changing his address, it’s likely that you might not be able to trace him in case of a default,” says Deepak. “Say you walk down any street of Mumbai, you will see shops that have been in the same place for decades. Those are good potential customers. We vintage ownership seriously,” he continues without letting in on any other details of FlexiLoans’ “secret sauce” that allows the company to dole out loans with an average ticket size of Rs 3-5 lakh—without collateral—in 48 hours.

 

The strength of FlexiLoans’ underwriting model is reflected in its cost of credit which has consistently been below four percent for the last two years. They pass on these benefits to their customers who can get loans at interest rates as low as 15 percent, depending on the risk factor, whereas the average for the industry for unsecured borrowings is 19-24 percent.

 

“The four ISB boys complement each other superbly,” says Sanjay Nayar, the former top boss of KKR India and an early investor in FlexiLoans. “Deepak has an investment banking background, Manish started out in an NBFC and did a lot of credit underwriting, Ritesh has a solid accounting and finance background and is high on operations, and Abhishek was the techie on the team. The four together were a force to reckon with,” he says.

 

Third, to keep costs low FlexiLoans decided to partner with platforms that already had verified merchants on board such as Amazon and Flipkart. It helps keep the cost of acquisition low as such platforms already have troves of data about sellers, ranging from monthly sales to growth in sales. When an ecosystem plugs into FlexiLoans’ platform, the merchants on the ecosystem get access not only to FlexiLoans’ balance sheet but the balance sheet of 10 other lenders including larger NBFCs and banks.

 

“We have co-created underwriting models with our co-lending partners—that is larger NBFCS and banks. So all checks and requirements are done on our platform, which makes the decision-making quick and easy. The end-to-end customer experience is controlled by us,” explains Deepak.

 

The fact that merchants have access to such a massive pool of capital—from FlexiLoans as well as its co-lenders, is what Lunia believes is FlexiLoans’ “biggest USP”. The 10 lenders are fully integrated on FlexiLoans’ platform, allowing the fintech to use their funds to deploy to its customers, thereby growing in an asset light manner. “In fact, 70 percent of our AUM growth was off balance sheet. The industry connects that the co-founders have with bankers who they worked prior to starting FlexiLoans helped in getting them on board as co-lenders,” notes Deepak.

 

Today FlexiLoans has more than 150 ecosystem partners including beauty e-tailer Nykaa, as well as popular food-tech, pharm-tech and MSME SaaS platforms, point-of-sale firms such as Pine Labs—besides the ecommerce giants. These partnerships helped the fintech scale quickly—from Rs 500 crore in AUM a year ago to Rs 1,000 crore today—but also frugally.

Also read: The FREED model to becoming debt free

 

Demand continues to grow

FlexiLoans’ average ticket sizes are in the Rs 3 to Rs 5 lakh range and it plans to stick to this sweet spot. The market, after all, is huge. There are roughly six crore MSMEs in India. These are typically businesses with one shop, one or two employees in that shop and yet a big proportion of India’s GDP—33 percent by some estimates—comes from them. “Ninety percent of these small businesses in India do not have access to formal financing, so the opportunity is massive,” says Deepak.

 

And the space is only set to grow. MSMEs are swiftly becoming digital thanks to the Covid crisis, the availability of cheap data courtesy Jio, and the proliferation of digital payments systems on the back of UPI.

 

Moreover, household debt in India is just one-third that of China and one-fifth that of the US. “The Indian economy has to grow and debt is needed to grow,” says Ritesh. “The BFSI sector will support this growth by providing credit and driving the economy.”  

 

But he warns, “The business of lending is actually the business of collections.” To that end FlexiLoans has collection partners across the country, all in the vicinity of their customers, such that these individuals can knock on customers’ doors in case of defaults—helping them keep NPAs at below two percent.

 

“The willingness to pay is always there—no customer wants to default on his loan because he is aware of the repercussions. It’s just that the ability is not there sometimes,” shrugs Deepak.

 

As the sector gets increasingly crowded differentiation may be FlexiLoans’ biggest challenge. But the trio have demonstrated that they can turn a business challenge into a win and in many ways, it’s just the beginning. Says Deepak, “We’re excited about the next phase of growth.”