Inside BharatPe’s big lending rethink

But this is life after Grover. It’s been three months since BharatPe accused its managing director and his family of financial fraud in a boardroom blow-up that forced Grover’s resignation.

As it takes stock, BharatPe seems to have realized that it cannot afford more questions on its business practices. The company appears to be in the middle of ‘consolidating’ its lending playbook—or in other words ‘cleaning up’ any bets that involve working in regulatory grey areas. The governance concerns arising from the allegations against Grover have played a key role in this shake-up. That it is also transitioning into a bank gives BharatPe more reasons for caution. (In January, the Reserve Bank of India (RBI) approved the merger of the scam-hit Punjab and Maharashtra Co-operative Bank (PMC) with Unity Small Finance Bank. BharatPe owns 49% stake in Unity Small Finance Bank.)

And so, BharatPe is set for a complete U-turn in its strategy from “owning and controlling" products to becoming a marketplace that connects buyers and sellers, two people aware of the development confirmed.

“The company doesn’t want to come under further regulatory scrutiny as it gets into the banking game. Secondly, it is preparing itself for an IPO," said the first of the two people quoted above.

In August 2018, in a market overcrowded with players such as Paytm, PhonePe and Google Pay, all wooing consumers, BharatPe had cracked the other end— by tailoring its payments business to the merchant side.

Even then, Grover had always set his eyes on the lending game, which it got into in 2019—that is where the margins, and the money, lie for fintech companies. Other big players have followed suit. Digital lending is the fastest growing fintech segment in India, having attained a value of $110 billion in 2019, from just $9 billion in 2012. Dominated by fintech startups and NBFCs (non-banking financial companies), this sector is expected to reach a value of $350 billion by 2023, according to Experian data.

Initially, BharatPe failed to get an NBFC license. But Grover explored different ways to fuel its lending ambitions—this included raising massive debt, raising deposits and lending via its peer-to-peer (P2P) lending partners. BharatPe also acquired stake in a few NBFCs.

Now, the company is having a rethink on at least two of these counts—first, the potential grey areas in its peer-to-peer lending products; second, it is considering selling off its stake in two NBFCs. BharatPe CEO Suhail Sameer, however, denied that it was either having second thoughts on the P2P lending products; or that it was looking for an exit from NBFCs it has partnered with.

The game so far

BharatPe was the first fintech that successfully tapped into the demand and supply side of merchant lending—all on the back of P2P.

P2P lending platforms are an alternative financing method, which allows individuals to take loans from other individuals, cutting out the dependence on financial institutions.

BharatPe realised that it had access to two sets of merchants—those who have surplus money and those in need of funds. The pitch to the former was: “Save your money into BharatPe ‘interest account’ at an annual interest rate of up to 12%." That money was then used to lend to the second set of merchants at an annual interest rate of 24%. These products were powered by P2P NBFCs such as LiquiLoans and, later, LendenClub. Of this, LendenClub would give 9% of the total interest charged to BharatPe, keep 2-3% for itself, and use 12% to pay the lender (the first set of merchants in this case).

A similar strategy was adopted for consumer lending with two offerings—PostPe and 12%Club. With 12%Club, the pitch was that an individual can get up to 12% interest on investment and can also borrow at 12%. In addition, PostPe, launched last December, has been categorized as a BNPL (buy now pay later) product.

But there is a catch here: In effect, BharatPe is collecting money in the name of investment and using it to lend to someone via P2P, a risky proposition in case of a default. Further, ‘guaranteeing returns’ is against the RBI guidelines for P2P platforms.

Nevertheless, P2P has powered BharatPe’s lending pitch. “Loans were at an all-time high in March 2022, where we disbursed about ₹900 crore across merchant and consumer loans. In March, PostPe was $50 million or close to ₹400 crore. All these loans are via P2P and non-P2P, where the meaningful part is P2P. Our overall NPA is sub-5%," said BharatPe CEO Suhail Sameer, during a recent interaction with Mint.

The company offers loans to merchants who accept payments via BharatPe QR and BharatPe point-of-sale (PoS) machines (BharatSwipe). It processes 150 million payment transactions with an annualised transaction processed value (TPV) of over $17 billion. “Out of this, $3 billion is from PoS," said Sameer.

BharatPe claims that close to 300,000 merchants have borrowed over ₹3,500 crore through its platform, while PostPe has facilitated credit lines worth ₹2,800 crore till date. PostPe and 12%Club were initially powered by a traditional NBFC, Hindon Mercantile, but “now we are more on LendenClub," Sameer said.

According to the first person quoted above, LendenClub powers more than half of all loans at BharatPe, LiquiLoans contributes to 20%, whereas the rest are divided among the other NBFCs.

The second strategy BharatPe adopted to break into lending was acquisitions. In 2020, the RBI rejected NBFC applications of several fintech companies, including BharatPe, which received investments from funds domiciled in Mauritius.

BharatPe then went on to buy stake in a few NBFCs—in a manner that kept it out of regulatory scrutiny. According to documents sourced from the Registrar of Companies, BharatPe acquired 25% stake in a Kolkata-based NBFC, Mamta Projects Pvt Ltd, for ₹ 4.5 crore, in October 2020. RBI guidelines demand a prior approval in case of 26% shareholding or more of paid-up equity capital of an NBFC.

In March 2021, the company picked about 13.92% stake in another NBFC, Hindon Mercantile Ltd, for ₹ 7.8 crore. “Last year, BharatPe was also in talks to pick up stake in a third NBFC which was a P2P," a former BharatPe executive, who is aware of these transactions, said.

Besides these, Grover had made angel investments in LiquiLoans and LendenClub—both significant lending partners of BharatPe—in his personal capacity.

The ‘clean-up’

BharatPe is exiting some of these products and investments due to compliance reasons and also changing its business model from ‘owning’ products to becoming a marketplace," said the second of the two people quoted above.

For example, there is growing unease about the way 12%Club products were portrayed. “That won’t be the case now. The realization now is that BharatPe is not in the business of raising liability (deposits in the name of savings) from consumers, that is the bank’s job. The positioning they are working on is that BharatPe is a technology company," the first person quoted above said.

Banks are able to lend at lower cost of interest to customers as compared to non-bank lenders and fintechs as they have deep pockets from deposits. In this case, BharatPe was raising deposits (in the name of savings and investment) and used that money to lend—a potentially dodgy area.

In a sign of the rethink, 12%Club—the lending-cum-investment product—has stopped taking investments from retail investors since January this year, several retail investors have confirmed to Mint. In December 2021, through 12%Club, BharatPe raised some $57 million (about ₹440 crore) in deposits from retail investors, as per numbers furnished by Grover.

When asked if it is closing down 12%Club in a separate email query, Sameer said, “Our P2P lending products, both on the merchant and the consumer side, are working and scaling well."

“BharatPe is still contemplating on what can be done with this product," said the second person aware of the matter. The idea is to become a lead generation platform and offer an investment marketplace, where users can put in money either in a P2P, or bank, or mutual funds, this person added.

The company is also in talks to sell off its stake in both Mamta and Hindon. “BharatPe is giving options to these NBFCs to buy back their shares," the first person cited above said.

“After the Ashneer debacle, the investors of BharatPe must have questioned this acquisition strategy because nobody knows what kind of compliance and governance issues the NBFCs have. Today, every authority is going after companies because of a crackdown on digital lending," an NBFC chief executive who has worked with several fintechs said.

The BharatPe official quoted above did confirm that one of the NBFCs (it had acquired) has got a notice from the Enforcement Directorate (ED).

In a response to an email query on NBFC investments and their strategy, Sameer denied plans of exit. He stated, “We indirectly own 25% in Mamta Projects through its parent entity, Arthmate Tech Pvt Ltd. We are always on the lookout for such strategic partnerships and investment opportunities."

Questions sent to Arthmate and a Hindon official over LinkedIn did not elicit any response. Mint also reached out to ask whether BharatPe had knowledge about an ED notice to one of the NBFCs it has acquired. It did not respond till the time of going to press.

BharatPe has raised $580 million in equity from marquee investors such as Sequoia Capital, Ribbit Capital, Tiger Global, Steadview, Coatue among others, and commanded a valuation of $2.8-billion during its last fund-raise. “Out of this, Bharatpe has over $450 million still in the bank," Sameer said.

Apart from equity, it was probably the only fintech uniquely positioned to raise massive debt—without holding an NBFC licence—at a cheaper cost.

In 2021 alone, the company raised about $84 million in debt from the likes of ICICI Bank, Northern Arc, IIFL Wealth, and MAS Financial Services. “The debt from ICICI was raised at a competitive interest rate of less than 9%," Grover had told PTI last year. BharatPe said it ended FY22 with around $100 million in revenue and is eyeing a revenue target of $300 million in FY23.

The road ahead

The Delhi-based payments company may also revise its strategy for merchants. From next year, the plan is to stick QR codes only at merchants whom BharatPe think it can lend to. The idea is to make BharatPe profitable at least on the merchant side before it goes for a public offer.

While merchants continue to be at its core, over the past 6-7 months, the company has invested heavily to promote its consumer product PostPe, which competes with the likes of Paytm and card fintechs like Uni, Slice and others. “PostPe recorded 1 million transactions in March," Sameer said.

Currently, the company claims it is earning an interchange (a fee that merchants pay on credit card transactions) of 1.3%, but the real business kicks in when companies earn at least 20% commission for enabling commerce. “This is an area we are looking to get into," Sameer added.

Only time will tell whether the new strategy will make business sense for BharatPe.