Inside Mukesh Ambani's retail lending dreams

As Paytm’s stock plummeted from its listing price of ₹1,955 in November last year, Sharma has had to make multiple public statements to soothe investor nerves. He put up a spirited defence of the company’s business at this summit, too, and went on to say something interesting about Paytm’s credit business.

“For our credit business, we should be benchmarked against only one guy and that is Bajaj (Finance)," he said in his usual animated self. “We should be looked at for the scale we deliver in terms of total loans, value of loans, and quality of loans."

People soon pointed out how the two companies are different: while Paytm earns fees on sourcing loans—the company does not have a licence to lend—Bajaj Finance can lend and earn interest.

The lack of opportunities to make money in the payments business and the array of opportunities in the lending business is perhaps making India’s richest man think, too.

Mukesh Ambani’s Reliance Industries Ltd (RIL) group is gradually changing its financial services plans. It is morphing an existing non-banking financial company (NBFC) into a retail lending behemoth.

In parallel, RIL’s plans of launching Jio Payments Bank along with the State Bank of India may be further delayed as it fine-tunes plans around a full-fledged retail lending business as opposed to being just a payments service provider.

At the heart of this push to build a retail franchise is Reliance Retail Finance Ltd, one of the many unlisted companies of Ambani’s Reliance group. It is a wholly-owned subsidiary of RIL and, till 2018-19, had primarily functioned as an investment company to generate revenues for other group companies. As per CareEdge Ratings (erstwhile Care Ratings), the company was incorporated to engage in the business of investments in shares and securities in India.

However, since September 2019, it has stepped up to disburse retail loans.

The company did undergo quite a bit of morphing already—ever since it was formed two decades ago. It was incorporated on 19 January 2000 as Tex-Style Synthetics Private Ltd and renamed as Reliance Power Ventures Ltd on 17 May 2000. On 24 May 2000, it received a NBFC license from the Reserve Bank of India (RBI), according to CareEdge Ratings. Then, on 21 August 2006, it was rechristened as Reliance Retail Finance.

Between 2019 and 2020, customers who bought Jio phones on a 12-month equated monthly instalment (EMI) programme, did not own them unless they repaid the loan, and instead had the right to use them. Reliance Retail Finance provided the back-end credit for these transactions. The financing model for Jio phones has now changed.

In a report dated 16 September 2021, the company’s management said that the idea is to tap the 400 million-strong customer base of Jio and Reliance Retail, one of India’s largest retailers, for consumer durable and personal loans.

“Reliance wants to emulate the success of Bajaj Finance," said an analyst tracking the conglomerate. “In future, when you go to a Reliance store to buy a consumer durable product, you will have access to finance from its own subsidiary. Later on, Ambani would also be able to tap into these customers for personal loans, as well, since he will have their repayment trends."

What SWOT says

To say that India’s retail lending market is crowded is an understatement. Banks, non-bank financiers and fintechs jostle for their own niches with every lender eyeing a share of the middle-class pie—customers who would spend on consumer durables and thereby need cheap credit. Several deep-pocketed public sector banks and equally well-capitalized private lenders have, over the last few years, moved away from lending to corporate borrowers. They have realigned their books towards smaller consumer loans.

While retail loans by banks stood at ₹29.18 trillion in September 2021, those by non-bank financiers were at ₹7.62 trillion, according to data from the RBI. The size of the total lending market in India, as of March 2021, stood at ₹156.9 trillion, showing a growth of about 100% between 2016-17 and 2020-21, credit information company Crif High Mark stated in a report.

It also pointed out that a majority of consumer durable loans, a segment Reliance Retail Finance is keen on, is dominated by the NBFCs. As on 31 March 2021, NBFCs accounted for 75.8% of the outstanding consumer durable loans, followed by private banks at 21.5% and public sector banks at 1.2%.

Meanwhile, Reliance Retail Finance has done a SWOT (strength, weakness, opportunities, threat) analysis to check its strengths and weaknesses. The analysis found that with Reliance Digital Stores spread across India and one-third of the population using a Jio SIM card, Jio’s brand recall and equity will assist the company in creating an effective branding strategy.

The weakness: Reliance Retail Finance is a late entrant.

“Reliance Retail Finance is entering a space which already has over 20 well-established players. As an NBFC, it is competing with banks like HDFC, ICICI, Kotak Mahindra, Axis, IDFC First and others along with NBFCs like Bajaj Finance and HDB Financial Services. The fintech companies who appeal to the millennials also provide sufficient pushback in terms of smooth and less cumbersome customer journeys as compared to traditional credit underwriting. It shall be a challenge in terms of innovation," the SWOT analysis, accessed by Mint, states.

Reliance group companies, however, operate at scale. And their disruptive abilities—ask the telcos—is something analysts know all too well. Yet, some experts see more promise in the NBFC’s merchant business than in lending to individuals.

“In my opinion, RIL’s B2B (business to business) plan to target merchants is more promising than the B2C plans. RIL is onboarding more and more merchants through its Jio and Retail network and this wholesale model is a low hanging fruit for them," feels Deven Choksey, managing director of KRChoksey Shares and Securities Pvt Ltd.

Choksey says that if the company ends up giving a credit of ₹5 lakh to a million kirana merchants, that aggregate amount turns out to be in trillions of rupees. “The size of the balance sheet itself will become so huge—it will be bigger than many NBFCs operating at present," he adds.

Announcing the December quarter results, RIL said that JioMart Kirana (JioMart works as an e-commerce website as well as on the online-to-offline platform where customers place an order online and can purchase the products from the local kirana store) recorded new highs with aggressive merchant partner onboarding in existing and new markets. On 15 December 2021, Akash Ambani, director of Jio Platforms Ltd, spoke at Meta’s (formerly Facebook Inc) Fuel For India event. He said that JioMart currently has half-a-million retailers or kirana owners on its platform. Jio Platforms is leveraging WhatsApp as a channel to solve stock assortment issues for small retailers, and as an ordering channel for customers.

RIL’s job will be to leverage the excess cash it has on the balance sheet and put it to work even in the form of a loan book. “This, I think, is what RIL is looking at. The B2C plan could be at a later stage," Choksey says.

The case of the missing loans

The consumer loans on the books of Reliance Retail Finance, though, appear in one year and disappear during the next.

In 2019-20, the company had consumer loans of ₹14,893 crore on its balance sheet. In 2020-21, it is entirely absent. In its place are unsecured related party loans of ₹3,599 crore. For an NBFC focussed on lending to retail customers, this is strange.

According to the company’s notes to financial results for 2020-21, the loans were given to fellow subsidiary company Reliance Strategic Business Ventures Ltd. The non-bank financier has three other fellow subsidiary companies: Reliance Retail Ltd, Reliance Projects and Property Management Services Ltd, and Jio Platforms Ltd.

A person aware of the development said that when the Jio feature phones were launched in 2019, Reliance Retail was the master franchisee for the devices. Reliance Retail procured those devices from the original equipment manufacturers (OEMs) from China and other nations. They were given to subscribers on a 12-month equated monthly instalment basis. There was a need to book these loans—this is where Reliance Retail Finance came into the picture, financing these devices. The monthly instalments were collected by Reliance Retail and were escrowed back to Reliance Retail Finance.

“The market dynamics changed next year. They were already in discussion with Google and Facebook for launching smartphones but covid-19 disrupted this plan and the smartphone launch was delayed. Moreover, expecting the launch of smartphones, the company went slow on pushing its existing feature phones, leaving no requirement for consumer finance from Reliance Retail Finance," said the person cited above.

At a group level, there was also a change in strategy for the NBFC. Following the outbreak of covid-19 and the expected rise in bad loans, the group was apprehensive of expanding the retail lending programme. They decided on a different business model where Reliance Retail would procure the mobile devices from OEMs only to lease it back to them. This way, the OEMs ended up taking the credit risk. Under the new strategy, EMIs were collected by Reliance Retail and escrowed to the manufacturers directly.

“That is why there are no consumer loans on its books in 2020-21 and whatever net-worth they have built up with equity infusion, they have lent to a group company. However, they have again launched smartphones and it would be interesting to see what financing strategy they use this time round," the source said.

An email sent to the spokesperson for RIL seeking comments on the story remained unanswered.

A broader push

Reliance Retail Finance would want the company to emulate its parent group’s strategy of testing the waters through in-house roll-outs, according to documents seen by Mint.

It is looking to finance customers who purchase from Reliance Retail—they will be used as captive borrowers before a broader, official launch. The covid-19 pandemic has had an impact on its plans to launch its loan products in the open market as the company monitors unemployment, cost of borrowing and bad loan trends in the market.

Meanwhile, RIL in 2020 expanded its business to include a vast swathe of financial services—it added non-banking services, including insurance broking and mutual fund products on the Jio platform. The platform already caters to its telecom and e-commerce businesses.

RIL’s aspirations, however, is not restricted to traditional forms of finance. In 2019, Reliance Jio obtained an account aggregator (AA) licence from the Reserve Bank of India through Jio Information Solutions Ltd. AAs are entitled to collect and share financial information with third parties after getting the user’s consent. The information can pertain to sectors governed by the RBI, besides three other regulators—the Pension Fund Regulatory and Development Authority, the Insurance Regulatory and Development Authority of India, and the Securities and Exchange Board of India. Jio’s foray may be part of its larger consumer finance push.

Jio’s anchor customer base of 428.6 million and Reliance Retail’s 14,412 stores could provide a strong distribution channel for its financial products, say analysts tracking the company. But as is the case with any other Reliance entity, analysts and other experts are somewhat in the dark about the group’s plans for Reliance Retail Finance.

Yet, it can be said with a degree of certainty that the conglomerate—if and when it decides to go the whole hog in retail lending—will be a force to reckon with.