Santanu Agarwal, Deputy Managing Director, Paisalo Digital Limited, writes on invitation and exclusively for our special series BRIEF24.
Learnings and achievements from 2023; Inspiration for 2024
In 2023, the financial sector witnessed remarkable trends and developments, shaping the landscape significantly. Firstly, there was a commendable surge in governmental efforts towards financial inclusion, notably exemplified by the Pradhan Mantri Jan Dhan Yojana (PMJDY), which facilitated the opening of a record 50 crore bank accounts.
This initiative has been instrumental in bringing previously unbanked individuals into the formal banking system, providing them easier access to credit facilities and familiarizing them with financial processes.
Secondly, the pervasive rise of digitalization has been pivotal in propelling the growth of Non-Banking Financial Companies (NBFCs). Embracing digital platforms has enabled NBFCs to expand their reach, streamline operations, cut costs, and enhance overall customer satisfaction.
Moreover, integrating cutting-edge technologies such as Artificial Intelligence (AI), Machine Learning (ML), and Big Data has further catalyzed this transformation within the NBFC sector. Leveraging these technologies, NBFCs have been able to innovate their product offerings, specifically catering to low-income individuals in urban areas and those working in informal sectors.
My year-end analysis of 2023: Amidst these positive developments, there have also been notable concerns, particularly regarding regulatory changes. The Reserve Bank of India (RBI) implemented stricter regulations, especially in consumer lending, which could lead to increased interest rates and higher costs for lending activities.
Navigating through these regulatory changes poses a significant challenge for NBFCs, especially as personal loans, which were a significant driver of loan growth in 2023, may face constraints in sustaining their momentum in the face of these regulations.
Moreover, the entry of retail giants like JioMart and tech behemoths like Apple into financial services adds to the competitive landscape. JioMart, with its vast customer base, can leverage new digital technologies to efficiently provide banking services to its customers.
Similarly, Apple’s entry into India with their first two retail stores, already established in banking-type services through Apple Pay and the Apple Card in the USA, it might start expanding into other related areas such as payment processing, credit risk assessment, person-to-person payment systems, merchant acquiring, and buy-now-pay-later offerings. These large technology companies possess significant advantages in data and proprietary systems, intensifying competition within the sector.
Success stories from 2023: In 2023, our company experienced significant growth both financially and beyond the figures. Financially, our total revenue for Q3 FY2024 stood at 4,368 million, up by 30%, and we achieved a remarkable feat of 42,280 million AUM in Q3 FY2023, up by 40%.
Our expanded reach was evident as we served a customer base of 34 lakh individuals through 1944 touchpoints spread across 18 states. We entered into Electric Vehicle (EV) financing in partnership with TVS Motors, marking a bold move into the rapidly expanding space of green transportation.
Furthermore, we launched an empowering campaign “Ab Rukna Nahi,” which aligned with our company’s vision and mission while resonating with the entrepreneurial spirit of our customers.
This campaign, more than just a marketing endeavor, embodied our commitment to supporting individuals on their journey toward success by providing financial solutions and an encouraging narrative. Looking ahead, we are energized to build upon these accomplishments, driving positive change and continued excellence across all facets of our operations.
Learnings and realizations from 2023: My professional growth has been deeply influenced by insights and discoveries within my industry, particularly in understanding the distinction between good and bad revenue and expenses.
I’ve learned firsthand how certain expenses, such as investing in well-designed and strategically located branches, can yield long-term value. Conversely, poorly underwritten credit may generate immediate revenue but lead to regrets down the line.
While many businesses, including NBFCs like us, claim to prioritize customers, we take it a step further by emphasizing our commitment to being there for them through good and bad times.
However, the lending industry is complex, and this customer-centric approach requires further explanation. In our business, we serve as financial partners to our clients. While we strive to build strong client relationships based on trust over the long term, our role involves intricacies.
Not every transaction needs to make economic sense individually; what matters is the overall client relationship year after year. For instance, If we create a loan and sell it at a profit above par, we have generated value, regardless of whether it remains on our balance sheet.
Furthermore, if we establish a loan while forging a client relationship and generating additional capital-light revenue, we have created long-term value that can be nurtured and expanded. This is what we refer to as franchise value.
2023 highlights and takeaways: Over the past year, we’ve keenly observed the evolving landscape of profitability dynamics, particularly in credit and loan assets, acknowledging the impact of stringent capital requirements. As a response, we’ve strategically realigned our focus, directing credit towards more lucrative avenues while emphasizing granular credit-related revenue generation to maximize profitability within our NBFC.
This strategic shift has been complemented by a series of measures aimed at enhancing management and execution efficiency across our business spectrum. We’ve undertaken initiatives such as repricing segments, phasing out less profitable products, and optimizing our business mix for individual clients. Moreover, we’ve adopted a more rigorous approach to client selection and resource allocation to drive sustainable growth.
Looking ahead, we’re actively exploring innovative strategies for capital optimization. This includes forging co-lending partnerships and considering expansion into cross-selling opportunities. By leveraging these avenues, we aim to bolster capital efficiency and overall business performance, ensuring resilience in dynamic market conditions.
Furthermore, we’re capitalizing on opportunities to incorporate low-capital or no-capital revenue streams into our operations. For instance, we’re exploring avenues like Business Correspondent services to diversify revenue sources and mitigate capital requirements while sustaining revenue generation.
Through these strategic initiatives and a proactive approach to adapting to market shifts, we’re poised to navigate challenges and seize opportunities, driving sustained growth and profitability in the year ahead.
Looking at 2024: In 2024, the landscape for Non-Banking Financial Companies (NBFCs) is poised for significant shifts, with notable trends emerging on multiple fronts. Notably, domestic NBFCs, particularly those in the upper echelons, are increasingly turning to bank borrowings as their primary funding source. This reliance underscores the evolving dynamics of financial operations within the sector.
Moreover, as NBFCs navigate this funding landscape, integrating advanced analytics and Artificial Intelligence (AI) stands out as a pivotal trend. These technologies empower NBFCs with enhanced collections management and payment monitoring capabilities, offering more robust decision-making frameworks.
Furthermore, there’s a notable shift in the approach towards managing non-performing and delinquent accounts. Traditionally, NBFCs have relied on customer account balances and credit scores for prioritization and strategy formulation.
However, with the next wave of growth expected from accounts with limited or no credit history, NBFCs must leverage broader data sets and robust big data processing capabilities. This entails synthesizing insights from existing and historical data sets to effectively manage non-performing assets and drive informed decision-making.
Amidst these advancements, NBFCs must strengthen governance and risk management standards. With the rapid expansion of the digital lending space, which offers significant opportunities for growth, there’s a parallel increase in the risk of cybercrimes. NBFCs must remain vigilant and proactive in addressing these novel challenges to ensure sustainable growth and resilience in an increasingly digitized landscape.
Some advice: Firstly, great management and leadership are critical to any large organization’s long–term success, whether it is a company or a country. Strong management is disciplined and rigorous. You can never do enough, and it does not end. But creating an exceptional management team is an art, not a science.
Secondly, when any value is based on models, it is essential to test the sensitivity of the outcomes against changes in assumptions. Understanding the range of potential outcomes holds far more significance than relying solely on the point estimate produced by a model. In some instances, an average outcome may appear excellent, but it could carry a significant risk of failure.
Lastly, authorized and coordinated by the board, directors should have unrestricted access to management, including those who report directly to the CEO. During board meetings, to foster open and unrestricted discussions, the full board should convene in executive sessions without the presence of the CEO or other members of management.
Independent directors must ensure that they have sufficient time for these sessions. This practice allows the board to engage in candid conversations and provide valuable feedback to the CEO and the management team.
A good CEO, striving to perform their best, should appreciate this important feedback and recognize the challenges of gathering input from a large group. Such high-quality discussions among board members cultivate collaboration and facilitate effective planning, as each meeting should include genuine conversations on this crucial topic. These meetings foster the invaluable virtues of collaboration and trust.