“To understand the ecosystem we spent a lot of time at offices of e-commerce companies: Amazon, Snapdeal, and Flipkart,” says Hinduja. The two got lists of top sellers on these platforms and studied their needs and other aspects: what’s the tenure they are looking at, how they would repay,etc. “The third-party sellers had a working capital problem,” says Rishyasringa. “They needed credit that is very short tenure in nature that they could pay back as they sold online.” Loans available to SMEs then were long-tenure ones. “They needed something like a 60-90 days creditline with a flexible payment option,” he explains.

Capital Float’s first product for SMEs was designed keeping these things in mind. The loan ticket size was about ₹10-15 lakh. The co-founders did not have to wait long to know their business model was sound and they were on the right track. “In the initial days... we came across a loan application from Bhilwara,a town in the Mewar region of Rajasthan. Fora south-based startup it was a little surprising. Our first reaction was, ‘Where is Bhilwara?’ ”recalls Rishyasringa. “It was a small shop in Bhilwara that sold mobile phones. And the shop owner was selling on Amazon and maybe he was making about a few lakhs per month. It was the only shop then in Bhilwara that was selling mobile phones in that area.” The applicant was looking for a loan of ₹10 lakh which he could use to push online sales. Lack of options from traditional banking made him google loans and he chanced upon Capital Float’s website. “Eventually, we ended up giving him a loan and within a couple of years he became the biggest distributor of mobile phones in that part of Rajasthan,” says Rishyasringa.

Lessons learnt through lending to SMEs helped it begin lending to consumers. “Our learnings in the SME space helped us build the consumer loans business because when you are evaluating a business, you are evaluating a promoter as well. The in-house technology and infrastructure is easily portable on to the consumer lending space, too,” says Hinduja. Today,consumer loans account for 40-50% of Capital Float’s business in monthly volume.

Samit Ghosh, who built one of India’s most successful NBFCs, Ujjivan Financial Services,feels fintech NBFCs such as Capital Float are doing good work. “They bring in a lot of new approaches on how to source credit and also evaluate and deliver credit. We, instead of trying to fight them, would rather join them and work together with them. That is our approach,”says Ghosh.

Industry experts point out that micro, small and medium enterprises have offered huge potential for growth to fintech NBFCs but the challenge is to build capacity, not just in large cities but also in smaller towns while keeping the default rate low. “A higher default rate remains a medium-term concern, compensated by higher yields but with more players coming into the business, yields would eventually drop and defaults may not decline... that remains the defining challenge for the space,” says Vineet Rai, chairman, Aavishkaar Group, an impact investment firm.

Capital Float has had to discontinue some products due to a rising default rate. “We were financing cabs for drivers from Ola and Uber, but there were many defaulters. That was a product segment we didn’t understand verywell. It didn’t go as planned. We took a lot of learnings from that and as we grew other products, we made sure we have a playbook to follow,” says Hinduja.

According to filings with the Registrar of Companies (RoC), Capital Float recorded a loss of ₹92 crore in FY18, while its total revenue stood at ₹135 crore, up 154% from a year ago. It wrote off ₹16 crore as bad loans compared to ₹1.8 crore in FY17. The founders say in the short term there will be ups and downs but along-term focus is critical. “The challenge is how fast you can grow while being prudent on risk,” says Hinduja.

Meanwhile, The Economic Times reported in February that Capital Float was in talks with PayU, the Naspers-owned payments company,to raise about $150 million at a valuation of $500 million. Later in May, the daily reported that a complete sale could happen at a lower valuation. Capital Float declined to comment about the deal. However, if this happens, existing investors stand to gain from it. Now, what’s the moral of this tale for naysayers? A little belief is a good thing.

(This story was originally published in the June - September special issue of the magazine.)

Gaurav Hinduja

A capital idea