Bharat-focused venture capital firm, India Quotient, has been an active investor in fintech start-ups, particularly in the lending space. Some of its portfolio companies include LendingKart, LoanTap, Pagarbook, Sharechat, and Sugar. LendingKart is a direct competitor to the SME (small and medium enterprises) lending vertical of fintech unicorns ($1 billion valuation), Paytm and MobiKwik. Both the billion-dollar valued companies have filed papers for public listings this year. BusinessLine spoke to India Quotient’s General Partner, Gagan Goyal, on how these two IPOs might impact SME lending start-ups in India and India Quotient's fourth fund .

How do you think IPOs of Paytm and MobiKwik will impact the SME lending business?

In lending, the biggest raw material is the money that you loan to the end-user, and your ability to raise this capital for lending. From that perspective, the companies which are profitable are in a better position to source money at a very low cost. Typically, lending tech companies borrow from NBFCs or banks at a high cost of capital. But, once the company becomes profitable and opts for a public listing, it is possible for it to secure low-cost capital. Now, I cannot comment on whether Paytm and MobiKwik will be able to do that. But the chances are bright for companies like LendingKart to remain competitive.

Given that both MobiKwik and Paytm have an established network of SMEs, do they have an advantage over other existing SME lending companies in terms of low acquisition costs?

There are definitely advantages in terms of customer acquisition cost, but the game of lending is not about being able to acquire a customer. The crucial part of the lending business is to underwrite customers and determine if the company can give them a loan, as it's a book-building business. People who are creditworthy have many options to get loans from multiple sources, they can go to the bank and ten other places. But in SME lending, companies have to find a customer who is creditworthy, and at the same time does not have a high CIBIL score. Someone whom they can underwrite and still expect to make money from by giving him a loan and recovering that. Paytm and MobiKwik have an advantage because they have a large base, but there are ten more things in lending which are more important.

Does that mean it is important to have low NPAs (non-performing assets) in SME lending?

You can run a high NPA business in lending too; banks typically have a 2 per cent NPA. I think it is about finding the right spot, between the borrowing cost of capital and lending interest rate so that one is able to recover the cash, cover operation costs and also make profits.

What is the update on India Quotient’s fourth fund?

Initially, in January, we aimed to raise $80 million for our fourth fund and we received a great response from domestic HNI capital. We were able to announce our first close at $64 million last month. Depending on the response we get from institutional investors, we might increase our target corpus from $80 million to $100 million. Till now, we have committed four deals from our fourth fund. We don't usually invest in US copycat businesses because they are largely capital-driven. We look for ideas that are in the early stage and are backed by the unique market insights of the founder or their product-building ability because that is an important factor for building a successful business. The average ticket size of India Quotient’s investments is $250K to $1 million.

The Indian start-up ecosystem is looking at about five IPOs this year. Do you think these companies will be able to maintain their valuations in the public market?

I cannot exactly predict whether these companies will be able to maintain the valuations, but we all know that their current valuations are very high. There's no doubt about it. People tend to see future value and so they are okay to pay a premium, but the real judgement will come when these companies get listed. I am curious to see how that shapes up, but it is true that these companies are highly valued and they have to pass the test.

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