Theme Covered in the article

• Zest money rapid rise
• Valuation swings
• Factors that led to contraction
• Delinquency Challenges
• Regulatory Impact
• Unsecured lending pitfalls
• Impact on Fintech ecosystem
• Lessons for the Industry
• Future outlook for BNPL Sector

From Inception to Contraction: ZestMoney’s Rise and Fall

Founded in 2015 with an initial seed funding of USD 2 million, ZestMoney quickly made a mark by utilizing artificial intelligence and machine learning for e-commerce consumer loans. Functioning as a digital distributor, it expanded from online to offline markets, challenging industry giant Bajaj Finserv and targeting new-to- credit users in India.

The USD440 million valuation that ZestMoney commanded in a large funding round in June 2022 represented a significant revenue multiple over its earnings.

But soon, it became challenging to justify this valuation. Within five months, in its deal talks with PhonePe, even a significantly lower valuation – an asking price of around USD300 million – cut no ice. Following its USD4 million emergency funding in July this year, ZestMoney’ valuation plummeted to just USD8 million.

Despite accumulating 17 million registered users, collaborating with over 10,000 online merchants, and forming partnerships with more than 20 financial institutions, ZestMoney found itself vulnerable to financial shock.

Multiple Factors at Play: Funding Slowdown, NPAs, and Regulatory Changes

Funding Slowdown: During August 2023 Zestmoney was in talks with phonepe to raise around 300 million Dollars which unfortunately for Zest didn’t materialize. Their future hinged on this money and since they didn’t had any backup plan the deal’s failure led to an immediate downturn in loan disbursements and a comprehensive overhaul of the lending strategy.

High Delinquency rate: ZestMoney was facing a critical challenge with high delinquency rates among its customers which led to a substantial liability owed to its NBFC partners under First Loss Default Guarantee (FLDG) agreements.

FLDGs function as safety nets, either in cash or bank guarantees, provided by digital lenders to cover non-performing assets (NPAs) for their lending partners, including NBFCs and banks. ranging from 20% to 100% to these partners to mitigate losses from bad loans, without regulatory caps, effectively absorbing all losses.

Facing escalating delinquency rates, the company opted to liquidate these guarantees and renegotiate all lending agreements into direct partnerships. To facilitate this shift, ZestMoney incurred a substantial liability, amounting to INR400 crore, payable to its lenders for the existing default guarantees.

Regulatory Requirements: The final blow came from the Reserve Bank of India’s decision to increase risk weightage, risk weights are essentially the capital reserves that financial institutions, including NBFCs and banks, must maintain against unsecured loans. This increase in risk weights signifies a rise in the cost of capital for NBFCs, a burden that is likely to be passed on to lenders, including digital fintech firms. As per a report by The Economic Times on November 17, the new risk weight norms from the RBI could elevate NBFCs’ funding costs by 25-70 basis points. Consequently, these NBFCs may raise their prices, potentially causing a spike in the cost of funds for fintech companies by as much as 100 basis points.

Unsecured lending: Another critical issue in the BNPL sector, which compounded ZestMoney’s challenges, was the heavy reliance of many players in this segment on unsecured lending to expand their businesses. post-COVID, digital lenders, in an effort to recover from business losses experienced over a two- to three-year period, resorted to a more aggressive approach in their lending practices. This approach entailed a relaxation of risk assessment standards, effectively broadening the scope for financing opportunities. According to RBI data and various reports, 2021-2022 saw a substantial demand for these unsecured loans, with many digital lenders seizing this opportunity.

A study found that fintech customers who were 60 days past their due dates posed significant challenges in terms of repayment. After crossing the 60-day mark, the ‘roll-back’ or collection efficiency drastically dropped to below 5%. Additionally, for customers who were 29 days past due, the roll-back rate was only marginally better, just above 5% in FY22.

Read Further:

• LiveMint
• Yourstory