On November 2, Prime Minister Narendra Modi made a slew of announcements aimed at reviving India’s faltering micro, small and medium enterprises. One of these was about a dedicated digital platform – www.psbloansin59minutes.com – to enable them to access loans of upto Rs 1 crore in just 59 minutes.
Unlike their larger counterparts, India’s smaller companies have long faced difficulty in accessing bank loans. The psbloansin59minutes website was presented as the solution. Once a firm uploads key information such as tax returns and ownership details, proprietary algorithms on the website appraise the application, determine the loan amount that can be given and then connect the applicant to a bank branch – all in under 59 minutes.
As it turns out, the website mirrors the aims outlined in a tender issued by the state-owned Small Industries Development Bank of India on January 22, seeking to hire a consultant to set up a new legal entity that would facilitate contactless lending.
“The solution will use algorithms and techniques to read complex balance sheets, IT returns and bank statements in a very short time,” said the tender. “These solutions can easily capture the basic details of the applicant from present documents. Smart analytics will enable the proposed solution to find discrepancies and automatically pull information from credit bureaus. More importantly the decision-making process for a loan officer can become simpler as the solution provides a summary of credit, valuation and verification on a user-friendly dashboard.”
The tender went on to define eligibility requirements. To qualify, consultants needed to have earned a fee of at least Rs 50 crore from management consulting during the three preceding years. “The consultant should have been in existence in India since April 01, 2012,” it stipulated.
Once a consultant was shortlisted, said the tender, a new legal entity would be formed, in the form of a company with SIDBI and other banks as shareholders.
However, a closer look at psbloansin59minutes shows that the company behind it does not quite meet the tender stipualtions. The website is not run by a new legal entity as envisioned by the SIDBI tender. Instead, it is run by a Ahmedabad-headquartered fintech company called CapitaWorld Platform, which was set up in 2015.
Who is CapitaWorld?
CapitaWorld is a young company that connects borrowers and lenders. Once customers upload their documents, it runs algorithms to assess their risk profile before connecting borrowers to lenders. In 2017, its software engine won second prize at a contest organised by the Reserve Bank Of India’s research institution, the Institute for Development and Research into Banking Technology, to encourage the development of banking apps.
It is this engine that is being used at psbloansin59minutes to process loan applications.
The company was set up by Vinod Modha, Jinand Shah and Aviruk Chakraborty. As this report says, Shah is a chartered accountant and a chartered financial analyst. Modha has worked in venture capital and non-banking financial companies, in addition to advising firms like Nirma, Mudra and Intellecap. Chakraborty has a background in manufacturing.
Till March 2016, the company had no revenues. That year, it posted a loss of Rs 38,888. The next year, its income rose to Rs 15,680. By this time, its promoters had rejigged their ownership over the company. CapitaWorld Platform was now a subsidiary of CapitaWorld Global, which held 60% of the shares in the company – this company is equally owned by Vinod Modha and Jinand Shah. Another 32.1% in CapitaWorld Platform was held by a limited liability partnership called JVKM Associates. As an LLP, it does not have shareholders. Its partners, as of May this year, were Jinand Shah, Krunal Sheth and Vinod Modha. Sheth was a director at a firm called E-Advisory Services.
Documents filed by the company with the Registrar of Companies contain a valuation report dated April 16, 2018. Produced by a firm called OMMS & Associates, the report says it has based the company’s valuation on its “potential earning capacity” – not on its past earnings or assets – to arrive at a valuation of Rs 129.39 per share.
In July, the company’s ownership saw a major change when nine public sector banks, including SIDBI, bought a total of 1743,371 shares in CapitaWorld Platform for Rs 22.5 crore, at Rs 119.39 per share. With CapitaWorld’s issued capital standing at 3228,466 shares, that gave the banks a 54% stake in the company.
A puzzling transaction
Both decisions – to appoint a private company to handle psbloansin59minutes and the selection of CapitaWorld – deserve a closer look.
In the past, the business of linking borrowers and banks was handled by SIDBI on its own through sites such as www.udyamimitra.in. It is unclear why the state-owned financial institution chose to tie up with a single fintech player instead of, say, buying its algorithm-based software engine.
Under the present arrangement, CapitaWorld will earn a lot of money and gain access to a lot of data. “For registration purpose, the borrower doesn’t need to make any payment,” the FAQ section on the website says. “Any borrower whose proposal matches with the products of lenders and wants to receive an In-Principle approval will be required to make a nominal payment of Rs. 1,000 + Applicable Taxes.”
This money goes to CapitaWorld because it provides that in-principle approval. Subsequently, banks do their own due diligence. If the loan gets approved, CapitaWorld also gets 0.35% of the loan amount.
The day after Modi made his announcement, a statistics counter on the website – it has been removed since – claimed 1.69 lakh registrations and loan approvals of Rs 23,582 crore. By a simple calculation, 0.35% of that works out to Rs 82.53 crore. “Can you imagine the amount of money that can be made if a million MSMEs apply for loans?” asked a Delhi-based businessman who applied for a loan. He said he thought he was dealing with a government or at least a public sector entity but was puzzled when an email containing his “in-principle approval” came not from a government bank but from firstname.lastname@example.org.
Money is just half the story. The website, as Moneylife reported, also gains access to a lot of data. To apply for a loan, companies have to submit critical details including not just bank statements and income tax and Goods and Services Tax returns but also their login IDs and passwords for both websites.
In the age of algorithm-based lending, such data gives CapitaWorld a competitive edge its rivals cannot possibly match. As the sole company managing psbloansin59minutes, it will have deeper access to the data of India’s micro, small and medium enterprises sector than any of its peers.
To top it all, in August this year, Bank Of Baroda nominated Akhil Handa, its head of fintech and new business initiatives, to the board of CapitaWorld Platform. His LinkedIn page contains a hyperlink to a Swarajya report that describes him as “a former Asian investment banker with JP Morgan (Hong Kong) and Founding Member of CAG – the professional support group for Mr Modi’s 2014 campaign. At present enjoying the freedom from the corporate world and excited to setup his own financial inclusion business. He tweets @navitweet321.”
Handa’s Twitter bio refers to Bank of Baroda, Citizens for Accountable Governance and Mitra Fintech.
When Scroll.in asked Jinand Shah, founder-promoter of the startup, how his firm came to run psbloansin59minutes, he declined to answer. “It will be better if you direct these questions to SIDBI,” he said. A text message request for a conversation to Ronak Shah, the firm’s co-founder and COO, did not get a response.
Scroll.in has subsequently emailed questions to CapitaWorld and SIDBI asking how the company was chosen.
This report will be updated if they respond.
In the meantime, CapitaWorld has changed its homepage. Till November 4, the startup described itself as a digital lending initiative supported by “SIDBI led consortium of PSBs”, and listed six banks as “strategic partners”.
But now, the company seems eager to stress the participation of banks in its operations. Its new homepage starts by listing these six banks and calls them key shareholders.
In a document about pre-bid queries to its January 22 tender, SIDBI revealed that it had received a request to include “IT / ITES services” in addition to “management consulting” in the section about financial eligibility but did not accede to the relaxation sought.
It also received a request citing “confidentiality agreements” to accept the certificate of Eligibility (Experience and Capability) with “a brief description of [...] client (without disclosing their names), the nature of services [...]performed for them, the duration of the project and approximate team size.” The document says that the SIDBI response was that “the bidder would be required to define the process of verification for the engagement, which should be acceptable to SIDBI”.