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With the rise in market volatility in the last few weeks & to reiterate the importance of curated investment we have scheduled an exclusive Q&A session for our members with Aagam Maniar, Co-founder of LiquiLoans.
Listen to the detailed webinar recording for the entire discussion.
Below is the list of questions asked by our members
Anoop – Cube Member
In the current market scenario, some re-payments will likely be missed. How do you plan to manage this impact?
Overall FOIR (Fixed Obligation to Income Ratio) is an avg. 33% for all LiquiLoans’ borrowers, which shows they are less leveraged and have enough savings/investments. Also, LiquiLoans exposure to each borrower is an avg. 15-20% of their annual income, i.e. LiquiLoans doesn’t have large loan exposure to any borrower. Also, all LiquiLoans’ borrowers have taken a Zero Cost EMI Loan, i.e. they are not paying any interest, but only repaying the principal monthly via the NACH (auto-debits borrowers bank account on a monthly basis).
Also, as LiquiLoans’ offers a Zero Cost EMI, they earn a healthy subvention which ensures a very high spread/buffer over the investors indicated hurdle (first come first principal and indicated return is paid back to the investor).
Also, in similar situations in the past, LiquiLoans has seen a surge in corporate defaults, rather than retail defaults.
There are already talks of government allowing delayed payments on certain loans, what is LiquiLoans take on loans disbursed via the platform?
The government will largely do this for specific sectors and specific banks; it is unlikely a blanket rule that the government will impose. However, LiquiLoans’ through its high subvention led gross IRR has an approx. 15% buffer, which over a standard consumer loan industry avg. NPA of Avg. 1.5% is nearly 10x.
Also, LiquiLoans’ sets up NACH or auto-debit instructions from the customer’s account and if any NACH bounces LiquiLoans’ is authorized to start file a case in the police as it becomes a criminal action under the negotiable instruments act.
How does LiquiLoans account for such Black-Swan events in its risk assessment?
LiquiLoans had back-tested their business model (1987 Crisis, Dotcom bubble, 2008 Lehman Crisis etc.) for such probable scenarios of economic slowdown/in-activity; when LiquiLoans had started the business and planned to maintain a buffer accordingly for such situations.
Even, if LiquiLoans’ sees a situation where retail consumer loan book NPAs are 2x or 3x of the Lehman Crisis, LiquiLoans does not foresee it as an issue. This is because LiquiLoans’ keeps a sufficient buffer which supersedes the default expected.
Also, LiquiLoans has created a basket of prime borrowers (Avg. 700+ Credit Score), from whom they do not charge any interest. All borrowers just repay the principal on a monthly basis through NACH.
What’s the average tenure in the education sector loans?
LiquiLoans’ only lends for upskilling courses, not for professional courses like B.tech or MBBS. The loan ranges from 3-15 months. E.g., Animation courses are around three months while Algo training can be up to 15-18 months.
The average tenure for education loans given by LiquiLoans’ is approx. 8-9 months
Abhin – Cube Member
How is the loan secured by the merchant, i.e. are there any form of guarantees underlying the loans?
The loan is not guaranteed by the merchant as the loan is in the name of the borrower who has to repay principal on a monthly basis. Loan amounts although are disbursed directly to the merchant post deduction of subvention (thereby avoiding fraud risk). In case of any service delinquencies as well – the loan payment is mandatory – the terms are clearly mentioned in the loan agreement. If the loan EMI NACH bounces for any reason – it is considered as a criminal offence under the Negotiable Instruments Act 1881. And lastly, being an NBFC – LiquiLoans has the power to comment on the Credit Report of the borrower and put a remark of “willful defaulter” if the borrower doesn’t repay monies. So, for a high credit rated borrower, the intent of impacting his or her credit score for a small ticket size loan is very low; as it shall hamper his/her ability to take a larger loan in future from any Bank/NBFC.
If there is a run on LiquiLoans, how is it ensured to return the money on time?
Let take a worst-case example in 3 assets – savings account, liquid fund and LiquiLoans. Where everybody pulls out the money. 60% of the investors if they ask the money back from their savings account or even liquid fund, the fund house or bank will not be able to fulfil the same.
Similarly – 60-70% of LiquiLoans investors try to do that – LiquiLoans will not be able to fulfil that immediately. An organic buffer of 9-12% is maintained in the escrow as cash, and as the typical loan tenure is 7-8 months, LiquiLoans’ gets an approx. 13-15% of the principal back in the escrow every month; creating a buffer of approx. 23-25%.
Approx. 35%+ of LiquiLoans’ investors/lenders have opted for the 12 Month MHP scheme; so, can’t opt for regular redemptions. So, the liquidity requirement is only of the approx. 65% of the book – the buffer thus suffices ~40% of the immediate liquidity requirement and rest will not be locked in but will be paid out as steady cash flow from EMI in next Approx. 5-6 months.
The best part is LiquiLoans’ is not a deposit-taking NBFC; thus even if they go down, the RBI approved trustee will do the collections and pass on to the investor.
Sritanu – Cube Member
What is the ALM (Asset Liability Mismatch) Scenario?
LiquiLoans on a monthly basis gauge supply and demand on the platform & accordingly models the monthly raise and disbursements(with an 8-15 % variation).In case LiquiLoans’ finds any mismatch or oversupply, they stop taking money from their partners and keep control on the supply side.
For e.g., LiquiLoans’ had stopped taking new inflows in December 2019 because LiquiLoans’ witnessed excess inflows, i.e. an increase on the supply side in November 2019.
What is the Liquidity scenario of LiquiLoans?
LiquiLoans’ always keeps approx. 9-10% liquidity of the total loan book in the escrow to sustain the short-term redemption requests
Does LiquiLoans think they can raise more debt in these conditions if they have to do a rollover of their existing debts which are maturing?
LiquiLoans’ business strength lies in deployment in underlying sectors which are a decent hedge to the current slowdown/lockdown. Key sectors like Stem Cell, IVF remain largely unaffected.
They do expect a moderate short-term slowdown in skincare and haircare treatments. However, parallelly they see an increase of nearly 25-40% in the education sector mainly on account of most of their partners offering online courses. The slowdown shall be offset by LiquiLoans ability to penetrate further with current partners (increasing presence in un-tapped outlets); additionally, stabbing in the broader market by adding new partners (NMIMS, Great Lakes, Career Launcher etc.).
Mahesh – Cube Member
Tomorrow if LiquiLoans shut down, what happened to my money? How much is guaranteed/insured?
Unlike FD (only up to a certain extent), no other instruments are allowed to be guaranteed by RBI or SEBI. That is why LiquiLoans’ follows the hurdle mechanism wherein they don’t make any income/fees until the investor gets back his principal and the indicated hurdle return.
Considering LiquiLoans’ is last in line to make money and first in line to absorb losses through their fees lying in the escrow, LiquiLoans’ always endeavours and ensures that they underwrite a better portfolio which shows complete alignment to customers.
With an approx. 15% buffer in the product, they have higher proportionate capital adequacy than most banks/NBFCs through their fees.
Amardeep – Cube Member
What If LiquiLoans change their lending style and start lending to specific partners for financial benefit - is there a possibility of spam and what are the safeguards?
To get a P2P lending license, one has to submit & get their business plan approved from the RBI.,
Additionally, there is a dealer level concentration; details of which are shared with RBI to ensure that all the monies are not concentrated with one dealer or partner. There is a monthly audit & quarterly NPA reporting to the RBI. Also, LiquiLoans’ deals with large established merchants who have tie-ups with multiple other NBFCS who can offer similar Zero Cost Loans to their customers; hence they don’t engage in malpractices nor bribe LiquiLoans to disburse monies.
Also, LiquiLoans’ is an equity-backed firm with complete alignment with the lender; hence only could raise equity capital from marquee VCs like Matrix Partners and large angels like Kunal Shah etc. Promoters have already built Rentomojo (USD 100Mn + Entity) in the past showcasing good intent and capability in the Promoter team.
Padmini – Cube Member
What is the expense ratio?
There is no expense ratio, no exit loads, no entry loads. 11%-12 XIRR is the hurdle which an investor/lender makes on their investments.
Shantanu – Cube Member
What ballpark probability figure would you put for a complete default of re-payment? Do you see risks on defaults?
This is a portfolio of prime retail borrowers. If we take into account all such past scenarios (Dotcom bubble, Subprime Crisis 2008, etc.) the gross retail NPA has never been more than approx. 3%. Even if this figure doubles or triples LiquiLoans do not foresee an issue with the principal re-payment. The buffer LiquiLoans’ keep is approx.15%.
Amit – Cube Member
Do you filter for proxy borrowers who are creditworthy on record but will default as proxy possibly?
So, there is no case of proxy borrowers except for IVF which has some cases where husbands are the co-guarantors, and they undergo similar underwriting checks of Credit score/report, low FOIR, salary, company, city etc.
Varun – Cube Member
Why is the hurdle rate not explicitly mentioned in the loan agreement, but it is mentioned under loan servicing fees?
RBI does not allow LiquiLoans to guarantee or quote a guaranteed return – that is why LiquiLoans’ has built a servicing fee with a hurdle.
Shekhar – Cube Member
Who will file the recovery case in Court under 138B?
LiquiLoans will file the case and will also bear all the expenses
If you are looking for the presentation we referred during the webinar. You can download it here.
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