Q1(a).

What factors played a role in the entry of capital float into various
product lines?

● Business Finance
○ SMEs in India: 50 Million
○ GDP Contribution: 15%
○ SMEs did not have adequate access to formal credit
○ Credit Gap: 400 Million
○ Need of flexible credit by vendors
○ Traditional lenders had specific fund and non-fund based products

● Co-lending
○ To lower its cost of capital
○ To deliver a differentiated value proposition

● Consumer Finance
○ Feedback by SME business owners to provide EMI options for consumers
○ Loans were provided to consumers for diverse purposes

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Q1(b) What institutional voids existed in digital lending in India and how did
capital float bridge this gap?
● Traditional lending institutions are limited by the constraints of their conventional underwriting models that
restrict financing due to the volatility of this sector. This, in turn, pushed SMEs to the informal sector where the
high interest rates charged by moneylenders restricting borrowers to a chronic cycle of debt.
● Capital Float was established with the objective to bridge this gap in the market with innovative and flexible
credit products for SMEs, delivered in an efficient and customer-friendly manner.
● Faster processing speed and had data driven robust assessment system
● Capital Float could use Walnut Prime’s credit assessment model, which helped in capturing the data about
customers’ income and credit capacity.
● The Walnut Personal Finance Management (PFM) application used artificial intelligence (AI) in order to provide
insights about financial needs of the users and proactively offer them credit facility.
● The use of machine learning (ML) along with digital marketing enabled customization of a credit proposal
● The company used various unconventional techniques such as psychometric tests on their clients, their business
reputation and information related to their business decisions and entrepreneurial skills

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Q2. How did capital float use technology for competitive advantage?
Capital float used technology to lend money at fast speed, with minimum paperwork and without any collateral. It
also collaborated with various e-commerce firms to access data of SME and analyse the same for lending money.
Following technologies were used:

● AI used to analyse financial needs of users and offer credit facility

● Machine learning with digital marketing to customise credit proposal
● Unconventional techniques like psychometric tests, business reputation, entrepreneurship skills to assess
applicant more accurately
● Data points like Aadhaar cards, social media and GST information
● Automated decision engineering loan application to analyse profile of merchants
● Automated Loan tracking to identify potential bad loans
● Strong API (Application Program Interface) to integrate with diverse partners
● Blockchain to reduce middle-men by reducing cost and increasing trust

Additional systems like LOS (Loan Origination System), LMS (Loan Management System), DE (Design Engine)
were used to process application quickly.
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Q3. How did capital float use its capital structure as a source of strength?

Capital Float used a mix of debt and equity for funding its operations.

Equity - the company had raised equity capital of $125 million (~ INR 8,000 million)

Debt - It had a total debt of USD 300 million (~ INR 22,000 million) raised from time to time from
banks NBFCs, investors as well as in other forms.

To finance its rapid business growth, the company raised funds from multiple investors that included
SAIF Partners, Sequoia India, Aspada Investments, Creation Investments Capital Management LLC,
Ribbit Capital, and Amazon

Though the company were incurring losses since its inception but we could see that the value of the
company were increasing year by year.

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Q3. How did capital float use its capital structure as a source of strength?

Also we could see that with the funding that they were receiving they were able to invest in new
technologies and In 2015, the company launched a co-lending model, where they partnered with
traditional banks as well as various non-bank lenders and in 2017 they were able to expand into
consumer finance

They used this as an advantage and In 2018, Capital Float acquired Walnut Prime, India’s leading
personal finance management application which helped them to increase their sales further.

Additionally, this acquisition enabled Capital Float to use an already approved credit line of INR
1,000 million (~USD 14 million) of Walnut Prime on its mobile application, for expansion into
personal finance business. Sequoia Capital and SAIF partners who were on the board of Capital Float
were also investors in Walnut Prime.

Even in the times of covid when every company were facing losses they were getting support from the
investors 5
Q4. How is Co-lending model beneficial to the conventional
lenders as well as Capital Float?

For Conventional lenders For Capital Float

● Lower customer Acquisition Costs for banks
● Faster Financial inclusion
● ●
Increase in overall Customer base
● Achieve Priority sector lending target
mandated by RBI
● Integration of technology platform offered by
Capital float for product & Geographical
diversification
● New and evolved range of banking solutions
● Decrease in time taken to approve loan
● Participate in Lending without taking
excessive risks
Collaboration with banks for differentiated
value proposition
● Capital Float can leverage IDFC's product
innovation and customisation of banking
products for different segment of borrowers.
● Collaboration with banks helped capital float
increasing their business
● Reduced cost of capital

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Q5. How did Capital Float handle the NBFC Crisis?
To handle the NBFC crisis, Capital Float took following measures:
● Asset quality became stressed due to default on the repayments in the education sector.
● PayU cancelled their funding of USD 150 million due to issues in asset quality
● Capital float raised debt of USD 26.5 million to meet the funding requirement
● The company focussed on internal efficiency in running the business.
● Capital Float cut down business lines to allocate overcome the liquidity crunch
● The company started focussing on digitization of collection systems
● The company reduced the level of operations to reduce the fixed costs by 30%
● The company started giving shorter-term loans
● The company decreased its focus on merchant finance and ed-tech sectors and increased its efforts
in co-origination, e-commerce checkout finance and personal loans via Walnut app.
By making above decisions, the company became less sensitive to macro factors and hoped to return to
a path of profitability in a period of six to nine months.
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Q6. How did Covid-19 pandemic affect Capital Float?
Covid 19 affected each and every business, Capital Float not being an exception to it.

Capital Float’s balance sheet deteriorated due to Covid Crisis and the both sides were impacted in following ways:

Liability Side: It faced liquidity issues due to less funding

● Venture Funds tightened equity funding

● Debt funding from Banks became difficult

Asset Side: It faced working capital issues due to less repayments

● Decline in demand for Credit

● Delayed EMIs and reduced ability of borrowers to pay

Further, their SME lending sector was most hit and they also experienced reduced profitability which further resulted
in downgrade of their Credit Rating to “Negative” by India Ratings & Research, a credit rating agency in India.

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Q6. How did Covid-19 pandemic affect Capital Float?
The crisis brought with it, delayed payment of installments as well as a decline in the demand for
credit.

The outlook revision reflects CapFloat’s weaker-than-expected financial performance in the first 9
months of FY20, with the company reporting net losses of INR1,070 million

Difficulty to tap banks to raise debt

Adopted defensive and aggressive strategies, raised new capital(Invested time) as

mentioned

Defensive: Sufficient liquidity, cash buffers, reduced cash outlays

Aggressive: Introduce new products, features and services and build loan book

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Q7. What Strategy should Capital Float devise to come out of Covid-19
crisis?

Capital Float should adopt two-pronged approach in following ways:

Defensive Approach:

● Maintain Liquidity and Cash Buffers

● Reduce Cash Outlay or Costs

Aggressive Approach:

● Introduce new product features and services, especially non-credit products like health & Covid Insurance
● Start building the Loan Book more effectively, efficiently & quickly

Capital Float should also seek new funding from existing investors which will give a strong support to company
as well as scale up its vision of Digital Financial Inclusion in India.

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-THANK YOU -
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