ZestMoney: Lending taps starting to dry up for crisis-hit ZestMoney

The sudden exit of ZestMoney founders after its planned acquisition by PhonePe failed has compounded the challenges for the fintech startup with its already clogged lending taps likely to dry up.

ZestMoney is clocking a fraction of the business it was processing even a few months ago, mainly because its lenders are scaling down their exposure to the company, two people in the know told ET.

The company was disbursing at an annual run rate of around Rs 200 crore even a couple of months ago, which fell to half last month and could further go down this month, one of them said. At its peak ZestMoney was disbursing at an annual run rate of Rs 600 crore, he added.

Founders Lizzie Chapman, Priya Sharma and Ashish Anantharaman had on Monday told the rest of the team that they are leaving the company, as ET reported.

Now, with senior company executives Mohit Chhajer, Mandar Satpute and Abhishek Sharma in the lead, investor Quona Capital is trying to lead a turnaround of the company with 175 employees still with the firm.

ZestMoney did not offer any comments to ET’s emailed query while a Quona Capital spokesperson said they along with Australian fintech firm Zip, Flourish Ventures, Omidyar Network and Scarlet Digital, were putting together a funding round to support the future growth of the business and finance the path to profitability.

ZestMoney offers consumer durable loans and ‘buy now pay later’ options for sectors across fashion, home decor, travel and education across both online and offline. It disburses quick credit by mostly sourcing it from lending partners. While the company has an in-house NBFC, it hardly takes the loans on its books.

Also read: Why PhonePe-ZestMoney deal fell through

Cautious partners

With the company in turmoil, its lending partners have turned cautious, given the loans extended through ZestMoney will eventually be sitting on their own books and could slip into bad assets.

“Usually, a lender agrees to work with a fintech on a co-lending arrangement or on a sourcing arrangement. If the fintech itself is in turmoil, then how can we trust the customers coming through them?” said a senior banker with a private sector bank that works with multiple fintechs.

He said such incidents go on to show that extreme reliance on fintechs to source business could come back to bite regulated lending entities. After all, the loans sit on the books of the lenders only, and they will need to be reported to the Reserve Bank of India (RBI).

Traditional lenders partner with fintechs on the basis of certain loan default arrangements and a level of trust with the management at the fintech. If a startup is going through such troubled times, lenders are bound to shy away from doing business with them.

“Since the company is financially in a bad shape, lenders could be going slow,” said one of the persons quoted above.

DMI Finance, Tata Capital, and IIFL are among the large NBFCs that work with ZestMoney. Among the banks, there are ICICI Bank and CSB Bank.

Investors and founders

ZestMoney was among the fastest-growing fintech lenders in the country. They brought on board investors like PayU, Ribbit Capital, Quona Capital, and Omidyar onboard, who together pumped $134 million into the company over multiple rounds of funding.

Data from Tracxn shows that after the series C round of funding, which was closed in June 2022, ZestMoney had achieved a valuation of around $450 million.

However, problems compounded when PhonePe reported issues it found during the due diligence process for acquiring ZestMoney. The Walmart-owned payments unicorn went ahead writing off an $18 million debt to ZestMoney. PhonePe was offering $90 million in cash for ZestMoney, with the transaction also entailing taking on ZestMoney’s debt and a $10 million founder pay-out, as ET first reported. But the deal eventually collapsed.

“Investors were not making any money in this deal, especially the ones who came in the subsequent rounds, which could have resulted in the mess up in the PhonePe deal,” said one of the persons quoted earlier. “This is a classic case of investors and founders trying to chart different ways,” he added.

While the announcement about the founders’ exit took place on Monday, ET understands that the founders had withdrawn from day-to-day operations at ZestMoney for more than five months now. As the sale process failed and employees started moving out, the company went into auto-pilot mode.

Multiple fintech founders ET spoke to said if there were issues around the asset quality of ZestMoney, its lending partners could have pointed them out. Given ZestMoney was giving out loans aggressively till last year, its lenders must have been confident of its business, they added.

Whether such a collapse will have a larger impact on the digital lending sector is something that will need to be watched out.

White label, a tough sell

ZestMoney has been betting on turning around by moving away from sourcing business and selling its platform as a white-label solution to lenders and NBFCs. PhonePe has taken a copy of its LSP and onboarded 150 of Zest’s employees too, said Sameer Nigam, cofounder and CEO, PhonePe in a tweet on Monday.

But what is the value of the ZestMoney platform is being questioned.“The era of LSP (loan service providers) is over as all fintech lenders and NBFCs are moving towards co-lending partnerships and lending from their own books,” said a fintech founder aware of ZestMoney’s business. “Further, with high delinquency on their books, it will be difficult for that company (ZestMoney) to prove the mettle of its sourcing and collection capabilities (especially with larger partners).”

ZestMoney is doling out its own loans and will compete with players who use its platform. How will that work out is a question too, the person said.

(With inputs from Tarush Bhalla)