Ritesh Srivastava, Founder and CEO, FREED
Image: Amit Verma
For Santosh L, it all started innocuously enough. The 40-year-old techie took his first set of loans to buy a television, a fridge and an air conditioner. The monthly payments were affordable and as a salaried employee with an MNC he was baited with new loan offers every day.
The loan offers came with varied names—from 0 percent EMI and personal loans, to buy-now-pay-later and overdraft facilities. But, in effect, they were all shoving credit at India’s middle-class borrowers, who are among the most unleveraged cohort in the world.
According to data from the Reserve Bank of India (RBI), unsecured loans for consumption have shown rapid growth over the last decade. In the year ended February 2023, credit card outstanding rose 29 percent to Rs186,000 crore and consumer durable loans were up 39 percent to Rs37,000 crore, according to data from the central bank.
Contrast this with a 7 percent growth rate for loans to industry and it is not hard to see why banks, non-banks and fintechs have rushed to build their loan books on this cohort.
Santosh’s credit was good, and banks and fintechs were flush with funds to build their loan books; he could take his pick of loan offers. At last count Santosh, who now earns Rs30 lakh a year, had seven credit cards, four digital loans and one personal loan against his name.
From there it all went downhill.
Four years after he took his first loan, Santosh’s debt stands at Rs80 lakh. While the principal amount is a mere Rs10 lakh, late fees and interest costs have resulted in a debt trap as well as a credit score that ensures he is unlikely to get a loan again. “It was all due to mismanagement. Only when you can’t pay do you realise how difficult the journey is,” he says.
Not one to be easily disheartened, he sought help from India’s first debt settlement company FREED. Set up to help borrowers negotiate with lenders, they promise to clear debt as well as put borrowers on a path to resurrect their credit score. “Just because you have fallen behind on debt doesn’t mean you don’t deserve a second chance,” says Ritesh Srivastava, who founded the company in August 2020. Srivastava had worked in this industry in the US and had seen it evolve over the last two decades. He says the time was ripe to start in India. Also read: Financial inclusion: How the India Mortgage Guarantee Corporation ensures low-risk mortgage loans for low credit score individuals
The industry works on the premise that collecting on debt it a long and arduous process for the lender. For the borrower it can also get particularly unpleasant. Santosh says he received 80 to 90 calls a day from agents who were often threatening him with dire consequences if he didn’t pay up. Shaming tactics are regularly used in this business and collection agents threatened to disclose his financial status to people on his phone contact list.
The industry works on buckets of 30-day intervals. So, if a loan goes bad, chances of recovering it in the first 30 days are the highest. Defaulters in this bucket could have one-time cash flow issues on account of which they didn’t pay. Often a simple nudge in the form of an SMS or email alert does the trick. Collection agents make the least (usually a 10 percent commission on the amount collected) if they collect from someone in this bucket. The amounts rise to as much as 25 to 40 percent for agents if they collect on a loan after the 90-day mark or after it is tagged as a non-performing asset. In effect, as the duration of the default increases the more the collection agency gets for collecting on it.
At FREED, borrowers are put through a counselling session to understand their repayment capacity. Mukul Aggarwal (name changed) approached FREED when his gross outstanding was Rs27 lakh, across 12 loan accounts. Once enrolled in the programme, he was given a plan whereby he had to put Rs20,000 a month into an escrow account to demonstrate his intent to pay. FREED has tied up with Catalyst Trusteeship to manage the account and has no access to the money and doesn’t use the float. The key here is to get the person to save money so that they can show his intent to pay off his debt.
Once the money is set aside and grows, the company starts contacting creditors to see if they would like to settle. FREED only charges Rs3,000 a month for an optional paid service that allows customers to deal with calls from collection agencies as well as reply to legal notices. All the customer has to do is answer the call and then connect them to the FREED team, which deals with it. Both Santosh and Aggarwal found this service particularly helpful.
FREED is able to negotiate with lenders as it offers the chance of a settlement on a bad loan and also allows them to settle accounts in bulk. The amount offered is usually 45 to 50 percent of the loan outstanding. “We don’t take any money from the lender as we are very clear we represent only the borrower,” says Srivastava. FREED’s offer is also a take it-or-leave it option for the lender, as they don’t go back to the borrower and ask him or her to settle for a higher amount. At this level (45 to 50 percent of the outstanding amount), creditors are willing to do business as it helps them save on the cost of a collection agency.
Faircent, a peer-to-peer lender, has done business with FREED and has settled 50 accounts. “There are several advantages in bulk settlements,” says Kamal Dhyani, head, collections, at Faircent. He says Faircent saves on the collection costs and since the payout to the collection agent is high after the 90-day mark it makes business sense to settle. “There are customers who have not contacted us but are working with FREED and then we hear of their intent to settle from FREED,” he says. In future he expects this to become a large avenue for collecting on accounts that have defaulted. Also read: India's Maturing Fintech Ecosystem: Five Companies To Watch In 2023
Srivastava, who has seen the industry grow in the United States, points to its immense potential in India. He now sees that lenders have started buying into the concept and are willing to take this as another route of collecting on debt.
In the US, the industry took off after the 2008 financial crisis and total debt enrolled for settlement is $50 billion, according to the American Fair Credit Council. Compare this to the $1.7 billion enrolled in 2012 and the business has grown at a CAGR of 45 percent a year.
While it is hard to estimate the potential size of the Indian market at present, FREED has enrolled Rs650 crore of debt so far on to its platform. Being a digital platform, it also has the potential to evolve into a large-scale business, with most of its fixed costs taken care of.
In April 2022, the company raised $2.8 million (Rs22.4 crore) in a pre-series A round to scale up as well as advertise its services. Bhushan Patil of Multiply Ventures, who participated in the round, was attracted by the fact that FREED is a ‘category creator’ and it is a pull product as opposed to a loan, which is a push product. The business has since attracted competition and Single Debt is another competitor in this space. FREED earns through the Rs3,000-a-month subscription for helping borrowers deal with debt collectors as well as a 10 percent payout on the settled amount. This is collected from the borrower and not the lender, as FREED doesn’t want any conflict of interest.
Recently, the company also rolled out a product that allows consumers to consolidate their debt. “If you have, say, six active loans we help you roll it into one loan with a longer tenure to ease your debt payments,” is how Srivastava explains it. He sees a lot of scope for this as well.
Back in Pune, Santosh has completed his first loan settlement with Bajaj Finance. He says he’s received the settlement letter and is hopeful of clearing all his loan outstanding by 2025-26. Thereafter he plans to build his credit score again. His key learning: “One must learn how to handle debt. And take only what one can pay back.”