Kushal Rastogi, Founder & CEO Knight FinTech chats with Sanjay Swamy, Managing Partner Prime Venture Partners.

Listen to the podcast to learn about

04:30 - Solving Hard Problems for Large Financial Institutions

17:15 - Gaining Trust & Confidence of a Large Enterprise

36:00 - Challenge of Building Two Products at a Young Company

45:00 - Future Plans of Knight FinTech & Global Opportunities

Read the complete transcript below

Sanjay Swamy

Hello, everybody. Welcome to this latest episode of the Prime Venture Partners Podcast, where we bring you stories from entrepreneurs and others in the startup ecosystem. Today, I have a fellow portfolio company of Prime, founder Kushal Rastogi of Knight FinTech. Kushal, welcome to the show.

Kushal Rastogi

Hi. Thanks Sanjay for having me here. Hi everyone.

Sanjay Swamy

Great. Kushal is the co-founder of Knight FinTech, which is a technology platform for banks, NBFCs helping them revamp and make this transition to becoming more nimble and smarter as the world goes more digital. I’ll have Kushal talk a little bit about his background and about the company and some of the insights and lessons learned over the first few years of the company. Kushal, maybe we can start with a little bit about your background and perhaps your co-founder Parthesh’s background and a quick introduction to what is Knight FinTech.

Kushal Rastogi

Sure. Thank you very much Sanjay for having us here. It has been truly a pleasure to work with Prime for the last few years. My name is Kushal. I’m founder and CEO of Knight FinTech. I’m an IIT grad 2008 batch and most of the last 14 years have been working at the cross section of technology and finance. Prior to starting Knight FinTech, I was working with a European hedge fund, which was, I worked there for about four and a half years, but I was essentially working as a system architect, building trading systems, managing billions and dollars of assets, which is a multi asset global portfolio.

In terms of large chunk of the portfolio was geared towards fixed income. Having said that we traded pretty much everything under the sun, across commodities, equities, currencies, and everything. The ideology was largely quantitative and mathematics driven. We used to leverage the AI and used to harness a large amount of financial markets data and build the insights either from the trading perspective or from a risk management perspective.

My co-founder Parthesh, who has not joined this podcast, again, I know him for now over 12 years. There’s an interesting piece on how we know each other from that time that we both were engineers and we both moved to finance. So essentially from our, you can say struggle days when we used to struggle to switch from engineering to finance, that has been the time that we know each other. So about his background, so he is again, SP Jain computer science grad. Initially, he was working with Deloitte. Then he moved to real-time trading systems called RTS, a German tech company, which was working into the high-frequency trading domain and which eventually got acquired by Bloomberg.

So both of us while I was largely on the buy side, working at a European fund and managing the assets and building the systems and building the algorithms, he was on the other side where he was actually working and interfacing the large institutional clients like the Goldmans and Credit Suisse of the world and actually selling them the financial systems and the solutions. We both have been living for the last 10, 12 years inside the ecosystem of how these large financial institutions work. What we have seen from the inside, from the outside, obviously people have a certain perception about how a large financial institution would work. That’s where we saw the apportioned piece, the gaps, and we saw that this is massive. That’s from where the idea came that why don’t we join hands and basically start something which basically solves for their hard problems.

Sanjay Swamy

Tell us a little bit about… It’s a great background. I would love to hear the anecdote perhaps about how you and Parthesh know each other, but yeah, I do recall in the early days of just this whole, even for us as investors, though we work in the space, the transition of we understand technology and some of the use cases and the applications you shared with us were still quite Greek and Latin, I would say, and still probably is a little bit of that. But tell us a little bit about the company, perhaps what’s the area that you’re focusing in and the problems you’re trying to solve and who your customers are.

Kushal Rastogi

Sure, thanks, Sanjay. At Knight FinTech, we are aiming to transform banking infrastructure. We are building specialized bank infrastructure layers on top of their legacy systems or the core systems. Trying to convert these legacy systems to modern and agile systems. We all understand that majority of the systems are a bit archaic and replacing them is something which is a very difficult decision for anybody while everybody faces certain challenges into their day to day operations, so that’s related to operations customers or the regulatory. That’s where we kind of sit on top of it. These layers are dedicated towards these specialized use cases. The first and the primary use cases we built for was firstly where obviously we both had significant operating experience of ourselves. In the initial avatar of the business, we were actually working with the mid-size portfolio managers who used to manage $50,000 million in assets.

We used to help them in terms of from an infrastructure side of it, that how do they manage the assets, manage market risk, customer servicing, et cetera. But later on, we evolved that into the large banks, midsize banks and the corporates, they also have huge amount of treasury, and there was lot of gaps. We were surprised to see lacs of crores of treasury amount was being managed into Excel sheets. We felt that there is a large opportunity. And I think anybody from MDs to head of risk are interested in basically having a better transparency, better audit trails of what is happening actually, which is a very sizable part of the balance sheet, which is close to one third.

So that the initial use case which came very natural to us was treasury, and then as we were deeper into the treasury, there was a natural progression from treasury to the other opportunities, which was the lending-related infrastructure. But from the day one, we have been focused onto the banking infrastructure and we are trying to solve the problems, which are something that we can solve for which our customers want us to provide solution for and where we have some sort of a winning edge. That’s what we are taking from.

Sanjay Swamy

Wonderful. So for me to just paraphrase it, basically, you’re saying all of the banks have got certain circa of technology stacks for solving their problems and you feel there’s a big opportunity to revamp and upgrade these systems. And the first place you attacked was treasury because of your background and treasury in the smaller banks was largely run on spreadsheet technology. So that’s the first one where you felt there was a use case, but you very quickly started to get a lot more exciting traction in recent quarters, especially as in last year or so in the lending space. Right? So tell us what’s going on because you also have some fairly large banks now with clients in the lending space, what are some of the exciting developments that are happening and what is driving that?

Kushal Rastogi

Thanks Sanjay. If we basically look at, there are multiple things which are happening into the lending space, particularly so, as we said, we first talk about the bank infra. The infrastructure is internal to the systems also and to the outside parties also. For example, when a bank wants to do business with a FinTech or the banks want to do business within NBFC. What we realize that there is a lot of investment, a lot of innovation has happened into the consumer facing layer where people have worked upon how they efficiently acquire the customers, how they minimize the CAC and the better customer experience. So the user experience has sold for, but at the second point, basically for product is the banking infrastructure, which are the legacy systems, which we felt was severely underinvested and the innovation was the need of the hour.

So we started building that infrastructure, even the extended infrastructure that builds the pipes between these N number of FinTechs and NBFCs and the banks. When we started to do that, we saw that magic started to happen. The acceptance was very fast, the momentum was very fast and there are again, deeper reasons we can get into that, that why it is driving. So whether it’s the regulator themselves, whether it’s the finance ministry or the bank stock management, there is a clear push towards the co-lending. And we started to become the kind of market leader into the co-lending infrastructure provider. Probably we are the only one into the industry today who has the full stack co-lending stack from an infrastructure perspective.

Sanjay Swamy

Got it. I think you’re making a very subtle point here, which is that banks are now starting to definitely realize that partnering with others, whether it is an NBFC or a FinTech is the wave of the future, and they have to coexist with them, which is actually exciting for FinTechs, but as investors in several other FinTechs also, one of the things we’ve always found is the business teams are happy to partner with the startups, but then the ability to onboard the startup and actually go live is often a huge, huge barrier. Even some of the more advanced NBFCs, very few of them have the state of the art, new age APIs and stuff like that.

I’m guessing, and feel free to correct or elaborate, from what you’re saying, your solution goes in there and enables the banks to be much more nimble and much more ready to onboard new FinTechs, onboard new NBFCs and work with them. Maybe you can in dive a little bit more because many of our audience are actually FinTechs who might be the beneficiaries of your platform as well. So maybe with a few anecdotal examples of some of the things that they have to do, which are challenging in today’s environment and how with your infrastructure in place, they’ve become a lot more doable.

Kushal Rastogi

Sure. As you mentioned, so primarily we are positioned as the infrastructure player and we are building the use cases on top of the infrastructure. The core infrastructure is where we have something called as the universal core banking adaptor, which we have built, which sits on top of the core banking solutions of the banks. We are already deeply integrated with Pinnacle. We are already live with couple of banks.

All three put together, we practically cover nearly all of the large banks where we are out of box compatible. Now this starts to bring in a very interesting synergies between the FinTechs, NBFCs and the banks who both want to work together. We can from a business side, I think everybody agree, and we can again speak at length that why there is a business case that they want to do business together, but in talking primarily from a product and infrastructure perspective, and what are the key challenge that they were facing.

They have two options. Either they do a point to point or a one to one direct integration, which is by definition inefficient. There is a lot of resources to be put in. The GTM becomes six, nine months, sometimes even 12 months for a FinTech to do a direct integration with the bank. It’s again inefficient, takes more time, more resources, more cost. At the same time for a FinTech, if they’re doing integrations with one bank, it is not reusable. If they have to do that integration with other bank, they have to do the exercise again. These integrations could be agnostic to use cases. The use case could be lending, co-lending. The use case could be for a new bank where they are sourcing for CASA, FD or a use case could be for even credit cards.

For different use cases, at the end of the day, they have to interface with the core banking systems of the bank. From a bank’s perspective, banks are not willing. From a security perspective also that they will not be able to open their core banking systems to the whole world. I think all of us understand these systems are held into a very secure way. They’re sitting inside the safe zone where there is no access to internet or even the bank users can’t access it. A lot of security layers are to be built in. Then there is a VFPT, and all those kinds of vetting, security checks have to happen before bank has some system to communicate to them. These are the natural friction points into the overall system. How we are positioning ourselves is building that infrastructure layer, building that infrastructure fabric, which is on one hand connecting and having a deep integration with those banks, and in the other hand, doing those integrations with the NBFCs and FinTechs.

So without actually replacing a core infrastructure, the thick systems inside the bank, we are building those thin layers on top of the existing infrastructure, which suddenly and magically becomes compatible to do business with all the FinTechs and NBFCs, which is much more secure, much more efficient, can be reused hundreds of times. Bank has an incentive as they get integrated. They can do business with hundreds of NBFCs or the FinTechs, and they have the incentive that if they get integrated with us, they can actually do business with some of the biggest lenders.

As a matter of fact, if we speak today in terms of the ecosystem enabler, the kind of large banks, both public and private sector, even if I exclude the certain pipeline that we have, the signed contracts, the signed banks and the signed NBFCs they together control approximately 32 lakh crores in assets, which is more than a quarter of the overall banking. So we are able to create that network and we are able to build that network off the FinTechs and NBFC where there is a lot of value which can be unleashed over a period of time.

Sanjay Swamy

That’s quite fascinating. One of the analogies I was thinking could be sort of almost like a payment gateway, where if you see the banks did have the abilities to process the payments, but it was always very inconvenient for merchants to actually integrate with the banks and the bank payment gateway itself out of the box probably was fairly rudimentary. It was literally a thin layer over the payments switch and companies in the early days and then later on Razorpay and others in that category, and of course, Razorpay is now a dominant player here have built a layer with a very developer-friendly interface. The business relationship still has to happen between the business and the banks, or maybe in some cases, the payment gateway providers are also aggregating that part of the business negotiations. But fundamentally at a technology level, they’ve built this layer that makes it easy for technology-based companies in this case that with the customers to interface with the banks.

I think what you’re saying here is for the banks, it’s actually both an opportunity, but a headache to have to deal with so many partners. And from the partner’s perspective, also it’s a headache to do custom integration with each of the banks and you are building that middleware there. Tell us to the extent you can share, what are some of the things that are now possible and from a regulatory perspective. I mean, if you think about it from a large bank’s perspective and several customer, several listeners in our audience are entrepreneurs who are trying to build perhaps analogous products and services and sell them to banks.

You have managed to overall for a very young company, convince a lot of these large banks that they should be opening up connectivity to the core banking system and allowing you to build the sort of API layer. Now it’s a pretty big decision for a bank to have to make. Right? What does it take to get into the level of trust and confidence for a large enterprise to say, “Oh, I should be working with a young company like this?” What are some of the challenges? How do you go about addressing them and how has it worked out for the company?

Kushal Rastogi

Yeah. Thanks Sanjay. I think it’s a great question. And if I try to combine it, so I think a lot of things have to basically fall in place to things start to work. So yes, as you rightly mentioned, in terms of building the credibility and trust with all these large financial institutions, they look a lot. So in terms of the credibility and what we have done. I think over the last two years, what we have built or empowering over 35 small banks and managing the infrastructure, at least for the one third of the balance sheet or so, I think that also gives them a certain comfort that we understand banking. We understand regulations and we understand the security and the compliance and we are dead serious about it. That is one part of it.

Sanjay Swamy

That’s actually rewind the clock a couple of years, because even what you have done with the small banks to build your sort of… I mean, what you’re saying is that they earn some credibility by working first with the small banks before we could break into the big banks, but let’s start there. How does one even earn the credibility for the small banks? Because they’re just small in relative terms, but otherwise, regulating compliance requirement wise, et cetera, their banks. So do share, especially since it was during the pandemic and you couldn’t even meet them face to face half the time. So do tell us about some of those stories.

Kushal Rastogi

Yeah. I think those were quite interesting days because we were working into a segment which was not that much tech savvy and where we used to do a lot of things in terms of actually telling them people how to use Zoom. Probably we made a lot of people, probably Zoom should be giving us some sort of referral, a lot of new customers and lot of people used stuff we used to do.

Sanjay Swamy

That was the business model then. We get a referral from Zoom. Now, maybe we can start just describe perhaps the type of customer, the cooperative banks that you had started working with. And then yes, some of these experiences I thought were fascinating that you were telling me off time.

Kushal Rastogi

Right. So especially if you look at the small banks and banking in general is a very much relationship driven, right? People like to, and especially when you’re talking about the decision makers that they want you to be sit in front of them and probably, you get to the three, four, five meetings, and then something happens. So obviously, you have to, and that’s a kind of mindset. Especially when we used to work with these smaller banks, which are a typical balance sheet from anywhere from fifty hundred million dollars to maybe going up to the billion dollars necessary. Now we’re talking about the banks, which are much larger in terms of a balance sheet, maybe up to 10 lakh crores in balance sheet. So we kind of graduated to a certain extent to work from the small community banks or corporate banks going up to the private sector and some of the biggest public sector banks also.

That is all the journey has been over the last two and a half years. But even for when we were starting for the first time building those kind of meetings, things started to happen. I think the strategy was good in terms of how we were able to get somebody who is a common trust. So they trust somebody and that person trust us because either they are the experienced bankers or they are the retired RBI or things like that. We were really involved into the ecosystem and where they didn’t see us as aliens that we have come, but somebody has come from Mumbai with sorts and all and we started selling something and which will probably disappear after selling of the systems. I think that human relationship and trust was built. And for that, they gave us the opportunity. We had the people from their community.

So people who can speak their language, who stay there. Even from a COVID, we got those tailwinds. We actually end up having a distributed office. For the scale we had we were actually running effectively seven, eight offices in terms of where we had the sales people. And they were able to build those relationships. From there, you start to get the early traction, and then there was a very strong word of mouth. I think, especially in an enterprise building their trust and when the customer says to their other peers, that these guys are good and they have actually done something meaningful where they have got benefited, then that momentum has started to build in.

Even from the push, we saw the transition happening towards the pull. We started doing this lot of podcast and these kind of activities and people really actually started following that, okay, who are these people, where they are sitting and they used to follow us through the WhatsApp and everything. The people actually came inbound that from where these people are and what they’re educating, and people got a lot of benefit and it was more of a service that they’re able to get benefited, where we had no commercial interest where people saved actually crores and crores of rupees because of that.

Sanjay Swamy

Actually, that I recall was a really interesting moment as well. I remember talking about the idea on a Tuesday with you. And then by that Friday, you had started with a draft content and then from the following week, I recall that next Monday, you launched the service. We were looking at even before we could even find a proper name for it, it was up and running and it has continued nonstop since then. Right? Tell us about that. Because I think that for our listeners would be very cool because you very subtly started a marketing program, which involved giving, as you said in the crores and crores of rupees of value to some of your customers without even, or some of your listeners without them ever becoming customers. Tell us a little bit about that and how that paid off over time.

Kushal Rastogi

Right. I think it paid off in terms of building the brand. I think while we might have 50 or hundred customers, but we know that okay, 500 people are following us almost daily, these are the 500 banks and their top management, their MDs, their head of treasuries, people who are responsible to move 500 crores basically in a month’s time. Sometimes their daily trading volume is over a hundred crores. These are the kind of people who are following and they’ve seen for every single week. People come and people try to understand what we should be doing. I think what happened that the brand got built, people started to trust the brand, they recognize the brand. If we walk into any bank, we were not required to give an introduction, especially Parthesh. Everybody knew him and his works. We started building even further to build our network content where we started building into the regional languages also because people appreciated it.

So we went one step ahead also to build that connect, to build that trust and to establish ourselves as a subject matter expert that naturally started to see that if these guys are for free are able to give us this much of a value and benefit. Then if we actually go with a scientific way and help in terms of what is the regulatory pressure. So how they can cut down the regulatory risk because RB is behind with most of the banks, small or big doesn’t matter. The RBs is very smart in the way they operate. So the first they will do the subtle where they’ll put some remarks basically during the audits. Then the next time they’ll start putting the penalties. The third time they will start putting some restrictions into certain activities. So as RBI was also tightening the grip, and at the same time, we were able to establish ourselves into the certain territory. That helped a lot in terms of building that momentum and having a clear leadership position where the people were not comparing us with anybody else.

We were not just a software vendor because they were seeing us much more than that. They look up to us in terms of these are the subject matter experts. They understand what they’re talking about and they’re working in their own interest. The cost of the system was kind of peanuts as compared to what the value it was creating, whether it was generating more returns or it was whether reducing the risk. We have seen over the last two years, the rate cycles right from day one when you’re from basically from six point something going up to 8% and then going again. So when you see this kind of 150, 200 basis point movement into the interest rate market, and then now your average duration is over five or seven years, then you see their actual portfolio is moving more than five to 10%. So for a hundred crore portfolio, it’s 10 crore.

That is the kind of risk they’re always getting. Some of them are running actually tens and thousands of crores of treasury. So there is a large amount of risk, which they’re carrying, which surprisingly many of them don’t even understand.

Sanjay Swamy

Got it. No, there’s some of the powerful insights there in terms of how do you establish trust. At the end of the day, you still have to walk the talk so you can do all the marketing you want, but the product has to deliver. That just takes time in some of these businesses.

So let’s fast forward now to today, coming back to the whole co-lending space where you’re seeing a lot of momentum with the larger banks. What is co-lending at a high level? We talked a little about partnering NBFCs and FinTechs but co-lending itself. Why is it so nuanced and why are existing banks have been having loan management systems and platforms and AI-based systems for underwriting list and things like that for the past several years, why has co-lending become such a difficult problem to solve? Why does it need new infrastructure to address the challenges?

Kushal Rastogi

I think let’s maybe go step by step that what the co-lending is, why there’s a lot of momentum from across the board, there’s a regulatory government, top management, or everybody but the entire business is trying to chase co-lending. And then what are the specific challenges into co-lending and how tech can solve for it?

So if you speak very simply in simple terms of co-lending, you can have a narrow definition and a broader definition. In the narrowest definition co-lending, we are talking about where the two lenders are joining hands and lending together. One is the NBFC and other is a bank. They would have a pre-agreed lending framework. So they agree to basically source and lend into a pre-agreed risk framework. The risk policy is agreed upon, works slightly differently than into a DSA model where DSA is sourcing into certain fashion and the bank where the rejection rates could be significantly higher. Now co-lending, since the risk policy is agreed, they are sourcing within that policy.

Sanjay Swamy

Let’s take an example, perhaps of an NBFC that is selling me a two-wheeler loan or a car loan, for example. What you’re saying it is actually, if it’s a car loan for say 10 lakh rupees, perhaps three lakh rupees is coming from the NBFC and seven lakh rupees is coming from a partner bank or something like that. What would’ve happened is even prior to starting to look for me as a client, they would’ve agreed that the certain cibil score has got to be this, income level has got to be this, et cetera, five, six different criteria. And so even for the NBFC to partake in that 30% of the loan, they know that the client has met all the bank’s criteria also, and all the common shared criteria. That’s when the high likelihood that the bank will also approve.

Kushal Rastogi

Absolutely. Typically, we have seen the see-through rate where DSA source is hundred, probably 20 gets through, 80 gets rejected. In a co-lending model because it’s the pre-agreed risk framework, so out of hundred, probably 99 will go through. That’s the kind of a difference. These are a very interesting market dynamics if you actually try to understand. So if you look at basically the recent past, so there were different models that used to exist. We had the FLDC kind of models. We had the business correspondent models on one side of the spectrum, and then we had the other spectrums in terms of the pool buyout. So where the banks used to buy out PSLs, the banks have their targets to build their PSL. So they have the PSL norms also to complete. So typically if they’re not comfortable in building the PSL, or if they do not have the certain expertise, naturally, they used to buy the PSL also.

They used to buy the SSLs. So on one time they were the asset purchases where the pool asset buyout securitization create enhancement, where you create an SPV where you do a credit rating enhancement. So all of those kind of models were existing. On the other hand, we have this hundred-zero kind a model of the DSAs, FLDG and DC, and then you have a origination core sourcing model. So in extended definition, all of this falls into a single ambit and we are able to attack this entire ambit of things. While on one side, the FLDG is becoming difficult and difficult as we all understand the new regulatory tightening happening on that side. On the other side, even from the traditional pool buyout or the securitization, the RBI came up with the new norms where the individual account level information has to be maintained in the co-lending system.

That started. So the line started to blur where in a classic co-lending, where you are doing everything at the account level, at the borrower level vis-a-vis now even into the traditional pool buyout, also you have to do the same thing and while in the FLDG, you cannot do that. The other interesting thing from the co-lending perspective, you would see from a leverage perspective. So NBFCs they have a lot to gain because obviously they’re able to build. Even from the overall ecosystem perspective, I would say, I think that is a fundamental corner that why there is a lot of momentum. And across the value chain, whether it’s an NBFC or a bank, or the customer, all three parties win. From an NBFC perspective, if there is a mid-size NBFC having maybe 500 crores of assets goes to have to a bank from a borrowing perspective to basically raise the money.

So the bank is going to look at their credit rating. They’re going to look at the vintage. They’re going to look at the rating and all of that. So most of the NBFCs will not make the cut. Even if they make the cut, the bank probably will not take more than 50 crores of exposure because they’re taking a direct exposure to an NBFC. Now they might lend at, let’s say 12%, 13%, whatever is the number. And then in NBFC, they do not even have a direct control to what risk NBFC is taking. So the NBFC might be building a book on 25% risk or 30% risk also on the same thing. At the end, the bank has an indirect risk, but at the same time, the return is limited to the same percent.

So essentially the counterpart risk has been transferred from the NBFC balance sheet to the same borrower because now the same NBFC can source N number of applications, and can build a large book as long as it is meeting the pre-qualified criteria. Theoretically, the same relationship can actually build a 2,500 per book wherein the NBFC has 500, bank has 2,000, collective 2,500 per balance sheet. So 50 could become 2,500. That is the kind of impact this relationship could do. That is one of the reason why the regulators and the government see as the biggest tool in terms of solving credit gap problem, because there are a large number of FinTechs and NBFCs who are good in sourcing who have a very good distribution, who have very good collection, who have very good underwriting, but they do not have the capital. To raise the capital, they need to raise more capital because for NBFC to lend, they have to first raise, then they can lend it.

There is an equity, and all of those things come into play. On the banks side, banks are sitting on collectively over 135 lakh crores in assets. Almost one third, close to one third of that goes to the treasury markets. They are already sitting on at least 10 to 15, lakh crores of dry powder. Now there has to be a framework which enables the two parties to do things together. So a regulatory framework, which is now already there, and then there are hundreds of technical and operational challenges. That is what we are solving for. So if we build those roads and pipes and we make this process frictionless, there’s a lot of volume which can throw to these pipes, and the commercialization is certain basis points. You gave the example of the for example, payment, right?

It is somewhat analogous to that, but the same time, it’s slightly different to that because we are not just where we are kind of enabling, moving from point A to point B, but actually it’s a full service stack. So if a loan is sourced into the middleware, let’s say a housing loan, if it is a tenure of 15 years, during the 15 years, everything that happens into that loan, whether it’s interest rate reset, part prepayment, foreclosure, everything which is happening onto that is going to be managed by this middleware.

Sanjay Swamy

If a payment processing is more referred transaction or at a snapshot, here, it is really a life cycle and it’s the entirety of that is being managed on your platform here, because the relationship with the customer is not at a point in time, it’s over a period of time.

Kushal Rastogi

Absolutely. Because the NBFC systems are, as you mentioned, that most of the NBFCs and banks, they have their own system, banks have their own Pinnacle, TCS, Oracle, et cetera. NBFCs would have their own systems but these systems don’t talk to each other and they can’t talk to each other because they have their own security policies and everything, and they cannot directly communicate to each other. That is where the middleware comes into play, where it gets deeply integrated on one side with bank, another side with the NBFCs. And then basically it starts that it enables the two parties who have all the willingness to do where they have the regulatory push also, as well as where they have the bank’s management also. It’s very profitable business because when they get into a co-lending for NBFC, the cost of borrowing goes down effectively by at least 200, 300 business points.

Sanjay Swamy

And for banks, the cost of sourcing goes down.

Kushal Rastogi

Correct. For bank, the cost of sourcing goes down. They’re able to expand the revenue also, because now they’re operating into a certain territory that probably they didn’t do before. They might be doing it nine to 12% of the loans. Now they’re doing probably 14, 15% loans. So they’re also having the increased ROI. They’re able to expand the business into certain territories, which where the NBFCs are, they’re more expert while the banks might not be. For example, we built healthcare financing as a new vertical, only we built it for a bank in the NBFCs.

So certain categories where they are not as specialized while the NBFCs are specialized. They’re able to build new capabilities. They’re able to open new markets. They’re able to lend at the higher rates. So bank has the direct revenue incentives. The NBFCs have the incentive because ROI almost doubles. The 15, 16% ROI becomes 30% ROI. The customer also gets benefited because certain benefits because of the lower cost gets passed onto the customer. So he also saves 50 or 100 business points. Then the entire ecosystem becomes more competitive. If let’s say 10 NBFCs start to do a co-lending, then there’s a network effect. Other NBFCs have to do that to either get the benefits or at the least become as competitive as their competition. So then the whole ecosystem starts to drive together.

Sanjay Swamy

Yeah. No. So from a customer perspective as a borrower, right? I don’t see that there are… Well, I know that there are two parties that are coming together to give me this loan and will I have to sign contracts with each of them, will I have to pay one third of this loan at entity X and two thirds to entity Y. How will all that not make life of the customer more complex whether it’s the consumer or an SME?

Kushal Rastogi

Whether it’s a retail or is a business, so for them, their life doesn’t change because their primary point of contact is the NBFC and FinTech. So for them, those are their counterparts for the entire servicing and collection. Everything is happening at the back end, and that’s been time of the different things that the regulatory relaxations, which have gone. They don’t need to get into a tri-party agreement. That’s where NBFC will be doing the demand collection for both the sites. That’s where again, the middleware comes into play because the middleware tells the NBFC that on behalf of the bank, what is the actual demand? Otherwise, NBFC will never know what is the demand in the bank.

Kushal Rastogi

So the middleware passes on, collects that demand, gives that information to the NBFC. NBFC combines it, does the presentation, does the collection. Again, the middleware knows what is the collection has happened. Then it’ll do the splitting of the amount that this much money has come from Mr. X and these are the two lenders at this pre agreed comes. Then again, doing the splitting of it. The entire gamut of accounting, collections, reconciliation, SOS, all of those things are managed by the middleware wherein this has actually three elements in one where it’s 80% is always reconciled with the bank, and 20% is always reconciled with the NBFCs.

Sanjay Swamy

So as a consumer, I’m not going to get an SMS reminder from the bank, from the NBFC saying, pay my, repay this, repay that, et cetera because then we want the things…

Kushal Rastogi

No. For a consumer experience, consumer experience remains same and rather better. And then there are different modes of the co-lending also. So we can probably can get deeper into that. But from a consumer, everything is being made so that at the end, the consumer gets benefit. They get basically the money cheaper and sooner so that their experience is better. That’s how the entire ecosystem will basically get benefited.

Sanjay Swamy

Got it.Let’s talk a little bit from a perspective of an entrepreneur. You said earlier, you started in treasury and then you expanded to lending and co-lending stack. It’s still a very young company, right? If you think about it, generally as investors, we look for laser focus in a company and solving on problem really, really well. Of course, you have the customers enterprise, great customers who are already using both products. First of all, you’ve got a lot of commonality and synergy in the product itself, and of course the customers are in the same customers. What are some of the benefits and challenges of building two products early in the life of the company?

Kushal Rastogi

Yeah, I think we also come across this question, but what we realized that we saw it, we saw for ourselves as a natural progression to what we were building. From day one, the idea was to build a bank infra and bank infra is not 10% of the assets or the 30% of the asset. And while we are talking about building the infrastructure layer on top of the core banking layer, so then all of those things matter. So from a strategy perspective, vision perspective, we are still the same. Yes, there would be the challenges. That’s why we did step by step. We didn’t try to do too many things at the same time. The treasury business is something which is not well established. We have able to partner with some of the biggest brands globally, so where we have partnered with them, where we are able to replace actually some of the multi-billion dollar companies in terms of their products.

So there is a solid traction which has been established. On the treasury side of it, it’s a stable business. The team is also very high quality, which we see that we have the confidence. They’re basically able to run the things in more or less autopilot mode. While obviously we have a larger focus into the co-lending, at least for the near term, because here, it’s more of a land grab strategy where we are trying to move very fast and cover the ground. In terms of how we evolved into a lending and co-lending space, it’s pretty much while in the treasury also, we were building those credit risk models. We were anyways helping the banks in terms of understanding the risk into what kind of corporate they’re getting into and those credit risk models in terms of where could be the potential default, where could be those kind of things we built for the treasury.

Moving forward, from a target segment perspective, we see that there is a lot and lot of synergies between the two products because assets and liabilities, no matter what, how we see, we can never keep them as two sides. That assets and liabilities are two different things. They are two sides of the same coin. So when we say that, okay, NBFC X is our customer that NBFC X is basically, they have the liability side, which is trying to raise money either from the banks directly on the balance sheet, or trying to raise money through the capital markets, through NCDs, commercial papers, et cetera, or they’re trying to raise money through co-lending. So first is the liability that comes into the balance sheet, where they have access to capital. And then the asset side get built when they distribute the capital. They are actually joined back to back. I think once we have this two-product strategy, it actually works beautifully.

Most of the times people ask ourselves only, right? Because they have a big problem into their treasury. On one hand, they have to manage the cash outflows on the liabilities, the other side, they have to manage the cash inflows on the assets. Again, all of those pieces come into play, whether you know how to manage the cash flows, et cetera. Probably the third reason to that, what I would want to add is in an enterprise space, typically when you have the same customer and no matter what, you still have the handful of logos, you’re probably working with 300, 500 large institutions in the country. If it is more of an SMB, kind of a SaaS play where you are more of maybe a Dropbox or Zoom, then you would be having one specific thing and you would be working across all the segments and you have a single product. But into an enterprise where your segment is known and defined that these are my 300, 500 customers, you would want to build a stack, which is complimentary to each other and where you have the one as an entry point.

And then you have a natural upselling opportunity because you would have the dedicated account managers. You have probably 50 account managers who can manage 300 accounts, and those are talking to them on a weekly basis. And they’re trying to understand, build that intelligence, that what is happening at the institution, what are the customer pain points and what is specific thing that we have, which we can upsell.

So we felt that we are not building as a two different verticals, two different sales team, two different segments, two different GPMs. It’s not like that, it’s actually one and the same. It’s just two sides of the same as like assets and liabilities are two sides of the same balance sheet. That’s how we see it.

Sanjay Swamy

Got it. Great. What plans next? Looks like you’re having some exciting momentum now. Do you think you’d be taking these products global? Is there a similar opportunity in other parts of the world?

Kushal Rastogi

Yeah, I think definitely there is a global opportunity and we are kind of globally incorporated. We are incorporated in Singapore. Having said that, the kind of momentum we have and the kind of massive opportunity that we are sitting in front of us, I think for the next 12 months, we are focused on the India opportunity. The India opportunity itself is very large. It’s a multi-billion dollar opportunity in India alone, and where we see with the kind of momentum and the kind of traction we have, we can get a sizable market share in this. I think once we are a bit of a scaled up, more of a matured company, I think probably another 12 months of time would be a good time when we start expansion globally. If we look at in a long term or mid to long term, when you look at three years, five years horizon, I think naturally we will expand globally because whether it’s a treasury business or it’s banking as a service or lending as a service is a global phenomenon.

Globally banks and FinTechs and neo banks are working together.I think everywhere the way we position ourselves is we are not competing with any of the new age FinTechs and neo banks. We are not sourcing ourselves. We are not lending ourselves. We are not raising capital and building the book. So there is no conflict of interest assets, so we can technically partner with the FinTechs and the banks and just become the ecosystem enabler. That is the position which we think can be done very much globally also, but for the next 12 months, I think the focus is clearly India and get a very, very meaningful share within Indian markets.

Sanjay Swamy

Wonderful. A lot of interesting anecdotes there, Kushal, and I think also building a company and establishing yourself and your presence in the B2B world right through the pandemic, I think it’s quite an exciting challenge in itself that perhaps created more opportunity than in hindsight, but I’m sure it must have been an intimidating thing as you had to change your approach. I always jokingly tell people it’s the company that takes… to reach its customer, has to take planes, planes, automobiles, and then walk the last hundred meters to get to the client because some of the clients were in very small towns and then perhaps even very, very rural parts of India.

Let’s close with perhaps a couple of quick anecdotes, things that surprised you either pleasantly or not so pleasantly. Would love to hear some thoughts and then we can wrap up for today.

Kushal Rastogi

Thanks Sanjay. So yeah, if we refresh our memory, so as you rightfully mentioned, so we used to travel to the interiors of the country and we were really surprised to see the amount of the assets were lying and the kind of in inefficiencies were there because when you’re looking at the metro, when you talk about some towns like Mumbai and Delhi, so obviously that’s the center of attraction for everybody, and everybody’s focused on those things. But still they have a lot of gaps, which we saw into the major capitals. Obviously, we kind of evolved into that, but even from the small towns, as you’ve mentioned, so there were the incidences where there is even in certain stations, even the train doesn’t reach. So you have to actually go and then take up those things, the local commute, and then eventually reaching to the person.

And then the person is probably available or says that, okay, because he has got something and then you have to wait for another 30 minutes or 60 minutes to get to the next appointment. All of those things keep happening and I think it was fun. And then it started to become more interesting from the COVID times when we have to actually educate them also, when some of the person actually goes and tells them that, okay, this is how you have to join Zoom, and this is how you can basically operate the things. I think we have seen a good amount of headwinds basically from the start, but I think the business and the team has shown a good amount of resilience and we have always come back stronger and I think we would continue to do the same thing.

Sanjay Swamy

Got it. I really appreciate your taking time out here on Ganesh Chaturthi to record this podcast with you and your family and your team. A very happy festival and a good year ahead and looking forward to continuing to work together. Thank you for being on the show.

Kushal Rastogi

Thank you, Sanjay, happy Ganesh Chaturthi to you and Prime family, as well as to all the listeners.

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