Why We Invested in FREED

Why We Invested in FREED

Why we invested in FREED?

Today, we are delighted to announce our fourth investment from Fund I in FREED. FREED sits at the intersection of managing the rise in credit lending, increasing defaults and social good. With robust industry fundamentals, the business is led by a team which has decades of experience in the US debt relief market and now looks to bring its best practices to India.    

Rising Bad Debt due to Proliferation of Unsecured Personal Loans

India has seen strong growth in unsecured personal loans over the last ten years. Retail credit has grown from ~19% of the overall credit market in FY15 to 32% of the market in FY24. This growth has primarily come from personal loans, which have grown at an 18% CAGR in that period.

Within personal loans, small ticket loans has been a fast-growing segment, with each borrower having multiple loans outstanding. More specifically, 40% of new loans given are to borrowers with 5+ loans. Further, ~25% of the new borrowers had at least one delinquency. This is 2x higher than 5 years ago.  

With growing risks in the system, we saw RBI increase risk weights for retail loan exposure to 125% from 100% except for housing, education, vehicle and gold loans. RBI also increased the risk weights for credit card receivables of banks/NBFCs by 25%. This step was preceded by a warning in October last year when RBI cautioned banks against unprecedented growth in unsecured retail loans and asked them to grow sensibly.  

Current Models of Bad Debt Collection are Broken

The current model of bad debt recovery is broken, with on-ground debt relief agents resorting to harassment of customers. RBI recently came up with a draft direction on the conduct of recovery agents, thus highlighting the various unfair on-ground practices which are prevalent. The draft said, "Regulated Entities and their Recovery Agents shall not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude upon the privacy of the debtors'/their guarantors' family members...,". These agents, typically local outfits, make threatening and anonymous calls, persistently call the borrower/guarantor, and make false and misleading representations. Generally, these agents are affiliated with banks, who outsource the recovery of bad loans to them.

These agents are also not ideal for the lenders as they charge high fees (~20-30% of the collected amount) and typically have low recoveries (in the range of 10-20%). Apart from this, there is no control/tracking of the activities of these agents, which results in a trust deficit.  

FREED brings a new solution to the market

FREED’s Debt Resolution Program helps financially distressed borrowers discharge their delinquent debt obligations honorably by taking charge of their personal finances. FREED is the second chance for borrowers who are unable to repay their loans due to extreme financial hardship. The reason for the financial hardship could range from a medical emergency in the family to a sudden loss of job or an unforeseen expense that throws them by the wayside.

FREED is a pull platform and borrowers seeking relief from their debt are drawn towards it. FREED’s onboarding platform determines the borrower’s eligibility by analysing their income and expenses and recommends a structured debt repayment plan to pay off their debts. The systematic plan allows borrowers to set aside a fixed amount each month in a trust/escrow account. Once the account balances build up, FREED negotiates with the lenders to bring a amicable resolution.

This results in a win-win for both the lender and the borrower. The borrower becomes debt-free and regains their financial freedom by repaying their debt at an amount acceptable to both them and the lender, while upskilling himself on financial discipline of saving every month. The lender on the other hand is able to make a recovery on a loan they would have otherwise written off. All this, while ensuring the dignity and trust of the customer remains intact.

While empathy remains at the core of FREED, it leverages technology to ease the user journey by recommending tailor-made/customised repayment plans on its digital platform. Further enhancing this experience, FREED keeps a close track of program milestones at various stages during the journey and gives automated psychological nudges and notifications. FREED is also in the process of automating negotiations with lenders in bulk, bringing operating leverage into its business.

FREED also offers a unique and industry-first debt consolidation program which allows borrowers to consolidate and refinance their multiple high-cost loans into one single loan with a lower interest and an extended tenure, giving them extra cash flow every month.

FREED has settled loans totalling INR 100+Cr across 5,000 customers on its platform. It has settled loans with over 140 lenders, showing its ability to work with lenders of all types. Currently, it has over 10,000 customers and INR 400+Cr in active AUM on its platform. And they are just getting started!

At Sorin, we are excited to back the FREED team in their journey to build a new category of financial products in India. The founder, Ritesh Srivastava, comes with 15+ years of experience working in the Debt Relief industry in the USA. Alok Sharma, co-founder and CTO, comes with 15+ years of experience in the tech domain.

For further details on FREED, visit https://FREED.care/

To speak with our Sorin team, contact aashna@sorininvestments.com and anshul@sorininvestments.com.