Surgical Strike on Surgery Finance

Revealing Insights & Ground Report of Customer Behavior and some shocking Demographic revelations in the country.

What's your prima-facie reaction when you first hear about Medical loans ? That..

• They would be mostly for Critical Illnesses - Heart transplant, Cancer treatments etc.
• If people are insured why would one need to take a medical loan in the first place?
• They would be for Accidental/Emergency surgeries for paying urgent Hospital fees.
• The loan would be an interim arrangement between the Hospital fees & Insurance claim.
• Loans would usually be taken by below poverty line patients or daily/rural wage earners.
• Loans will be for extremely High Interest Rates.
• General Assumption - India has a demographic dividend of a young & fast growing population. (This underlying assumption may seem unrelated, but is closely linked to the business model)

Lets surgically strike at all the above myths in the following article!!

It is no secret that Consumer loans are the fastest growing segment in the Alternative finance space & Fintech VCs have gone full-throttle to invest in these businesses regardless of their:

x Lack of uniqueness of business models

x Low Entry Barriers

x Poor Credit Underwriting practices

x Low standard of Technology stack

x Heavy dependence on Costly offline sourcing channels.

But within the Personal loan space under General Purposes category, the segment that is fast emerging from the shadows is Surgery/Medical Finance. Infact, by certain estimates, the segment occupies anywhere between 10-30% of loan books of most of the General Personal loan providers in India.

Now, let us start performing an exhaustive Surgery on the sector & our pre-conceived notions.

First of all, which factors are fueling the demand for these Medical Loans?

1.      Lack of Insurance coverage in the country:

You will be surprised to note that prior to the launch of Ayushman Bharat Scheme (ModiCare), over 80% of India’s population was NOT covered under any healthcare scheme. 

2.      Under-Insurance:

Infact, even the population, which is covered by the basic Health insurance policies have the below severe restrictions:

a) Insufficient amount coverage for In-patient treatments (IPD):

b) Almost complete lack of coverage for Out-patient (OPD) & Day care treatment:

The poor/low income segment (the target market of these lenders) generally prefer OPD treatment since it does not involve hospitalisation which leads to their loss of daily wages/salary from their jobs. Hence, OPD forms the major part of the expense, which most of the Insurers do not cover.

c) Lifestyle procedures like Cosmetic surgeries, Hair transplant, IVF, Dental are rarely covered in any standard insurance policies

3.      Lack of affordability of Treatments for the low income segment.

Although this is expected to change post the advanced implementation of the Ayushman Bharat Scheme.

What are the Customer sourcing channels for these Medical Loan NBFCs/Aggregator Tech Startups?

• The interesting thing to note that despite most of the Startups and players in this segment claiming to be Tech Startups, it will be dissappointing to the Tech investors to hear that there's NOTHING TECH about this sector. It is actually a very heavy Offline & Physical Point of Sale focused business model.
• The Online lead generation is abysmally negligible at the moment.
• The loans lead generation happens at the Clinics and Hospitals. The below deal discovery process will accurately enumerate the on-ground level sourcing channels.

Deal Discovery process:

The below Touch-Points are applicable for both at Large Govt./Pvt. Hospital as well as Single-Specialty Chains:

• Doctors
• Reception
• Finance Assistance desks
• Business/Payment desks

Physical touch-points extremely Critical:

• Higher the number of On-Ground Sales staff at Hospital/Clinic Counters/Desks/Kiosks or even being mobile at the Hospital area, the far higher chances of achieving a quantum jump in the Deal sourcing efforts.
• The cheapest source of physical presence for lenders with slim teams are having Marketing Standees present at hospitals/clinics which offers them a good visibility with Patients walk-in.

The illusion of ZERO INTEREST RATE LOANS: Lender's Brahmastra

Zero Interest Loans are the most potent weapon in a Lender's arsenal to acquire customers. And as can be observed from the graph, they form the most widely preferred mode of loans by the borrowers as well.

In a typical Zero Interest Loan, the Lenders/Aggregators earnings include the following:

• Subvention fee from Hospital of ~ 7-9% of the loan.
• Processing fees from the Patients of ~ 2-3% of the loan.
• Origination commissions earned by aggregator (if any from the actual Lender)
• 2 months advance EMI deposited by the Borrower reducing the base value to be calculated for IRR.

Hence, the Lender/Aggregator easily pockets ~10-12% IRR with all the fees put together on the so-called "Zero Interest Loans"

Common Sense OR a Lunatic Behavior by Customers?

• I would say that it is a very common Human behavior that if one can delay their payments into multiple installments without having to pay any extra interest on it, it’s an extremely attractive proposition for anyone.

Even patients who can afford large upfront down payments opt for Zero Interest Loans.

• However, there's no concept such as free meals in the world & unlike the e-Commerce industry, this industry follows the prudent Cost accountancy rule of passing on the costs to the consumers.
• Zero Interest Loan may sound to be a sensible choice for a layman, but the borrowers don’t realize the actual IRR calculations (as explained above) and how much they end up losing out.
• Apparently, the sub-Rs 40k income category customers (the largest target segment), don’t seem to go deep into the calculations for deriving the actual costs they have to end up bearing. The usual human behaviour of Zero Interest product is that even if it may cost 5-6% of extra cash, its still better than the prevailing personal loan market rate of 12-14% p.a.
• Further, Hospitals escalate the charges for medical treatment, to make up for the subvention fee.
• Even, discounts offered by hospitals to patients which they would have received if the patients would have paid out of pocket, do not get extended to them.

So, no prices for guessing that the BIGGEST LOSER in the whole scheme is the CUSTOMER!!



Is lending towards Critical/Emergency treatments negligible?

Surgerywise Loan Distribution Pattern (Sample Avg. Data)

The top 3 surgeries – IVF, Surrogacy & Hair Transplant cover almost 50% of the total treatments financed.

• Its interesting to note that the ‘Others/Undefined’ section form 48% of the lending.
• It is observed that patients tend to mask their treatments under these 'Others/Undefined' sections when asked about treatments like Surrogacy, IVF, Hair transplant.

Even if an estimated half of this hidden 48% category is assumed to be amongst the IVF, Surrogacy, Hair Transplant surgeries, the numbers are quite astonishing... Almost 74% of Medical Loans financed would be towards the Lifestyle & Aspirational surgery category.

• Ticket sizes of loan disbursals range from Rs 20k to Rs 1.5L.
• The key is to increase the per loan ticket size beyond Rs 1 Lakh in the loan book.

The Paradox of PRICE IN-ELASTICITY even in the Low-Income segment

Instead of approaching low end Clinics, the low income segment prefers to avail services from High-end Clinic brands since they don’t wish to take risk with quality of outcomes of these critical treatments like IVF, where they feel the end quality & safety of the new-born baby is of paramount importance.

• High-end clinics surprisingly offer majority of leads to Medical loan Cos, even from low-income segment as their Health-camps are setup at remote & not-so-posh areas.
• A lot of under-privileged segment leads get generated from these camps, which eventually gets converted for these lenders.
• Patients from Low-income segments can negotiate the prices down even at Premium Clinics since these Clinics are fairly flexible in their pricing.
• They also offer micro pricing packages on a variety of their treatments which help target the low income segment.

Are Single-specialty chains booming the Medical Loan market?

(Source: PRLog, Tracxn)

Primary source of the leads of these Medical Loans come from Single-specialty players & the Medical Loan sector is highly correlated with the Single-specialty industry.

• Within the Single-specialty chains, IVF chains have got the most of the attention from the investors
• Breath-taking expansion of these Single-Specialty chains backed by Private Equity Investments means the Borrower Leads flowing into the Surgery Finance firms are Not stopping anytime soon.

Is the 2nd most populous country also amongst the most Infertile?

• Shocking but True! Infertility levels in actively attempting reproduction couples is amongst the highest in India, as per a recent EY Report.
• Hence, about $200m has already been pumped into the IVF Chains by PEs & another $200m of war chest is planned by Foreign & Domestic players to future expansion to cater to this huge IVF demand.
• Also, in lower mid class families (target segment), avoiding parental/relative/social pressures & stigma of infertility is one of the reasons to spend on IVF treatments.
• Since, a major segment in the country cannot afford this treatment, IVF Finance is perfectly suited for the these customers.

Does the Lower-Middle Class India really spend so much on Lifestyle treatments like Hair Transplants, Cosmetics?

 Unbelievably Yes!! India is the 3rd largest consumer of Non-Surgical & 5th largest consumer for Surgical procedures for Aspirational treatments like Hair Transplant, Liposuction etc. (Source: Isaps report)

Not just this, the Lower Middle Class (Rs 20k - Rs 60k salary p.m. in metros. Defined in the Customer demographics graph below) spend heavily on them.

The reasons for today’s young with below Rs 40k income population spending on these Cosmetic, Hair transplant treatments are:

• Looking good culture taking over not just youth but mid-life adults
• Professional requirements to look presentable especially at front end roles like Receptionists, Sales etc.
• Marriage aspirants
• Teenagers who form a big chunk of these treatments, take finance since they have not started earning yet.

What’s the Customer Segment we are talking about?

 a) Income Segment Analysis:

Salary-wise Loan Distribution Pattern (Avg. Sample Data):

• Majority of the no. of Loans has been disbursed to borrowers in the monthly income range of Rs 20k-40k.
• This sample mix of data is from High Cost of Living Tier1 cities like Delhi, Mumbai.
• This reflects the major consumer segment being the lower income class, which either do not have insurance, or are inadequately covered by insurance and also cannot afford one-time expensive treatments.

b)     Credit Score-wise Analysis

CIBIL Score-wise Disbursement Pattern

(Sample Avg. Data)

• Majority of the loan disbursement has happened to borrowers with CIBIL score of 700+.
• First time borrowers form the 2nd largest pool of borrowers, which indicates that these surgeries are being taken by the youth, who have just started or about to start their first jobs & still have not achieved the affordability of these expensive treatments.
• This also re-instates our point that the young India is the biggest consumer segment of these aspirational surgeries like Hair Transplant, Cosmetics, etc. But at the same time, it also means that a big part of our youth is facing health concerns, which is reflecting in their body appearances.
• Although it is prudent to lend above the CIBIL Credit score of 650+, multiple players are deviating from their own Credit Policies to lend borrowers with even low Credit Scores.

c)     Age-wise Analysis:

The target segment for these treatments is youth between the age of 20 -49 yrs of age. While, the insurance coverage in this group is extremely low, making them the perfect target for the Surgery Finance product:

Health Insurance Coverage Distribution:

• 20% of Women (15-49 yrs)
• 23% of Men (15-49 yrs)

(Source: ETNow)

What’s the Competition matrix like?

Bajaj Finserv - The Incredible Hulk of the segment:

• Without a doubt, Bajaj is the big bull in the market with a market share of around 70-80% as per some experts at the ground level.
• It is a strong brand which is immediately recognizable by the borrowers at the ground level. Most often Bajaj is the Borrower’s first choice of financing. The lender although until a few months was lending medical loans from its generalized personal loans product, it very likely it would have recognized the need for the medical loans to be carved into a separate retail category.
• The lender attracts the best of sourcing of borrowers with Credit worthiness on a higher side.

The Emerging Startups like Arogya Finance, LetsMD, Healthfin are fast growing in this category expanding from one metro to other. Most of these Startups have successfully raised their Series A & are backed by marquee Consumer focused Investors.

Is it really a David (Startups) V/s Goliath (Bajaj Finserv) contest?

The Startups face the below challenges from our 800 pound Gorilla - Bajaj:

• They are outnumbered by Bajaj with Feet-on-street ratio by atleast 10:1
• Bajaj’s technology stack with far superior.
• Each of the Bajaj’s Sales representative carries a Digital Tab, which immediately enables them to answer the patient whether their loan will be sanctioned or not, in a matter of minutes.
• The other startups are yet to catchup on the expensive hardware & an upgraded software needed for immediate Credit decision of Yes/No.
• This is also due to the reason that most of these startups are still aggregators & not an NBFC yet, without the absolute decision making power in a matter of minutes.

Lastly, every Indian recognizes the famous Humaara Bajaj brand. And at retail level customers will most often go with a known & trusted brand, especially when its about their finances.

What’s the mechanism of Lending by these Startups?

•  Most of the Companies in the segment offer loans through the FLDG Model (First Loan Default Guarantee) since most of them are aggregators and Not NBFCs, with the exception of Bajaj Finserv.
• Most of these Aggregators are backed by large NBFC Partner Credit Lines at their back-end and most are flush with Cash disbursals. Hence, their primary objective at the moment is to disburse loans at full-scale.
• All the aggregators aim to convert themselves into an NBFC sooner than later.

Credit Risk Quality focus usually gets a 2nd priority.

Why wouldn’t the World’s largest Free Insurance Scheme – ModiCare NOT be a threat to this model?

ModiCare V/s Medical Finance Customer Target Segment

• Fundamentally, the Surgery Finance product is an antithesis to a Health Insurance product
• But what would happen when the world’s largest free Insurance scheme – Modicare get implemented in its full-scale.
• The Modicare scheme whose target base is the Below poverty line population uses deprivation conditions in SECC (Socio Economic & Caste Census) as eligibility criteria.
• The medical lenders target segment is perfectly placed above the income levels of Modicare beneficiaries & below the Mid-middle class.

Treatments like IVF, Dental & Cosmetic are almost never likely to be covered in a standard Health insurance or any Govt. Insurance policies.

What do the Macro-economic indicators say?

• In BRICS, India has the lowest Healthcare spend but is fast likely to reach the levels of other developing countries in the segment soon.
• It presents a huge opportunity for Medical Loan providers to tap this market.

Trust this dispels all your previous understanding of the retail Medical loan industry!

(Views expressed are Personal & do not represent official policy or views of any Organization)

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