Direct vs Intermediated Distribution: Who Does the Finding

Under one route a lender finds the borrower itself. Under the other, another party finds the borrower and passes them to a lender that decides, holds the loan and funds it. The routes differ in who does the finding, who has it afterwards, what the finding costs and what shape that cost takes. The routes do not differ in who decides.

Five figures that a comparison of these two routes would obviously want are missing from the reading below: no split of any lender's costs between the two routes, no cost of finding a single borrower, no commission or sourcing payment of any kind, no volume of lending by route, and no second year to hold the first one against. Not one of the five turns up later. One sensitivity does exist and is worked in full, and each of the five absences is named where a reader would otherwise expect a table.

What exactly is being compared here?

Every loan in the world begins with somebody finding somebody. Before any assessment, any pricing, any paperwork and any money, one party has to arrive in front of another. Arriving in front of somebody is work in its own right, it costs something, and it can be done in two structurally different ways. The two ways are taken apart below and put to the same six tests.

Take the everyday version first. The finance version is the same shape with more zeroes on it. A tailor who wants customers can put up a board outside the shop, learn the names of everyone on the street and build a reputation over fifteen years. Or the tailor can take work sent across by a nearby cloth merchant who meets those same people first. Both fill the shop. One of them leaves the tailor with a street full of people who know the name, and the other leaves the tailor exactly where the merchant found them, needing the merchant again next week.

The direct route, defined in full

Under the direct route the lender finds the borrower through means it built and holds itself. Branches, a website, an application, an outbound calling operation, a referral scheme it runs, a brand people already recognise: whatever the means, the lender paid to construct it and the lender still has it after any particular loan is made. The borrower deals with the lender from the first contact through to the last repayment, and there is one party in the arrangement doing the finding, the deciding, the funding and the holding.

The intermediated route, defined in full

Under the intermediated route a lending service providerAn outside business that brings in, administers or chases up lending for somebody else, while the loan itself never lands on its own books. Its work is set out separately. finds the borrower and passes them to a lender. The lender then decides whether to lend, holds the resulting loan on its own balance sheet and funds it from its own funding side. The party that did the finding may have met the borrower in some entirely different context, selling something else or running some other service, and the lending is reached through that existing contact rather than through anything the lender built.

The two routes differ in who finds the borrower. Both end in exactly the same place: a lender deciding whether to lend its own money. The second half of that statement is the part readers drop, and dropping it is what produces most of the confusion about this subject. The arrangement itself, and who is party to what inside it, is covered separately.

Which six tests must a comparison put to both routes?

A comparison is only useful if the same questions are asked of both sides in the same order. Otherwise it becomes a list of assertions about one thing followed by a list of assertions about another, and a reader cannot line them up. So the six tests are named here, before either route is examined, and then applied in this order and no other.

The six tests are these: who finds the borrower and who has the finding afterwards; where the cost sits and what shape it takes; who the borrower thinks they are dealing with; who decides; what is known when the decision is made and whose it is; and who collects and whose conduct it is.

The order is deliberate rather than arbitrary: the first two are about the business, the middle two are about the borrower's position and the lender's responsibility, and the last two are about the lender's information and what happens after the money moves. Read in that order the six build on each other. Read in any other order they read as a checklist, and a checklist is a much weaker thing.

Who finds the borrower, and who has the finding afterwards?

Start with what is easiest to see and hardest to remember. Under the direct route, the means of finding somebody is an asset in the ordinary sense of the word. The lender built it, paid for it, and still has it the morning after the loan is disbursed. The next borrower can be reached through the same thing, at no further cost of building it, and so can the borrower after that.

Under the intermediated route the means of finding somebody belongs to the lending service provider. The lender reaches it one loan at a time. The reach is the other party's business rather than a thing being sold, so nothing about the arrangement transfers it. The lender buys passage through that reach, once, for this borrower.

The direct route leaves something behind and the intermediated route leaves the lender exactly where it was, and that single asymmetry is what every later test rests on. Saying so is not a criticism of either route. Building something takes years and money the business may not have. Reaching people through somebody who already knows them takes neither. Both are ordinary commercial choices, and neither is ranked ahead of the other.

Notice the claim the drawing does not make. Neither block carries a value anywhere, so the drawing does not say that the filled one is worth more than the empty one. The drawing says only that the two positions are different, and that the difference shows up on the second loan rather than the first.

Where does the cost sit, and what shape does it have?

Here is where a comparison usually goes wrong, so the absence gets stated before the first number rather than after it. No split of any lender's costs by route, by activity or by product exists, so what follows works the sensitivity rather than an allocation. An invented cost per borrower found would be a figure nobody produced, and that kind of figure travels: it gets copied into a note, the caution gets left behind in the copying, and a year later somebody is quoting it as a fact about an industry.

Now the arithmetic that does exist. Rukmini Finance Limited, an invented lender, takes no deposits and lends from money it borrows. Its book comes to Rs 18,000 crore of assets under managementHow many rupees of loans a lender is carrying at one moment. Every percentage below is divided by it, so it turns up beside each of them.. Its operating expensesThe bill for keeping the business running. Salaries, premises, systems and collections sit here, and neither interest nor any charge for lending gone wrong does. for the year are Rs 540 crore, and set against that Rs 18,000 crore book they read 3.00 per cent.

Both routes land in that same Rs 540 crore operating line and nowhere else in the stack, and readers get that wrong more often than anything else in the comparison. Interest is what the lender pays on its borrowings, so the cost of finding a borrower is not interest. Nor is it the credit costAn amount booked against a period to cover lending that did not come back whole. The charge runs through the profit and loss account across twelve months and is not a balance parked anywhere.. The credit cost is a charge for loans that did not come back. Whether the lender ran an outbound calling operation or paid a partner for a passage through its reach, the rupees land in operating expenses.

Since the whole question is a question about one line, the handle available is a handle on that line. Each 0.10 per cent of assets under management moved on or off it is 0.10 per cent of Rs 18,000 crore, or Rs 18 crore for the year. Rs 18 crore stands against profit before taxWhatever survives a period once every cost has been subtracted and before tax takes its share. Reported here across the identical twelve months used everywhere else. of Rs 450 crore and it is 4.0 per cent of it. A tenth of a point on the operating line is a twenty-fifth of the profit, and that single reading is the whole of the arithmetic available on the cost question.

Now the part that needs no split at all, and which is the actual teaching of this test. The two routes behave differently inside that one line. The direct route's cost is largely built before any loan arrives, and it does not fall when the loans stop. The intermediated route's cost is largely paid loan by loan, and it does fall when they stop. The same Rs 540 crore line of the stack, and opposite behaviour when volume moves.

A street analogy fixes it in place. A shop that pays rent on a busy corner has paid for its position whether or not anybody walks in on Tuesday. A trader who pays a boy a commission for each customer brought pays nothing at all on a Tuesday when nobody comes. Neither arrangement is cheaper than the other in the abstract. The two arrangements simply respond to a quiet week in opposite directions.

Who does the borrower think they are dealing with?

Analysts skip this test and borrowers care about it most, so it gets its own place in the order rather than being folded into something else.

Under the direct route the party met and the party owed are the same. Somebody walks into a branch or opens an application, deals with that business, and repays that business. One name throughout.

Under the intermediated route they need not be the same. The party the borrower dealt with may hold no loan at all. The debt runs to a lender the borrower may never have spoken to, one that raised the money on its own funding side and stands to lose every rupee of it.

A person who dealt with one party and owes another has not misunderstood anything and has missed nothing obvious. The arrangement is the thing with two parties in it. The information about which party is which travels only if somebody sends it, and nothing about that is a fact about the person standing at the other end of it. The opposite framing, that somebody should have read more carefully, is both wrong and common, so the point is worth stating plainly.

The Reserve Bank of India at rbi.org.in sets what a borrower is told about who the lender actually is, and what a borrower is told about a party's role and how that party is paid. Both requirements move.

Who makes the decision to lend?

Four tests in, and here is the one that comes out the same on both sides. Under both routes the lender that holds the loan makes the decision to lend and carries the loss if the money is not repaid. Not the party that found the borrower. Not the party that collected the paperwork. The lender whose balance sheet the loan sits on.

Finding the borrower is one activity and underwritingThe lender's call on a request: yes or no, for how large a sum, priced how, and against which conditions. is another, and a business that lets the first drift into the second has moved a decision to a party that carries none of the loss from it. The drift is gradual and nobody announces it. The drift starts with a partner filtering out applications it thinks will be declined, to save everybody time. The drift ends with the filter doing the deciding while the lender carries the consequence.

The requirements on a party that sources, services or collects a loan for a lender, and the requirements on a lender that puts any part of its lending process outside itself, are set by the Reserve Bank of India at rbi.org.in and they move.

What is known when the decision is made, and whose is it?

Under the direct route, what the lender knows is what it collected and holds itself. Every item was gathered by the lender, for the lender, for this purpose, and the lender can say where each of them came from.

Under the intermediated route some of what arrives came from the lending service provider's own dealings with the borrower. The information arrives with the borrower rather than being gathered by the lender. The arrangement adds reach the lender could not otherwise have, and it does not add a repayment history the lender can verify by itself. Both halves of that sentence matter, and dropping either one produces a bad habit.

The consequence for the decision is easy to slide past, so state it flatly. Information that arrives with an application is information somebody chose to send. Somebody assembled it, for some purpose of their own, and decided what to include. A lender that treats it as though it had gathered it has changed what it knows without noticing. Changing what a lender knows is a different and more dangerous thing than knowing less.

Think of a vegetable seller who is told by a neighbouring stallholder that a particular customer always settles up on Saturday. The neighbour's word is genuinely useful and genuinely not the same as having watched fifty Saturdays go by. The right response is to keep the information and keep it labelled. At the moment of deciding, what was seen and what was passed along are then still two different piles.

Who collects, and whose conduct is it?

The sixth test cuts across the other five rather than following from them, which is why it comes last. Servicing and collection can run through either party under either route. A lender that found every borrower itself can still hand collection to somebody else. A lender that found none of them itself can still collect every rupee in its own name.

Handing the work to another party never hands over the answering for how that party behaves. The answering holds under either route and whatever the arrangement is called. The task travels; the accountability for it stays exactly where it was.

Which rows can be drawn but not filled in?

Five requirements have been named in the reading above, each one at the moment it became relevant. Collected in a single sheet, the shape of what is decided elsewhere becomes visible in one place. Beside each requirement stands the party that decides it. The third column stays blank on every single row.

What is each route exposed to?

Trace the exposure from the funding rather than from the selling. Tracing it that way makes it a question about a lending business rather than a question about marketing. Rukmini Finance Limited's Rs 14,400 crore of borrowings carries a rate of 8.50 per cent a year and repayment dates of its own, whatever the book does. Interest paid on it is Rs 1,224 crore for the year. The obligation on those borrowings was agreed before any borrower was found, and it does not consult the originationTurning somebody already found into a live loan: the paperwork, the checks and the money leaving. Its start and end points are marked out separately. pipeline about anything.

So origination has to keep pace with the funding rather than the other way round, and the two routes fail that requirement in opposite directions. An intermediated route can be switched off by the other party, on notice or on terms, and the lender that was relying on it has a funding side that did not switch off with it. A direct route cannot be switched off by anybody else. The reach it rests on was built rather than bought, so it cannot be turned up quickly either.

Neither of those is a fault. Both are ways the same requirement can be missed, and neither route is ranked ahead of the other.

Where does each route stop?

A pair of limits closes the comparison rather than a preference, and the two limits are unlike each other in kind rather than in degree.

The direct route stops at the reach of what the lender built. Extending that reach is a decision to build more, and building takes time the lender may not have and money that comes out of the same Rs 540 crore operating line as everything else. The extension cannot be bought quickly. Anything that could be bought quickly would be the other route.

The intermediated route stops at the terms the other party will agree, and at the fact that the same finding is bought again for every single loan. None of it was retained. Both of those limits arrive well before anybody runs out of people who want to borrow.

With no split by route, no cost of finding anybody, no commission or sourcing payment, no volume by route and no second year, the two routes can only be compared structurally, and nothing follows about which produced more, which cost less or which any lender should use. A comparison of two routes is not a ranking of them.

Why is there no control to move here?

How does anybody actually use this?