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NBFCs Must Continue To Innovate & Serve Niche Market Segments Which Are Not Served By Banks: Shachindra Nath, Executive Chairman, U Gro Capital

In an inteview with BW Businessworld, Shachindra Nath, Executive Chairman, U Gro Capital, talks about loan market and more

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What led to the founding of U GRO? What market gaps were you trying to fill? You were rechristened U GRO from Chokhani Securities last year. Is this when you reinvented your business model? 
Through my 25+ years of experience, it had become apparent to me that the SME lending space had critical inefficiencies amongst the established lenders. SMEs currently account for 29% of India’s GDP, and yet the sector is struggling with a credit gap of $300 billion. Upon analysis, we found a wide gap between the demand for customised credit solutions from SMEs and the existing one-size-fits-all lending approach utilized by the supply side. U GRO was founded to address credit under-penetration and generic credit products for SMEs. We are working to fill this gap by blending the strengths of traditional financial institutions with a modern data-driven approach – all of it backed by institution-scale capital. To this end, we developed a completely new SME lending model powered by industry leading technology and sector-specific know-how.

The objective behind acquiring a listed vehicle (Chokhani Securities Limited) and subsequently renaming it as U GRO Capital was threefold – being listed adds an additional layer of governance, provides one more source of capital and gives the sense of perpetuity. Our business is built to last for generations, not to be sold in a few years.

Tell us a bit about your concept of sector specific loans. Is this process unique to U GRO or do you have any parallel business models locally or globally? How does the model work?
There are many smaller NBFCs in India which target either a geography, sector or product. However, they lack scale and implementation of analytics/technology in their business. We believe that to solve the credit problem efficiently, we need to combine ‘Knowledge and Technology’.

Our unique business model draws from the best practices of both traditional lenders and modern fintech companies with a sector-specific approach. We selected 8 targeted sectors of high potential and strong macro outlook and further narrowed down to 38 sub-sectors based on contribution to overall sector credit demand, risk profiles and macroeconomic defence system.

Once we had selected our sectors and subsectors, we spent almost 2 years building digitised scorecards, based on commercial bureau data (enhanced for our sectors and ticket sizes); and expert scorecards, which were developed through meeting more than 1000 Indian SME borrowers.  
 
We amalgamated our scorecards and traditional policy parameters to create a robust in-house technology-led lending platform that is embedded with advanced Bank, GST and Bureau analysers to assess a broad range of parameters. Our industry leading turnaround time (60 minutes in-principle approval) is made possible partly by OCR technology with integrated machine learning to expedite loan processing.
 
We are reaching out to our customers through GRO Partners who are spread across key SME clusters. We have an Ecosystem vertical which targets sector-specific Anchor partners who have dealings with large pools of potential SME borrowers. We are also partnering with NBFCs specialised in originating and servicing MSME customers across different geographies. By the end of this year, we will launch our GRO–Direct Digital platform which will allow subsector-specific customers to reach out to us directly.
 
What’s your typical business loan ticket size? What do you look for in companies that you lend to?
We have built the ability to service the credit needs of small businesses from Rs. 1 lakh to Rs. 5 crores. We currently offer secured loans of up to Rs. 5 crores and unsecured loans of up to Rs. 25 lakhs. Our credit eligibility criteria are designed around two simple parameters – Intent & Ability to repay, tested through our analytical platform and credit underwriting. A small business with a revenue in the range of Rs. 2 crores-Rs. 200 crores, operating in one of the eight selected sectors, with a minimum business vintage of three years and a prior borrowing history can approach us with its credit requirement. We only cater to companies which require capital for either business expansion, purchase of machinery or for fulfilling working capital requirements. We also select for those companies where the loan can be repaid through the business’s cash flows.

What stage of businesses do you cater to? Do you lend to early stage businesses? How do you control risks within your portfolio?
We don’t lend to early stage businesses. We require a minimum three-year business track record to be eligible to apply for credit. We have incorporated stringent verification standards in our credit appraisal processes to minimise risk. We evaluate more than 1000 parameters from more than 20 data sources. The pre-approval checks include legal verification, fraud control unit check, field investigation and valuation. That’s how we control risk on a per-loan basis, in addition to which we also control our portfolio level risk basis how we construct our portfolio – more than 87% of our current portfolio is secured, and we keep a track on sectoral exposure, type of collateral, loan tenor and multiple other complex factors.  

What’s your take on the credit environment at the moment, particularly with respect to NBFC liquidity and NPA’s in bank portfolios? Do you think the worst is behind us?

The sector is going through a crisis of trust at the moment – in my personal opinion this is the best time to build a new platform which does not have a historical legacy, which is not burdened by asset-liability mismatches created because of the prior easy availability of liquidity. NBFCs must continue to innovate and serve niche market segments which are not served by the banks – they have to learn the art of serving the asset side needs of large financial institutions rather than trying to compete with them. The Central Government has been proactive in tackling the NBFC liquidity crunch, and I believe that NBFCs which are deeply focused on solving the credit problems of small businesses will soon start getting recognition and access to liquidity. Those NBFCs focusing on wholesale lending will likely
continue to struggle for liquidity.

Lastly, do tell us a bit about your numbers achieved last year and your business targets for the next three years.
Our disbursals increased from Rs. 64 crores in Q4 FY19 to Rs. 218 crores in Q1 FY20. We ended the quarter with an annualized disbursal exit run-rate of Rs 1,200+ crores. Our AUM at the end of June 30, 2019 stood at Rs. 276 crores with a total client base of 561 customers.
 
In the short span of six months, we have opened eight branches and on-boarded 138 channel partners who are operating at an industry leading productivity of ~5 files disbursed per person per month. On the liability side, we have initiated conversations with multiple large banks for debt and for co-lending partnerships. We expect some of these discussions to conclude in Q2 FY20.
 
Our aspiration is to build India’s most respected small business lender and to be known both for the quality and size of our book and for our commitment to stringent corporate governance.


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