The SME-lending eco-system is in a phase of transformation thanks to the adoption of new technology and knowledge-driven outlook as well as evolved investors’ outlook. On one hand, debt providers are looking for companies in the lending space with sustainable profitability and inherent mechanism to withstand shock, on the other SME credit under-penetration opens up a huge growth spectrum. In such scenario, companies must embrace technology and new credit underwriting mechanism without sacrificing the business fundamentals, says Shachindra Nath, Executive Chairman, U GRO Capital, in an interview with Elets News Network (ENN).
U GRO Capital has turned profitable within 10 months of launching its operations. How would you like to explain this accomplishment?
Well, becoming the first fintech platform to achieve profitability within a year of operations is a proud moment and rare achievement for us. We have been able to achieve the feat thanks to the efforts and commitment from the management team and exemplary entrepreneurial leadership of CEO Abhijit Ghosh.
Our mission is to address $300 billion SME credit gap. In fact, start-ups in India which explore large market opportunities usually focus on capturing larger shares of their respective markets, thus prioritizing revenue growth over bottom-line growth. Such business model may work in other sectors as businesses in those sectors are primarily driven by two key stakeholders – consumers and online market place platforms.
For instance, companies like Alibaba at some point reach an inflexion point wherein operating losses convert into significant cash inflow because of a sheer scale of their business. VC investors show confidence in such model and back many such companies globally. On the other hand, the financial services sector is a different ballgame altogether. For the companies in the lending space, liabilities or debt providers like banks, financial institutions, etc. are important stakeholders. Although lending companies approach investors to raise debt based on the strength of their balance sheets, investors scrutinise the profitability of a lending company based on Return on Equity (RoE) and Return on Assets (RoA) before investing.
Regardless of the viability of the business model, the liability-side stakeholders do not lend to businesses which are not self-sustainable in terms of profitability and don’t have the inherent strength to withstand future shocks. That’s why you would invariably see that most of the FinTechs which bank on their balance sheets fail to attract quality debt. We believe while eyeing at the larger market pie, it is prudent to concentrate on the fundamentals to build a sustainable and profitable business model.
Building a sustainable business model requires a deeper level of commitment from the management team to keep the cost structure completely aligned with the vision to bootstrap the business. As many as 38 key members of our leadership team are part of our co-ownership structure through ESOPs. They ensure that our business model is in line with our company philosophy.
Technology is transforming the banking sector significantly. How is the trend affecting the lending companies focussing on the SME segment?
The lending companies focussing on the SME sector, in particular, will witness multiple innovative technology transformations to be primarily driven by AI in the next 20 years or so. SME segment is highly fragmented and dispersed in nature. So, deeper technology interventions hold the key to develop in-depth sectoral understanding as well as devise and deliver the credit solutions.
Our SME lending model is based on two core elements – Knowledge and Technology. Knowledge is a continuous process of developing specialised know-how on the SME sectors and sub-sectors which we target whereas technology helps us leverage the knowledge to devise customised credit solutions.
We are the first lending company in India to build and operate our GRO+ platform which has fully integrated every element of underwriting digitally (using all conventional parameters) and our platform approves a loan within the first 60 minutes.
We have transformed the SME-lending narrative by developing proprietary sector-specific statistical scorecards collectively called GRO Score based on commercial bureau data and expert scorecards. Based on our statistical scorecard which is at the heart of our sector-specific lending outlook and its geographical spread, we have been able to build a scalable small business underwriting platform similar to lending platforms operational in consumer finance segment.
Liquidity crisis posed a huge challenge for NBFCs last year. How optimistic are you about the scenario in 2020?
To my mind, the scenario which will be played out in 2020 would be no different as against what we have experienced in 2019. In the last few years, the NBFC sector witnessed an enormous growth which was not driven by sound business fundamentals but by excess liquidity.
Going forward, the SME lending market will consolidate in two segments. On one hand, there will be large corporate-owned NBFCs with the perceived ability to absorb shocks and on the other, differentiated franchisees operating in niche segments with a high degree of corporate governance will become a force to reckon with.
In a way, NBFCs must evolve from borrow and lend model to originate-to-sell model and the capital market should start valuing NBFCs on the basis of P/E ratio in comparison to P/B ratio to support this transition.
U GRO Capital has recently tied up with ICICI Bank to co-originate loans to SMEs after similar partnerships with SBI and Bank of Baroda. What is the progress on the synergies?
As I said, NBFCs should evolve to adopt ‘originate-to-sell’ model and our co-lending approach is based on that philosophy. We also believe that technology has a significant role to play in making the co-lending model a success. That’s why we have developed a tech-based platform – GRO Xstreme – which integrates our origination and underwriting model with the lending mechanism of the large banks. It functions as an intelligent decisioning system that takes a prospective borrower to the best-suited bank. It’s quite encouraging to see three leading banks of the country have shown confidence in our underwriting system. For a company which is in its early stage of growth, the development is quite reassuring. We expect at least two of the co-lending partnerships to become fully operational by Q4 FY20.
U GRO Capital lends customised loans to small businesses in eight sectors. Any plans for extensions in 2020?
In fact, we cater to approximately 38 subsectors within those eight sectors and that shows how deeply fragmented small business financing is in India. Our objective in FY 20 is to expand our sub-sector reach to 75. Given the fact that the eight sectors contribute approximately 50 percent of sector credit demand, we foresee a huge growth spectrum.