India is home to approximately 6.3 crore of micro, small and medium enterprises (MSMEs), according to the IBEF (India Brand Equity Foundation) research platform. These companies form the backbone of the Indian economy, contributing around 30 percent of the GDP and being the second largest workforce after agriculture. In fact, MSMEs contribute 48% of Indian exports, making them an important income generator for the country.
However, this sector faces many challenges, the most important of which is access to formal credit. In recent years, fintech platforms and non-bank financial institutions (NBFCs) have slowed capital flows, especially during the COVID-19 pandemic, according to Shachindra Nath, Executive Chairman and Managing Director of the MSME U GRO Capital lending platform.
U GRO Capital, formerly Chokhani Securities, is an ESB-listed NBFC established in 1993. The birth of U GRO Capital occurred after Shachindra acquired Chokhani Securities and reorganized its management team in December 2017.
In recent months, U GRO has reported several developments, including a partnership with traditional banks such as Bank IDBI, SBI and Bank of Baroda. A market leader, the company is about to usher in a new era of co-lending.
In an interaction with SMBShistory, Shachindra shares the evolution of the small business lending ecosystem over the years, the role of banks and other fintechs, and her vision for the ecosystem in the coming months.
SMBShistory [SMBS]: How Has the COVID-19 Pandemic Altered Small Business Credit?
Shachindra Nath [SN]: Small business loans were driven primarily by guarantees. Indeed, it was very difficult to assess factors such as the income of SMEs, their expenses and how much money the company can afford to repay. Thus, having physical collateral guaranteed lenders.
This is changing dramatically because lenders now have the data and technology tripod. In fact, I believe that MSME financing will reach the level of consumer finance in the next three years. Today, the GST, the digitization of the banking sector through account aggregation, office footprint, have helped lenders better analyze MSMEs in minutes. This is also how we operate.
Today, we are not asking for balance sheets or other historical data.
We have also proven that these models have been accepted within major financial institutions by signing a co-loan partnership with Bank of Baroda, State Bank of India and IDBI Bank, all of which follow our tripod data approach, which means that eligibility is being created. around different datasets.
The second change is that the financing of SMEs is moving from entry financing to financing at the transaction level. This means that the previous lenders were lending term loans for working capital needs.
Small and medium-sized enterprises (SMEs) were able to use the raised capital for whatever they wanted. Now the loan occurs at the transactional level. This eliminated the risk at the entry level.
SMBS: The common idea is that banks only look at balance sheets when lending to MSMEsâ¦
NS: This is not at all true. This is just a myth because if that was the case Bank of Baroda would not have granted loans with us under the Pratham program. The banks have lent in a way that has been established over a period of 30 to 40 years.
And that is why there is a regulatory intention to collaborate within the banking system, where they are ready to adopt NBFC best practices in a calibrated manner. In fact, while partnering with SBI and IDBI Bank, they have not changed our credit programs. It took a while because the methods are completely different, but to say that they are not open to new methods of credit underwriting is not true.
Having said that, I cannot comment on the whole banking fraternity. Some banks will be slower to embrace or embrace change, but others will be faster.
SMBS: How did you integrate the technology into your systems?
NS: We divide the technology into two parts: one is for data analysis and the other is for process simplification. We analyze each client based on GST, office and banking. Subsequently, our data analysis platform analyzes different sets of data and we make sure that the machine has the ability to say yes or no based on certain models.
In streamlining processes, our goal is to ensure that when a customer arrives on board, their journey with us goes smoothly. For example, everything, including the KYC, is digitized and the submission of documents goes smoothly.
SMBS: The GRO-Xstream platform brings together several players in the fintech and lending ecosystem. What are some of the most important goals you plan to achieve through this?
NS: Our GRO-Xstream is a highly customizable API-based technology platform that integrates banks and multiple fintechs, NBFCs, neobanks, etc. Since the lending ecosystem is very large, what we have done on the one hand is to partner with big banks and integrate them into the GRO-Xstream platform. And they co-lend on the asset loaned by us.
The flip side is that we integrate with the NBFC and fintechs and co-lend just like the banks.
Ultimately our goal is that once the platform has reached maturity, a large bank like SBI can go to the bottom of the pyramid (hundreds of fintechs) via this platform and can co-lend with them.
SMBS: What are some of the remaining gaps in the small business lending ecosystem?
NS: The change must come from the MSMEs themselves. First of all, MSMEs must surpass themselves be part of the formal sector gladly. Today it is happening by force, be it the GST or digital banking, which they cannot avoid.
So, being digitally activated is one of the most critical factors otherwise their credit score will be badly affected.
Second, is the the ecosystem must continue to evolve. There are many changes taking place in the ecosystem.
From an NBFC perspective, getting the money has been a challenge as most of it goes to large, corporate owned NBFCs. So companies in the middle and lower end of the spectrum don’t get too much money. But the solution to that lies somewhere in building quarantine models, lending as a service, building assets, presenting maturity, portfolio performance, and reselling to a big bank.
So I think we are in a very exciting and evolving phase.
SMBS: What are your plans for the next 12 to 18 months?
NS: NBFC and fintech loans in India are the transition inflection point where the focus is on lending as a service and not lending as a balance sheet.
What has happened so far is that the banks are lending to NBFCs with the intention of the money going to an underlying borrower. But the money is invariably used for other purposes that were never intended by the bank.
Our point of view is that we have to present different kinds of customers and products and then for each product we will have a banking partner so that we don’t have a balance sheet business, we will have a service oriented business.
We pay around Rs 100 crore every month to MSMEs and part of this will now go to SBI under the Sanjeevani program.
We are a publicly traded company and are looking to double our AUM (Assets Under Management) by the end of this year.