[Startup Bharat] This Rajasthan-based NBFC is redefining rural lending, one small loan and one city at a time

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After more than 15 years in retail banking, banker Mohit Sahney gained first-hand experience in providing financial services to The population of the Indian hinterland when formerly Bank of Rajasthan merged with ICICI Bank in 2010.

In his role, he managed about 250 branches, 100 of which were rural, financing small loans such as livestock loans, kisan credit cards, self-help groups, microloans, tractor loans and vehicle loans. commercial, among others.

Over the years, he increasingly felt that the big banks were simply reluctant to service smaller locations and their niche needs. This got him thinking about the great opportunity and funding potential of India’s over 40 million Micro, Medium and Small Enterprises (MSMEs) and emerging sections of middle and lower middle class.

Mohit and Sunita Sahney launched Finova Capital, a non-bank finance company based in Jaipur in 2016. Mohit is the managing director and CEO of the loan company, and executive director Sunita handles HR, operations and audit functions.

In 2016, he decided to take up a new challenge and laid the foundations of Finova Capital with his wife. Sunita Sahney.

Finova is a Jaipur-based Non-Banking Financial Company (NBFC) registered with the Reserve Bank of India (RBI). The company provides loans to micro-entrepreneurs and semi-skilled professionals who do not have or have limited access to loans from formal financial institutions.

Shared spending and the credit market

India’s shared credit market is worth $550 billion in the addressable market, according to a report 2021 by consulting firm RedSeer.

“More than $200 billion in loans are given informally to friends and family in India every year. Additionally, over $300 billion in expenses are shared with family/dependents. Together, this creates a huge opportunity for India’s ‘spend/credit sharing’ market, most of which is cash-based and extremely informal,” according to RedSeer estimates.

To address this informal market, which is largely found in rural areas, and solve the problem of the underpenetrated credit market, Mohit took a conscious call to operate from Jaipur.

“We thought we would solve this puzzle, but it cannot be solved by operating from major cities. We had to go into the backcountry,” he says. And so, based in the “pink city”, Mohit started by reaching small towns and villages such as Sardarshahar in Churu district, Chomu in Jaipur district among others.

His previous experience working in a private sector bank came in handy as Mohit knew what to take in and what to leave behind. He cites professionalism as a key factor and notes that “most NBFCs in India take time to scale because they are run by businessmen who do not have proper exposure to the business.”

“We have a full hierarchy filled with professionals with professional backgrounds, and we don’t skimp anywhere,” he notes. Mohit’s wife and co-founder, Sunita, who is also the company’s executive director, handles HR, operations and audit functions, and is actively involved in the day-to-day running of the company.

At Finova, synonymous with financial innovation, Mohit ensured that his investments in software and technology were at the forefront. He also focused on profit growth – bottom line – not just revenue growth – turnover.

“We’re one of the few NBFCs to make a profit from year one, so we’ve never burned the cash,” Mohit claims.

The rural challenge

Mohit says Finova has focused on providing small loans of around Rs 3-5 lakh to underserved customer segments in rural areas. It charges an average interest rate of 20%, which works out to a flat rate of around 12%.

NBFC works with 42 lenders to provide these loans, and while nearly 75% of these borrowings are funded by banks, around 10% come from NBFC and the rest from financial institutions.

Mohit notes that although the addressable market is large here, it is difficult to be a lender in this segment – consider the populations with no banking habits or history, no documentand no credit history record.

What prompted him to take up this challenge then? “We always believed that in India neither fintech nor ‘physical banking’ would work,” says Mohit.

He adds that what has a chance is the fusion of the two. “You have to build the technology in a way that it complements the brick-and-mortar structures. You have to be close to the customers. The customers have to feel at home.

This approach has enabled Finova to undertake assessments based on cash analysis, something that is not easy for Finova, as its customers – usually in the lower end of MSMEs – are not very demanding when it comes to record keeping.

Although it is not easy, he uses different ways to analyze the income of these companies, instead of documenting or analyzing ratios based on income statements alone, which is what most lenders do.

This is what differentiates Finova from other lenders, says Mohit.

For example, before lending to a vegetable seller, the NBFC team talks with the neighbors, customers, suppliers and sellers of the person.

“We take referrals from these people. They shed a lot of light,” he says.

They also spend time understanding their spending, spending habits, and financial and business behavior.

In just over five years, Finova has created around 30 designs for mostly professional clients, including tea sellers, taxi drivers and kirana owners. Finova’s credit team visits these clients and understands their business nuances before making any decisions.

For example, before lending to a tea vendor, Finova would review daily footfall and business testimonial serving nearby businesses. This model would include granularities like taking a look at how much milk he/she buys, how full the bin is, and asking and checking with stores around.

“We document it, verify it. Through this, we determine their eligibility and then, accordingly, we fund them,” explains Mohit. This, in turn, adds to their financial literacy and helps them build a credit score they can rely on in the future.

One of the many beneficiaries is Banwari Lal Bairwa, 33 years old, a mechanic in the Bassi district of Jaipur. To improve his business, he took out a loan of Rs 5.70 lakh in 2017 for seven years from Finova. Usually clients like him are turned down by official sources due to financial indiscipline, improper banking and lack of credit history.

With the loan, which he has been successfully repaying for five years now, Banwari has been able to more than quadruple his income to Rs. 80,000-90,000 per month. His bicycle repair shop, in which he now also retails auto parts, also employs five other people in addition to him.

“I have loyal customers now, and I’m much better off than before,” he jokes.

Banwari Lal Bairwa, a 33 Years mechanic in Bassi area of ​​Jaipur, took a loan of Rs 5.70 lakh for 7 years from Finova in 2017 to improve his business. He was able to more than quadruple his income to Rs. 80,000-90,000 per month with the money he got. His bicycle repair shop, in which he now also retails auto parts, also employs five other people in addition to him.

The good and the bad

During his time at ICICI, Mohit managed assets worth Rs 1 lakh crore, a figure that helped him drive Finova’s growth. The company has always focused on quality and made sure to keep its non-performing assets below 1% every year.

Although already profitable, Finova has used its funding to expand, starting with the first round it raised in 2017 from Sequoia India.

In March of this year, he raised $65 million from Norwest Venture Partners, Maj Invest and Faering Capital

The company wants to use the funds to grow its loan portfolio, invest in technology, expand geographically, and pursue its vision of enabling financial inclusion at scale.

Currently, Finova has 180 branches spread across more than nine states in western, northern and central India. He claims to have more 30,000 customers, and a Rs 1,000 crore+ loan book.

Impressive numbers aside, Finova has also had its share of challenges. The COVID-19 pandemic has left the MSME sector in shambles, preventing borrowers from repaying their loans. Demonetization and Deployment of GST were other stumbling blocks.

Another blow came when in September 2018, finance giant Infrastructure leasing and financial services (IL&FS) collapsed.

Nonetheless, Mohit is quick to dismiss the impact and remarks, “It has never hindered our continued growth. We grew from 150% CAGR.”

Finova’s total assets increased by more than 100% to Rs 984.32 crore in the 2021 financial year, according to documents filed with the Registrar of Companies (RoC). Its after-tax profit rose 40% to Rs 16 crore in the same period, according to the RoC filing.

The ability to change over time and adapt to crises is what Mohit says has kept them growing despite the tough times.

After the demonetization, the company decided to provide smaller size loans, which were initially Rs 10 lakh.

“And because of the smaller ticket sizes, we’re responding more to essential service items,” Mohit says. This includes grocery stores, kirana stores, and medical stores, which are relatively safe from seizures.

“And we don’t care much about discretionary items like electronics, cell phones, travel and hotels. We are not doing much there, and it is the people who are the most affected,” he adds.

Finova has a team of 1500 people, with a presence in Rajasthan, MP, Delhi, Haryana, Punjab, UP, Uttarakhand, Jharkhand and Chhattisgarh. More than 50% of its employees are in sales, with a “feet in the street” approach to developing its clientele.

The company competes with traditional lenders and other NBFCs like Lending cart, Capital Float, Flexiloans.

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