Lending startup Finova has attracted many VCs. It now needs to scale up beyond home

Think of Jaipur and it usually evokes the image of camels, Hawa Mahal and the Jantar Mantar besides many other castles. But beyond the royal touristy lanes, the city has been quietly producing a few business gems.

Some like AU Small Finance Bank have broken the ceiling of Mumbai-based banking cluster while others like CarDekho have taken to the world of technology, something one would expect from a venture out of Bengaluru or Delhi-NCR.

Finova Capital, a lending startup, is looking to join the growing list of success stories from the city.

Finova was founded by former ICICI Bank executive Mohit Sahney along with his wife, Sunita, who was previously associated with her family’s building materials business besides a salon of her own in addition to working for institutions like Shyam Telelink and Tata Teleservices

Backstory, VC backers

Incorporated seven years ago, Finova Capital is an RBI-registered non-deposit taking non-banking finance company (NBFC) operating primarily in Rajasthan. It also has a presence in Madhya Pradesh, Delhi-NCR, Chhattisgarh, Haryana and Jharkhand, with new additions in Punjab, Uttarakhand and Bihar.

It mainly provides loans to micro, small and medium enterprises (MSMEs) and also has a small proportion of housing loans.

The founders had started the operations with an initial capital of Rs 10 crore and have attracted multiple investors to help scale up the business.

It has executed four institutional rounds of funding including the most recent infusion worth around Rs 450 crore in March this year from new and existing private investors. The new round was led by Norwest Venture Partners and Maj Invest Fund with participation from Faering Capital. In the past, the firm raised money from Sequoia Capital.

Growth trajectory

Unlike several of its new generation lending startup peers, who are dependent on collateral-free lending, Finova Capital has a secured nature of portfolio as all the loans advanced are secured against the property mortgaged. It lends at loan to value (LTV) of around 40-50% for mortgage and housing finance. This provides a good cushion.

On the flip side, as the majority of borrowers are non-bank serviced self-employed borrowers and their cash flows remain vulnerable to economic shocks, the company faces a business risk by the profile of the borrower. For now, it has managed to cushion this risk with the interest spread.

Finova Capital has installed modules of an online lending software, which facilitates connectivity of the branches with the head office with information updation on a real-time basis. It has an established monitoring structure for overseeing its operations, including area-wise, product-wise, and sales executive-wise data.

Loan origination and collection is done through its own employees with its credit team itself visiting the client to see the standard of living and understand the overall income of the family. The sanctioned limit is based on the credit appraisal memo prepared by the credit executive to find out expenditure and income of the borrower.

The firm usually includes the female member in the borrower family as a co-applicant or guarantor, which has worked well in the past to induce the borrower to repay.

Its outstanding portfolio grew by 60% from Rs 590 crore on March 31, 2021, to Rs 948 crore on March 31, 2022 and further to Rs 1,232.80 crore on September 30, 2022. It increased its scale of operations by increasing the total number of branches from 132 to 162 last year with three new states added for expansion. In the first half of this year the branch network grew by another 25% to 201.

The total borrower base increased from 15,251 as on March 31, 2021, to 26,868 on March 31, 2022 and then again to 36,340 as on September 30.

The loan portfolio is concentrated with mortgage loans to MSMEs constituting the major portion at around 92.3% of total, while the balance is towards housing loans.

It does face a few other risk elements. Foremost is that its operations are majorly concentrated in Rajasthan with the home state accounting for around three-fourth of loan book. Moreover, even within the state the business is largely concentrated around Jaipur.

Although this has shrunk marginally from March, at nearly 75.49% it does bring a risk to the overall business from say a natural calamity. The risk is not lost on the management. It has entered markets of Bihar, Punjab, Uttarakhand and Uttar Pradesh this year.

Another factor that the management needs to manage is that the borrowings of the company have a mix of floating and fixed rates (75% floating book as on September 30, 2022), whereas its entire asset book is at fixed rates. In a scenario where the interest rate regime is moving towards an upcycle, this poses a question mark on the company’s own spreads.

At the same time, the company has managed to keep asset quality under control. The NPAs had increased last year due to MSME borrowers being impacted by the COVID-19 lockdowns. This has been reined in over the last six months and the secured nature of the loan book brings a comfort level to the startup.

With fresh funding early this year, robust capital adequacy ratio and reasonable asset quality, the startup is poised for growth but it has to navigate the key challenge of replicating its success in the home market to new geographies.