Interview with U GRO Capital Ltd

Our wide distribution reach along with the depth of our product offerings makes us the preferred partner of MSMEs, asserts Nirav Shah, Chief Strategy Officer, U GRO Capital Ltd.

What is your outlook on the Indian NBFC sector?

NBFC sector is at the cusp of the next stage of growth and is set to witness multiple changes such as: 

• Higher growth and expansion of credit on the back of Co-lending model: Co-lending will emerge as the preferred liability model across NBFCs. It will specifically benefit NBFCs having differentiated credit underwriting and niche product expertise, as banks will eventually transform into institutions managing liabilities and will turn towards these niche NBFCs for being their asset origination and underwriting engines. Co-lending will solve the liability problems of NBFCs and in turn help them achieve their full disbursement growth potential as under the co-lending model NBFCs will have to arrange for capital to the extent of 20% of the loans sourced. This model will further augment financial inclusion as affordable credit can be made available to the remotest areas of the economy through NBFCs.

• Shift towards on tap financing on the back of OCEN network and account aggregator framework: The account aggregator framework will enable consent backed free flow of customer data which can be readily plugged into the new generation AI/ML credit models of NBFCs. Availability of data will fuel alternative credit evaluation methods which are the bedrock of new-age NBFCs. The implementation of India Stack will thus shift credit to on tap financing as credit decisioning can be done instantly on the back of the availability of data combined with new-age underwriting models.

• 100% digital loan process: The government thrust on digitization of data and e-signatures will truly make 100% digital lending possible in India. The major hurdle to this milestone would be digitization of records and charge creation on land and properties.

• Convergence of MSME lending with consumer financing: Collateral backed MSME lending in India is already shifting to cash flow-based underwriting using alternate data as opposed to relying on historical financials of MSMEs. This has been possible using the tripod of data evaluation technique which involves triangulation of GST, banking and bureau data for underwriting MSMEs. NBFCs will play a major role in unclogging MSME credit in the Indian economy and will be pivotal in bridging the USD 300 billion credit gap.

At an overall level, NBFCs will be seen transforming from being on balance sheet lenders to offering lending as a service to banks and other financial institutions that will be primarily focused on managing liabilities.

U GRO Capital’s Net Interest Income (NII) for Q2FY22 stood at Rs 31.7 crore compared to Rs 20.7 crore in Q2FY21, which is a 53% increase on a Y-o-Y basis. Which factors have contributed the most to help you outperform?

NII is a function of three things: interest income, interest expense and leverage (i.e. debt to equity). Interest income is in turn a function of AUM growth and yield. U GRO’s AUM witnessed 98% YoY AUM growth and the portfolio yield improved by 130 basis points to 15.7%, while the blended cost of borrowing has reduced by 40 basis points to 10.2%. U GRO was formed by raising large institutional capital and thus with an increase in leverage (1.14 x as of Sep-21) there will be a partial offset in the NII. However, increase in leverage will eventually improve the ROE of the company.

What are your growth levers?

On account of our ability to service MSMEs across segments our growth levers can be bifurcated into two broad categories: distribution channels and products.

• Channels: We operate through 3 broad channels namely: branch (prime business, micro business), ecosystem (supply chain, machinery) and partnerships & alliances.

1. Branch Channel: Currently we have 55 branches consisting of 14 prime branches (across 8 states) and 41 micro branches (across 5 states in Tier III to Tier VI towns). The lever for growth in the branch channel shall be micro branches. We plan to expand the micro branches to 75 by FY22E and further to 225 by FY25E. Our prime branches are distributed across key SME clusters selected through data analytics wherein the inherent demand for MSME loans is quite strong.

2. Ecosystem Channel: In our supply chain vertical we on-board anchors along with their ecosystem and lend to suppliers and dealers/distributors. We have invested heavily in the integration of technology and have digitized the entire customer journey which will start bearing fruits in near future.

3. Partnership& Alliance Channel: We have currently on-boarded 15 fintech partners on our platform and plan to add more in the coming years. Our ultimate goal is to develop this channel into GRO – Xstream platform which will be a debt marketplace connecting Banks with multiple fintechs, payments, NBFCs, neobanks, market places and other digital platforms through API integration

 
• Products: We have a comprehensive product suite to service the entire spectrum of MSME credit requirements (term loan, working capital loan, micro loan, supplier/buyer discounting, pre/post shipment funding, rent discounting and machinery financing). As of date we can service an MSME customer across ROI range of 10% - 26% and ticket sizes of 2 lakh to 300 lakhs.
 
Our wide distribution reach along with the depth of our product offerings makes us the preferred partner of MSMEs. 
 
What are your top three strategic objectives?
 
Our top three strategic objectives are:
 
• Shift towards co-lending model to create a larger credit multiplier effect: We have already tied up with major banks like SBI, IDBI and Bank of Baroda for co-lending across different products. We have also recently signed a MOU with the Central Bank of India for a blanket co-lending arrangement for all our products. This will allow us to achieve our goal of reaching Rs 20,000 crore of AUM with a minimum capital requirement.
 
• Focusing on portfolio granularity to manage risk: Micro segment being a relatively newer channel is bound to grow faster than the prime business. With increasing mix of micro business (i.e. sub 25 lakh secured loans) our overall portfolio granularity will increase. Post covid 2.0 we have decreased our maximum lending ticket size to Rs 3 crore from Rs 5 crore which will further add to our portfolio granularity as the proportion of newer AUM increases.
 
• Provide lending as a service through GRO-Xstream: With banks on one end and fintech partners on the other U GRO shall enable the flow of credit to the smallest and most remote MSMEs in the Indian ecosystem. U GRO Capital has already on-boarded 15 fintech partners on its platform.