MSMEs contribute about 30 per cent to the economy and 45 per cent to total exports. They are the second largest employer, employing close to 110 million. But a major barrier to their growth has been access to formal routes of credit. From Rs 69 trillion in FY17, the credit gap has increased to Rs 106 trillion in FY22.
Shachindra Nath (SN) who hails from Banaras had witnessed the struggles of small businesses first hand. Nath had wide exposure and had been instrumental in setting up two insurance companies, a large asset management firm and a NBFC. He sensed both an opportunity and a duty towards the MSME sector, and went ahead to set up UGRO Capital in 2008, that raised about Rs 340 crore of equity capital in 2023.
In an interview with IE, SN highlights on UGRO’s innovative approach, strategic focus and the transformative impact of digitisation on the financial sector.
IE: What are the challenges in financing MSMEs?
SN: Credit cap in MSME has been ever increasing and the primary reason is the operating style of the sector. They prefer to deal most of their business transactions in cash. While this offers a higher working margin, it also denies access to formal credit. Much of their cash flow is unaccounted through financial institutions. For a lender, the ability to assess repayment becomes difficult. But this is gradually changing.
The force of digitalisation has been both the hardest and fastest for MSME. Three major events – demonitisation, GST and cash flow being recorded into bank statements – triggered this. By utilising this data well, credit gap can be reduced significantly. At UGRO, we have designed our business in such a way, if there is a cash flow statement, we would be able to provide credit based on that. Our target customers are small and micro enterprises that have a turnover ranging between Rs 25 lakh and Rs 15 crore.
IE: What is the unique USP of UGRO?
SN: Even within MSME, each section behaves differently. A focussed and tailored approach is necessary to address these problems. With the power of available data, at UGRO, we have identified 8 sectors based on various parameters including, being less prone to government policy changes and lower dependence on exports. The sectors include: auto component, education, food processing, hospitality, micro enterprises, chemicals, electrical equipment, health care, light engineering and other MSMEs. UGRO finances the underserved and the lending is done based on our proprietary scoring model, the GRO Score 3.0. It is an enhanced version which assesses borrower creditworthiness by triangulating repayment history, banking behavior and GST. In addition to scrutinising banking and bureau behaviour, the company also extracts and analyses crucial data from GST. This comprehensive analysis enables to calculate and predict the probability of a company in repaying the loan.
IE: Is your UGRO score powered by robust AI and ML models? Also, what is the success ratio?
SN: We’ve made significant strides in ensuring success, having applied for patents on this front. Our success ratio is predominantly high, more than 90 per cent. With a dedicated team of 75 data analytics experts, we’re well-equipped to navigate the expansive industry landscape. Our data repository spans five years, comprising vast datasets obtained ethically through customer consent for GST, bank data and bureau information. Utilising a comprehensive 25,000-feature library, our model continually evolves, with ongoing modifications for the foreseeable future.
IE: Can you elaborate on your, lending as a service model?
SN: Traditional banks lend by utilising deposited savings, while NBFCs like UGRO, face limits on balance sheet borrowing. In 2018, RBI introduced a co-origination framework that enabled banks and NBFCs to collaborate for loan origination. These guidelines were revised in 2020 and named Co-Lending Models (CLM). It paved way to leverage the lower funding costs of banks and the extensive reach of NBFC/HFCs. In this model, U GRO becomes a service provider, contributing a portion (20%) of the business loans with the remaining 80 per cent supplied by the bank. This approach optimises lending capacity, fostering a mutually beneficial arrangement for both UGRO and partner banks.
During repayment, customers pay through their bank accounts and the system automatically allocates payments proportionally. The significant impact of this approach is the substantial capacity it creates for us. Half of our total assets is funded directly by the bank and our lending capabilities are now assessed based both on the banks’ and our balance sheet. This increases UGROs lending capabilities by 10X times. We have established partnerships with about seven of the twelve public sector banks and three private sector banks.
IE: Do you take any steps to increase awareness on formalisation for MSME?
SN: We’re set to announce a major collaboration with a large organisation that has extensive MSME membership. We are also doing an awareness campaign on formalisation across 100 cities. During the pandemic, we had a similar initiative in partnership with Wadhwani foundation. Our scale is limited, compared to the vast MSME base. An institutional framework is crucial, and we’re engaged in a media series to explain the benefits. A broader societal and governmental effort is needed in this regard.
IE: You have recorded a consistent upward trend in your performance. Could you share your projections for the year-end?
SN: We started in 2018 with an initial capital infusion of around Rs 1000 crore, and embarked on full-fledged operations in 2019, marking our first year before the onset of COVID-19. The pandemic became a catalyst for rapid expansion. Transitioning from a modest team of 120 from 7-8 locations pre-COVID, we burgeoned into a robust organisation with over 1500 personnel, spanning 100+ locations. We made significant investments in digital infrastructure, banking collaborations and balance sheet liabilities. Our foresighted early investments materialised in reaching Rs 3000 crore in total assets by 2022 and doubling to Rs 6000 crore in 2023. Decisively, by the end of 2023, our inaugural infrastructure phase will be complete, positioning us to capitalise on sustained monthly growth.
We have raised another Rs 340 crore capital equity in 2023. Our capital adequacy is around 25 per cent and our financial outlook indicates, we will be sufficient for the next three years and the first half of the following year. Being a listed company with full institutional ownership, we have ready access to capital as needed for our business model.
IE: Your footprints in east and central India are almost nil. Is there any reason?
SN: Our credit provision is intricately linked to data insights. The geographical expansion aligns with our cluster approach, driven by credit behaviour analysis. After evaluating credit patterns across India’s 35 States, we identified the top 25 cities with favourable state behaviour. Five states—Tamil Nadu, Telangana, Karnataka, Rajasthan and Gujarat—stood out for exceptional credit quality. Expanding into Madhya Pradesh, Uttar Pradesh and Andhra Pradesh reflects our strategic response to evolving economic activities. Historical credit performance in specific states correlates with economic dynamics and influences our footprint decisions.
IE: You target is to achieve 1 per cent market share with 1,000,000 small business customers in the next growth phase. How do you plan on achieving this?
SN: Our growth is organic, driven by diverse channels comprising, physical branches, prime customer engagement, micro-customer outreach and partnerships with over 50 fintech allies. The GRO X platform, our direct-to-customer channel, enables even small shopkeepers seeking morning loans to access funds digitally. Our target of 1 per cent market share, equivalent to Rs 23,000 crore in the Rs 23,00,000 crore MSME credit landscape, spans across these varied channels, aligning with our two-and-a-half-year goal.
