As entrepreneurs we know the pains of getting funding. It is the struggle that binds us. From the local artisan, to the aspiring app developer, everyone could use a little extra cash to help jumpstart his or her business. The problem, as we know, is finding a lender with fair prices that will accommodate the size and type of the company in need. So what are our options? We all know about microfinance, and despite ongoing debates about its effectiveness, it exists and caters to entrepreneurs at the bottom of the pyramid. We also know about the big commercial lender, and although its coveted capital is difficult to acquire, entrepreneurs looking in this space can be thankful it is even an option.So who lends to those that are too big for microfinance but too small for commercial loans? Although they seem to get less attention, these meso-level lenders are becoming increasingly important players in addressing the critical “middle” that seems to be lacking in so many developing markets. To get a little insight into this area, we had a chat with Hardika Shah, Founder and CEO of Kinara Capital.
Kinara Capital is a young, nonbanking finance company (NBFC) that lends to micro and small businesses. Holding to the vision of its founder, Kinara attempts to fill the capital gaps between microfinance and commercial institutions, providing key funding to small but growing businesses. What sets them apart from other institutions is not the market they address, however, but their strategy of addressing it.
“According to a report by Intellecap, the debt gap for micro and small businesses in India is $198B,” Hardika explained. “An entrepreneur will fill his debt gap from numerous sources: from asset financing providers, from banks, from other NBFCs, from pledging gold, and if all else fails, from local financiers. So in that sense, the market space is perhaps not that new, but what we’re doing in terms of how we’re approaching the market is different… for instance we are funding various players across supply chains and we’re probably one of the few NBFCs that provide unsecured lending in the 1 to 10L range at market rates.”Unsecured lending is a practice we commonly associate with microfinance, but which becomes increasingly unpopular as you move up in loan size. It has its benefits, particularly in terms of impact and outreach. By not requiring collateral as a condition of lending, institutions are able to reach borrowers further down the pyramid, and to broaden accessibility to capital to those who might not be able to get it otherwise. However, an unsecured loan is often viewed as a red flag by financial institutions and commercial banks due to the perception of risk attached to it.
According to Hardika, though, this risk assumption is only applicable where local culture makes it so. “India is a relationship based culture unlike the US which is a transaction driven culture,” she explained. “If we can understand the leverage point in the relationship maps of people, we believe it can provide the same pull in terms of repayment that other forms of security do.”
To minimize further minimize this risk, Kinara has adopted an innovative approach to borrower acquisition. They acquire reliable borrowers by plugging into existing supply chains, such as that of retail chain, Mother Earth. “Mother Earth is that entry point. [They have] been transparent in sharing who their suppliers are and introducing us to them,” Hardika explained. “That allows us to come into an existing supply chain, understand the money movement, the history of the buyer-supplier relationship: who has been providing to whom, how much is ordered, how long they have been in business, what is the quality of their product, what is the projected future demand from this buyer, etc… we get to know all of that.”
Because Mother Earth primarily partners with artisan, cooperative, and fair trade suppliers, these businesses tend to fall directly into Kinara’s target market. This unique approach to accessing the meso-level capital markets also helps Kinara reduce some of the burdensome administrative costs that come with borrower acquisition.
Besides the manufacturing sector, Kinara also targets agri-retail companies. In partnership with Villgro, Kinara seeks borrowers in this sector who are working to rejuvenate organic farming by selling organic fertilizers, seeds and other products in their respective localities.
While Kinara is in the business of providing loans to those who typically might not have access to them, one thing must be made clear: Kinara is NOT a microfinance institution. “The biggest challenge I have especially in terms of trying to raise capital for us is to convince people… first, that we are not microfinance, and second, that unsecured does not mean risky,” Hardika explained to us.
This is not the only challenge that the microfinance legacy has left for Kinara. In the wake of the 2010 microfinance crisis in Andra Pradesh, the Reserve Bank of India has scrambled to adjust their policies surrounding the nonfinancial sector. This has resulted in a variety of frequent changes on the regulatory side which Kinara sometimes finds difficult to keep up. “On the second of July… what we were doing was considered priority sector lending,” Hardika told us. “On the twenty-third of July it was no longer considered priority sector lending. The regulatory structure for NBFCs need to evolve significantly for us to be able to operate and make an impact.”
Today there are around 26 million small enterprises in India, and only 5% of them have access to capital. Hardika hopes to see this latter number rise with the impact of Kinara Capital. In the next five years, Kinara hopes to expand their portfolio to 20,000 loans, to create 100,000 new jobs, and to impact one million lives. Yet although Kinara continues to grow and to provide the capital necessary to boost small businesses to the next level, as Hardika emphasized, impact can only come with regulatory systems that allow for it. As systems become more conducive to the type of lending that Kinara does, capital will become increasingly accessible to the critical middle level of the economy. The quicker regulatory systems evolve, the sooner we might see Kinara Capital’s work pay off on a macro level.
Interested in Kinara Capital?