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

After over 15 years in retail banking, banker Mohit Sahney got first-hand experience in providing financial services to India’s hinterland population when erstwhile Bank of Rajasthan merged with ICICI Bank in 2010. 

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

Through all these years, he increasingly felt large banks were simply reluctant in catering to smaller locations and their niche needs. This set him mulling over the large opportunity and potential in financing India’s 40 million-plus micro, medium and small business (MSMEs) and emerging middle and lower-middle-class sections. 

In 2016, he decided he was up for a new challenge, and laid the foundation for Finova Capital with his wife Sunita Sahney.  

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

Shared spending and credit market 

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

“More than $200 billion in loans are given informally to friends and family in India each year. Moreover, more than $300 billion in spending is shared with family/dependents. Together this creates a massive opportunity for the ‘shared spending/credit’ market in India, most of which runs in cash and is extremely informal,” according to RedSeer estimates. 

To address this informal market, which is largely found in rural areas, and solve the problem of the under-penetrated 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 bigger towns. We had to go into the hinterlands,” he says. And thus, based in the ‘pink city’, Mohit began by reaching out to small towns and villages such as Sardarshahar in Churu district, Chomu in Jaipur district, amongst others. 

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

“We have a complete hierarchy filled with professional people with professional backgrounds, and we do not cut corners anywhere,” he remarks. Mohit’s wife and co-founder Sunita, also an executive director at the company, looks after HR, operations, and audit functions, and is actively involved in the day-to-day workings of the company. 

At Finova, which stands for financial innovation, Mohit made sure its software and technology investment was at the forefront. He was also focused on growing profits–the bottom line–and not just the revenue growth– the top line. 

“We are one of the very few NBFCs which has been in profit since year one, so, we have never burnt the cash,” Mohit claims. 

The rural challenge 

Mohit says Finova has been focused on providing small loan sizes of about Rs 3-5 lakh to underserved customer segments in rural areas. It charges an average interest rate of 20 percent, which effectively comes down to a flat rate of about 12 percent. 

The NBFC works with 42 lenders to provide these loans, and while nearly 75 percent of this borrowing is financed by banks, about 10 percent comes from NBFCs, and the remaining is from financial institutions. 

Mohit notes that while the addressable market is large here, it is a challenge to be a lender in this segment - consider populations with no banking habits or history, no documentation, and no record of credit history. 

What made him take up this challenge then? “We have always believed that in India, neither fintech nor a ‘brick-and-mortar only bank’ would work,” says Mohit. 

He adds that what stands a chance is the amalgamation of the two. “You must build the technology in such a way that it will complement the brick-and-mortar structures. You must be close to customers. The customers should feel at home.”

This approach has allowed Finova to take up assessments based on cash flow analysis, something that doesn’t come easy for Finova, as its customers–usually on the lower end of MSMEs– aren’t very particular about record-keeping. 

While not easy, it uses different ways of analysing the income of these businesses, instead of documentation or ratio analysis on the basis of the income statements alone, which is what most lenders do. 

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

For example, before lending to a vegetable vendor, the NBFC’s team engages with the person’s neighbours, customers, suppliers, and vendors. 

“We take references from those people. They throw a lot of light,” he says. 

They also spend time understanding their expenses, spending patterns, and financial and business behaviour. 

In a little over five years, Finova has created 30 or so templates for most of its professional customers - including tea vendors, taxi drivers and kirana owners. Finova’s credit team visit these customers, and understand their business nuances before making any decisions.  

For instance, before lending to a tea vendor, Finova would look at daily footfall and corporate testimony of serving nearby businesses. This template would include granularities like taking a look at the amount of milk he/she purchases, how filled the dustbin is, and enquiring and checking with the shops around. 

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

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

With the loan, which he has been successfully paying off for five years now, Banwari has been able to more than quadruple his income to Rs. 80,000-90,000 per month. His bike repair workshop, in which he now sells auto-parts in retail too, also provides jobs to five other people besides him. 

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

The good and the bad

During his time at ICICI, Mohit was managing assets worth Rs 1 lakh crore, a figure that has helped him drive growth at Finova. The firm has been consistently focused on quality, and it has ensured that it has kept its non-performing assets below 1 percent every year.

While already profitable, Finova has used its funding to scale up, starting from the first round it raised in 2017 from Sequoia India.

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

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

Presently, Finova has 180 branches spread across more than nine states in the West, North, and Central India. It claims to have over 30,000 customers, and a Rs 1,000 crore+ loan book.

Impressive numbers aside, Finova has had its share of challenges too. The COVID-19 pandemic left the MSME sector in shambles, rendering borrowers unable to make repayments on their loans. Demonetisation and GST rollout were other stumbling blocks. 

Another blow came when in September 2018, financing behemoth Infrastructure Leasing & Financial Services (IL&FS) collapsed. 

Nevertheless, Mohit is quick to brush aside the impact and remarks,“ it has never hampered our continuous growth. We have been growing by 150 percent CAGR.” 

Finova’s total assets have grown by more than 61.7 percent to Rs 1591.9 crore in the financial year(FY) 2022, according to documents filed with the BSE. Its profit after tax grew by 75.6 percent to Rs 29 crore during the same period (as per Indian Accounting Standards), according to the filings.

The company's loans rose by 62 percent to Rs 936.5 crore and investments rose by 105 percent to Rs 216.6 crore in FY22.

The ability to change with time and adjust to crises is what Mohit believes has led them to grow despite challenging times. 

After demonetisation, the company moved to provide lower ticket-size loans, which initially was Rs 10 lakh. 

“And by virtue of being in a smaller ticket size, we cater more to essential services items,” Mohit says. This includes grocery shops, kirana stores, and medical stores, which are relatively immune to crises. 

“And we don't get much into discretionary items such as electronics, mobiles, travel, and hotels. We don't do much there, and those are the people who are most impacted,” 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 percent of its employees are into sales, with a ‘feet on the street’ approach to building its customer base. 

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