How this duo is helping the ‘underserved’ micro-business sector with small-ticket unsecured loans
Numbering around 6.3 crore, micro, small, and medium enterprises (MSMEs) constitute an integral part of the Indian economy, contributing about 30 percent to the GDP, 48 percent of the exports, and creating 11 crore jobs. Over the last few years, their prominence has risen rapidly.
Despite playing such a crucial role in the country’s growth, this sector suffers from a credit crunch due to which many businesses fail to survive. The worst affected is the micro-business segment, comprising small retail trade and repair shops, that lacks the luxury of accessing funds from banks and fintech institutions who take the MSMEs sector as high-risk borrowers because of insufficient assets and low capital. So, these businesses prefer financing from expensive informal sources.
Despite there now being an increasing number of financing options available to MSMEs in recent years, the addressable credit gap in the MSME sector is estimated to be Rs 25.8 trillion ($397 billion).
Deepak Aggarwal, Co-founder, Co-CEO and CFO of Moneyboxx Finance, tells SMBStory,
“To credit the sector, banks and NBFCs are restricted by unique challenges in underwriting – lack of credit history, formal business documentation, and collateral. Fintech institutions are unable to serve this segment due to the lack of data, and addressing this segment requires an on-ground presence for effective underwriting and collection efficiency. Here, Moneyboxx plays the role of ‘The Missing Middle’.”
This idea to address the credit needs of underserved micro and small enterprises (MSEs) overlooked by banks and NBFCs led him to start Moneyboxx in Mumbai, a small-ticket unsecured loans company, along with Mayur Modi, who is the Co-CEO and COO.
Mayur Modi and Deepak Aggarwal, Cofounders, Moneyboxx Finance
The Missing Middle
Chartered accountants by profession, Deepak and Mayur had spent 18 years in the finance industry, with their core competencies being in capital funding (PE, debt, and venture capital), capital structure optimisation, credit and industry risk, and growth and strategy consulting.
Deepak explains that having gained experience in the industry, they understood that the bottom of the pyramid segment in India is adequately addressed by numerous Microfinance Institutions (MFIs) providing small group loans totalling Rs 2.28 trillion.
Secured loans with a higher credit size of over Rs 5,00,000 is also aggressively pursued by banks and NBFCs, and credits for salaried individuals and enterprises with documentary proof too are actively pursued by banks and fintech NBFCs. However, he says unsecured business loans in the range of Rs 50,000 – 5,00,000 range to individuals was severely underserved. This presented a huge market as well as an opportunity for microfinance borrowers to graduate to individual loans.
This is where the duo found a sweet spot and decided to plunge into the market by contributing an equity capital of Rs 20 crore.
Registered as Moneyboxx Capital Pvt Ltd in 2018, the company acquired Dhanuka Commercial Ltd, which is an existing listed NBFC that was then rebranded to Moneyboxx Finance Ltd under the new ownership and management.
Deepak says that Moneyboxx extends loans to individuals, which is a significantly underserved market vis-a-vis group-loan MFI segment. Unlike the MFI debt market, which stands at Rs 2.27 trillion, the ‘Missing Middle’ debt segment in Rs 50,000-10,00,000 ticket range stands merely at Rs 0.94 trillion. Players like Aye Finance are also growing rapidly in this sector.
Moneyboxx was formed to address the unmet credit needs of this segment by providing easy, cost-efficient, and technology-driven financing solutions to deserving micro-enterprises. A BSE-listed NBFC, it provides small-ticket unsecured loans from Rs 50,000 to Rs 3,00,000 to micro and small enterprises in mostly Tier II and III cities in India, and charges an interest of 27 percent.
Moneyboxx has expanded its presence to 22 branches across four states with Assets Under Management (AUM) of close to Rs 64 crore as of March 31, 2021. It has an income of Rs 4.17 crore as of FY20 and in the last nine months it has made Rs 7.20 crore.
Impact on customers
In February 2019, Moneyboxx disbursed its first loan to joint applicants Babita Kumari and Chatur Singh, who were livestock rearer and residents of Bharatpur, Rajasthan. The total quantum of the loan was Rs 1,51,000 disbursed over 11 months for the purchase of cattle.
“We provide loans to underserved micro-enterprises and self-employed people who lack access to formal credit but generate a strong return on investment, leading to negligible bad debt for lenders,” Deepak adds.
Talking about the underwriting process, he says the nature of Moneyboxx’s financing is for businesses growth and expansion, and the company follows a ‘phygital’ model of operations.
“While we are not a pure fintech lender, we highly leverage technology with digital processes and tech-enabled decision-making. Given that our target borrower segment does not have regular documents to prove income, the sole reliance cannot be placed on technology when it comes to decision-making,” Deepak explains.
Moneyboxx has a team of Loan Relationship Officers (LROs) who source the leads directly from customers through cold calling and existing customer reference. “We do not engage or employ any DSA or third-party model to source our loans,” he adds.
He adds that the team of LROs typically cover ~40 sq km to optimise sourcing and collection. Customers are acquired via an assisted mobile application wherein the LROs capture more than 150 data points about the customer, nature of business, income, expense, and all other relevant information.
The credit process also involves various types of verification exercises like house verification, business verification, neighbour verification, buyer and supplier verification, and so on. All this information is captured in the mobile application, after which the disbursement and collection of loans are completely digitised, taking place via banking channels like Automated Clearing House Network (ACH).
Till now, Moneyboxx has disbursed loans amounting to Rs 90 crore, with 100 percent recovery. Moneyboxx’ target customers are from small to mid-size kirana owners, livestock rearers, among others. It has 14 lenders in place, including Capri Global, Caspian, and others.
Major challenges and the way ahead
Raising adequate funding from banks and NBFCs has been a challenge so far, despite proven underwriting and collection efficiency with close to zero NPAs. “This has been driven due to several challenges in the industry, which have been aggravated by COVID-19,” Deepak explains.
Having said that, Deepak says that even though there was a moratorium option, only five percent of its customers availed it, which indicates that the company’s underwriting process is strong.
“Despite the pandemic, we have still added 12 new lenders in H2FY21 and we’re hopeful that the situation will improve in the near term. We believe PSU banks have to be at the forefront in lending to NBFCs like us, which are entirely focussed on priority sector lending and to customers who are not catered by banks and large NBFCs,” Deepak says.
Given the huge under penetration in the segment, Moneyboxx sees a tremendous growth opportunity and targets to achieve an AUM of more than Rs 1,000 crore over the medium term in the next three to four years.
“We have positively impacted the lives of thousands of people, and we aim to create a positive impact for one million people in the next five years.,” Deepak signs off.