We are a services-led business rather than a balance-sheet led one: Shachindra Nath of U GRO Capital

India is home to approximately 6.3 crore micro, small and medium enterprises (MSMEs), according to research platform IBEF (India Brand Equity Foundation). These enterprises form the backbone of the Indian economy, contributing about 30 percent to the GDP and being the second-largest workforce after agriculture. In fact, MSMEs contribute 48 percent to India’s exports, making them a major revenue generator for the country. 

However, this sector faces numerous challenges, the biggest of which is access to formal credit. The last few years have seen fintech platforms and non-banking financial institutions (NBFCs) ease capital flow, especially during the COVID-19 pandemic, according to Shachindra Nath, Executive Chairman and Managing Director of MSME lending platform U GRO Capital.

U GRO Capital, formerly Chokhani Securities, is a BSE-listed NBFC established in 1993. The birth of U GRO Capital happened after Shachindra acquired Chokhani Securities, and revamped its management team in December 2017.

In the last few months, U GRO has reported several developments, including a partnership with traditional banks such as IDBI Bank, SBI and Bank of Baroda. A market leader, the business is set to usher in a new era of co-lending. 

In an interaction with SMBStory, Shachindra shares how the small business lending ecosystem has evolved over the years, role of banks and other fintechs and his vision for the ecosystem in the next few months. 

SMBStory [SMBS]: How has the COVID-19 pandemic changed lending among small businesses?

Shachindra Nath [SN]: Lending in small businesses was majorly driven by collaterals. This is because it was very difficult to assess factors such as revenues of the SMBs, their expenses and how much money the business can afford to pay back. So, having physical collaterals secured the lenders.

That is dramatically changing because lenders have the tripod of data and technology now. In fact, I believe that MSME financing will reach the level of consumer financing in the next three years. Today, GST, digitisation of the banking sector which happens through account aggregation, bureau footprint, have helped lenders analyse MSMEs better in a matter of minutes. This is also how we operate.

Today, we don’t ask for balance sheets or any other historical data.

We have also proven that these models have found acceptance within the large financial institutions as we signed a co-lending partnership with Bank of Baroda, State Bank of India and IDBI Bank, all which are following our tripod data approach which means eligibility is being created around different data sets.

The second change is that SME financing is moving from entity-level financing to transaction-level financing. This means that earlier lenders were lending term loans for working capital needs. 

Small and medium businesses (SMBs) had the flexibility to use the capital raised for whatever they wanted. Now, lending occurs at the transactional level. This has eliminated risk at the entity level.

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SMBS: The common notion is that banks only look at balance sheets while lending to MSMEs…

SN: That is not true at all. It is just a myth because if this was the case then Bank of Baroda would not have been disbursing loans with us under the Pratham Programme. Banks have been lending in a way which has been established over a period of 30 to 40 years. 

And that's why there is a regulatory intent of collaboration within the banking system, where they are ready to adopt the best practices of NBFC in a calibrated manner. In fact, while partnering with SBI and IDBI Bank, they did not alter our credit programmes. It has taken time because the methods are completely different but to say they are not open to the newer methods of credit underwriting is not true. 

Having said that, I can't comment on the entire banking fraternity. There will be some banks that will be slower in adopting or embracing the change but there will some who are quicker.

SMBS:  How have you integrated technology within your systems?

SN: We divide technology into two parts — one is for data analytics and the other is for process simplification. We analyse every customer based on GST, bureau and banking. Thereafter, our data analytics platform analyses different sets of data and we make sure that the machine has the ability to say yes or no based on some patterns.

In process simplification, our aim is to ensure that when a customer comes onboard, his or her journey with us is smooth. For instance, everything including KYC is digitised and the submission of documents takes place without any hassles. 

SMBS: The GRO-Xstream platform brings several fintech and lending ecosystem players together. What are some of the larger goals you are planning to achieve through it?

SN: Our GRO-Xstream is an API-driven highly customisable tech platform, which integrates banks and multiple fintechs, NBFCs, neobanks, etc. Since the lending ecosystem is very vast, what we have done on one hand is to partner with big banks and integrate them into the GRO-Xstream platform.  And they are co-lending on the loan asset originated by us. 

The other side of the coin is we are integrating with NBFC and fintechs and co-lending just like the banks.

Eventually our goal is that once the platform matures, a large bank like the SBI will be able to go at the bottom of the pyramid (hundreds of fintechs) through this platform and will be able to do co-lending with them.

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SMBS: What are some of the gaps that still remain in the small business lending ecosystem?

SN: The change needs to come from MSMEs themselves. First, MSME have to push themselves to become a part of the formal sector willingly. Today, it is happening by force, be it GST or digital banking, which they can’t avoid. 

So being digitally enabled is one of the most critical factors otherwise their credit score will be impacted severely. 

Second, is that the ecosystem needs to keep evolving. There are multiple changes happening in the ecosystem.

From the perspective of NBFCs, getting money has been a challenge because most of it goes to the large, corporate-owned NBFCs. So companies falling in the middle and the bottom spectrum don’t get too much money. But the solution to that lies somewhere in building quarantine models, do lending as a service, originate assets, show maturity, portfolio performance and sell it back to a large bank. 

So I think we are in a very exciting and evolving phase.

SMBS: What are your plans for the next 12-18 months?

SN: NBFC and fintech lending in India is the inflection point of transition wherein the focus is on lending as a service and not lending as a balance sheet. 

What has been happening up until now is that banks lend to NBFCs with the intention that the money goes to some underlying borrower. But the money invariably is used for some other purpose which was never the intent of the bank. 

Our view is that we have to demonstrate different types of customers and products and then for every product we will have a bank partner so that we don't have a balance sheet-led business we have a services-led business.

We roughly disburse Rs 100 crore every month to MSMEs and a portion of that will now be going to SBI under the Sanjeevani Programme. 

We are a publicly-listed company and are looking to double our AUM (assets under management) by the end of this year.