In conversation with Nirav Shah, Chief Strategy Officer, U GRO Capital

Some important digital initiatives taken by the government bodies have provided a fillip to digital MSME lending in India says, Nirav Shah, Chief Strategy Officer, U GRO Capital. 

How is U GRO Capital, a specialized MSME lender better positioned to bridge the MSME credit gap?

Today lenders like U GRO capital are better placed to underwrite MSME loans (as compared to five years ago). I think a large part of the credit should be given to the government as several steps taken on the digitization front has enabled lenders like U GRO Capital to capture the host of primary and alternate data. This has helped the lenders to solve the issues surrounding data availability/information asymmetry and in turn, has helped them to cater for the needs of MSME’s in a more effective way by introducing customized lending solutions. Some of the important digital initiatives taken by the government/various bodies which have provided a fillip to digital MSME lending in India are India stack, OCEN framework, and the recently announced account aggregator framework, GeM Sahay platform has helped democratize MSME credit in the country. Owing to this MSME underwriting models are seeing a huge paradigm shift.

Differentiated underwriting: We at U GRO Capital with a clear focus to lend to specific sectors within the MSME space have developed our own underwriting model called GRO Score - which is a scorecard-based evaluation of customer applications. Last year and a half were notable from the point of view of the evolution of U GRO’s underwriting systems. Our tech team has built a proprietary underwriting model called GRO Score 2.0 which uses the tripod of GST, bureau and banking data and provides superior performance through the use of ML Models. A holistic credit score for MSMEs built by combining repayment history and cash flow transaction data; provides improved performance by fitment on own data, extensive feature creation and use of machine learning models. It combines entity, individual and banking data into one model. The time taken to disburse an uncollateralised/collateralised loan is 2-3/7-8 days from the application date. The current underwriting process reduces dependency on any specific bureau data and provides 10-20 per cent higher approval rates for similar or lesser risk cases.

Multi-pronged distribution approach led by the offline presence and tech capabilities: We believe U GRO has built distribution channels that enables it to cater to the MSME’s across all geographies and ticket sizes. Each U GRO channel is powered by a proprietary technology module. For sourcing of loans, U GRO has four key distribution channels which are a blend of traditional channels and tech-driven channels comprising of (a) Branch led channel – GRO Plus (b) Ecosystem Channel – GRO Chain (c) Partnership and Alliances – GRO X stream (d) Direct digital – GRO Direct (e) Co-lending.

Variety of products enables the company to serve a wide spectrum of MSME customers: U GRO Capital follows a multi-pronged approach on the asset side consisting of (a) lending (on its own balance sheet), (b) co-lending / co-originating with partner banks and (c) assignment/securitization.

And last and the most important thing - On the liability side, U GRO follows a traditional balance sheet led approach plus a fee-based platform. U GRO has partnered with a large number of lenders and levers to grow by co-lending with banks. U GRO currently has partnerships with 36 lenders (8 PSU + 10 Private. Banks) including a Rs 10 billion co-lending arrangement with Bank of Baroda. In the last one year, the company has built a strong liability book by utilizing government schemes such as TLTRO 2.0 and PCG to achieve lower borrowing costs. In terms of the liability side balance sheet, 50% would be on the balance sheet, around 30% would be in co-origination, and the balance would be, in terms of securitization of assets.

What is the AUM growth that you are targeting?

While it is a bit difficult to put a growth number on a quarter-to-quarter basis, one thing I would say is that we are on track to achieve the stated AUM target by FY25E. Currently, our diversified AUM mix across the identified sector with light engineering, food processing and electrical equipment forms 51% of the AUM mix as of Q2 FY2022. 77% of the portfolio is secured in nature. Just to put things in perspective in the very first year of operations (for 11.5 months) the company disbursed Rs 8.5 billion whereas in the second year (a large part of it being impacted by Covid) the company disbursed Rs 7 billion despite being in operation for barely five months. So, we were to annualize the above number to Rs 15 billion. Also, in the interim, three new distribution engines (GRO micro, partnership and alliances and supply chain financing) got built and have started disbursing. We believe U GRO capital has all the ingredients (the infrastructure, distribution, and the funding) in place to reach their stated AUM target, the management must keep executing as per the plan.

What is your earnings outlook for the upcoming quarters?

Again, I would refrain from giving any numbers on a quarter-to-quarter basis but we have a well-articulated plan of reaching Rs 119 billion of disbursements in the fifth year (i.e. FY25E), and Rs 200 billion of AUM by FY25E. We are targeting a ROA of somewhere between 4-5 per cent while not levering our balance sheet beyond 3.8x to 4x.