Interview with Shachindra Nath, Founder and Managing Director of UGRO Capital

Our technology empowers loan officers, not replaces them. This human touch, along with a deep understanding of MSME needs, is vital in our industry, states Shachindra Nath, Founder and Managing Director of UGRO Capital.

In Q4 FY24, the company's total income increased by 52 per cent from Q4 FY23 to Rs 330.4 crore, while the profit after tax impressively soared by 133 per cent compared to Q4 FY23. What factors contributed to the company's strong financial performance?
UGRO Capital's impressive financial performance in Q4 FY24, marked by a 52 per cent increase in total income to Rs 330.4 crore and a 133 per cent surge in profit after tax compared to Q4 FY23, reflects our unwavering commitment to reshaping small business financing. Surpassing Rs 9,000 crore in AUM underscores our dedication to delivering unmatched financial solutions as we strive to become the Largest Small Business Financing Institution Driven by Data and Technology. Key factors contributing to this growth include strategic investments in expanding our distribution channels and broadening our lender base. Our data-centric underwriting model, which ensures consistent monthly disbursals of about Rs 500 crore, has also played a crucial role in driving this success.

Our robust quarterly figures, along with optimal GNPA/NNPA metrics of 2/1.1 per cent on the total AUM, highlight the quality of UGRO's portfolio and our well-structured risk management approach. As India's largest co-lender in the MSME segment, our distinctive co-lending approach, combined with strategic co-lending partnerships that account for 45 per cent of off-book AUM, has significantly propelled our growth trajectory. These strategic initiatives collectively reflect our dedication to providing unmatched financial solutions, enabling us to deliver strong financial results and solidify UGRO Capital's leadership in the industry.

How will the recent acquisition of MyShubhLife benefit the business and support its growth? Additionally, are there any plans for further acquisitions and expansions?

The acquisition of MyShubhLife (MSL) marks a significant milestone in our journey, highlighting our commitment to growth, innovation, and delivering value to stakeholders. Scaling up Embedded Finance necessitates a deep understanding and penetration of the payment ecosystem, coupled with a cutting-edge data and technology stack. MSL’s proven track record in these areas fits well with UGRO’s strategy. With its live embedded relationships with leading payment ecosystems and a contemporary, functional technology architecture, MSL will enhance the granularity and yields of our portfolio. This acquisition also reinforces our commitment to direct digital lending for small retailers, positioning us to provide even more tailored credit solutions to this crucial segment.

MSL is a market leader in embedded finance solutions, specializing in offerings for small shopkeepers and distributors. Its unique products, including daily and weekly instalment options and an overdraft facility, along with robust underwriting and distribution capabilities, make it uniquely positioned to deliver customized credit solutions to last-mile retailers and distributors. Having sourced over 15 million merchants through anchor partners like Pine Labs, Fino, Airtel Payments Bank, and others, MSL brings substantial market reach. With MSL integrated into our ecosystem, UGRO Capital plans to onboard 200,000 new retailers within the next three years, unlocking substantial growth opportunities.

We anticipate an incremental AUM of Rs 1500 crore and achieving a PAT of Rs 100 crore over the same period, significantly bolstering our growth trajectory. Our plans include exploring further acquisitions and expansions to continue our path of innovation and market leadership.

Regarding the credit cost in Q4, which stands at around Rs 41 crore for the quarter, this represents approximately 2 per cent of the overall AUM. Do you have the capacity to manage or reduce this credit cost further?

Our portfolio performance is well-calibrated and aligns with our expectations. Our proprietary GRO Score model and underwriting framework have been designed to achieve planned product-wise lifetime losses. In the case of Unsecured loans, lifetime NPAs are planned to be below 5 per cent; in the case of Prime secured loans, a lifetime NPA of 1 per cent; and in the case of Micro secured loans, a lifetime NPA of 3 per cent. Overall, as a blended portfolio at a consolidated level, this would result in about 2 per cent credit cost on an annualised basis. So far, all lead indicators are headed in the same direction and are likely to remain that way.

How does the recent capital raise benefit the company? What are your major focus areas with this capital increase?

UGRO Capital's recent equity capital raise of Rs 1,332.66 crore through Compulsory Convertible Debentures (CCD) and Warrants is a strategic investment that significantly boosts our capability to support MSME lending in India. This innovative funding approach ensures that we have the capital necessary for both current and future growth locked in today. With strong backing from existing investors like Samena Capital, which committed Rs 500 crore through Warrants, and participation from institutional investors such as Aregence, alongside several of India’s marquee family offices, this capital infusion underscores confidence in our mission and strategy.

This capital raise marks a pivotal milestone in our journey to create an Institutionally Owned, Independently Supervised, and Professionally Managed FinTech in the public market. Our primary focus with this increased capital will be to further empower small and medium businesses, bridging the significant credit gap of over Rs 90 lakh crores in India. We are committed to utilizing these funds to enhance our lending capabilities, expand our reach, and strengthen our technological and operational infrastructure. This will enable us to better serve the needs of small businesses across India, fulfilling our vision of becoming a leading financial institution dedicated to MSME growth and development.

In this era of AI and ML, how are you incorporating these technologies into your business operations? Additionally, are there any challenges you face in doing so?

Artificial Intelligence (AI) and Machine Learning (ML) are transforming MSME lending across the NBFC and Fintech industry. UGRO Capital leverages AI algorithms to analyse vast datasets, going beyond traditional credit scores. This allows us to identify promising but overlooked borrowers and personalize loan offerings based on their specific needs. AI coupled with advanced technology applications and platforms, enables us to assess cash flows accurately, marking a shift towards cashflow-based lending. Ensuring high-quality data specific to MSMEs is crucial for effective AI models. Additionally, we prioritize interpretable AI models to explain loan decisions and ensure fairness.

At UGRO Capital, we believe the best approach combines data and technology with human expertise. Our technology empowers loan officers, not replaces them. This human touch, along with a deep understanding of MSME needs, is vital in our industry. We're constantly exploring new ways to leverage AI and ML, staying at the forefront of MSME lending innovation for businesses across India.

Disclaimer: The article is for informational purposes only and not investment advice.