Two business leaders from India’s leading NBFCs discussed initiatives to improve SME and MSME lending process:
Small businesses in India often struggle with a lack of financial data and discipline necessary for credit assessment. Additionally, they face challenges related to the number and quality of collateral they can provide. As a result, many small businesses must resort to accessing credit through unorganized channels, which can be unaffordable and sometimes exploitative.
Process Improvement Initiatives
U GRO Capital has adopted a unique approach to address credit demands. Instead of relying on financial and collateral-based assessments, the company focuses on cash flow-based assessments. By understanding the customer’s income and cash flows, which may not be reflected in banking and financial records, U GRO Capital extends credit to this underserved segment. This process is time-consuming, but it has helped U GRO Capital stand out from other lenders.
To assess creditworthiness, U GRO Capital overlays the assessed cash flows to their proprietary risk model called GRO SCORE, which evaluates customers based on their banking, bureau, and GST behaviors. This allows U GRO Capital to extend credit to the last mile.
According to Amit Mande, Chief Revenue Officer of U GRO Capital, this approach has proven effective and has helped the company make a positive impact in the lending industry.
Electronica Finance specializes in financing for MSMEs. While the company has traditionally focused on machine financing, it has since broadened its range of offerings to include rooftop solar financing, loan against property (LAP), micro-LAP, and working capital financing. All these products have been developed with a customer-centric approach, ensuring that the needs of the clients are met effectively.
Shilpa Pophale, the Managing Director & CEO of Electronica Finance, has stated that the company now covers nearly all industry sectors where MSMEs operate, with a particular emphasis on manufacturing MSMEs, but does not finance real estate or infrastructure projects.
Electronica Finance has recently developed new products, such as micro-LAP and rooftop solar finance. These products have helped Electronica reach out to MSMEs in the services and retail sectors. The company offers coverage across all major industrial belts in the country (except the East). Retail micro-LAP financing product has already been launched in 3 large states. Shilpa says: “Our aim is to ensure that every region is thoroughly penetrated and that MSMEs have access to the best financing options. Our focus has been on the underserved segments across various industries and sectors, particularly those at the bottom of the pyramid in the supply chain.”
U GRO Capital has developed sector and subsector-specific risk models, thanks to its sectoral focus. This has enabled the company to extend credit to MSMEs and price it correctly. Amit stated that they aim to revolutionize the MSME lending ecosystem and solve the Rs50 trillion credit gap in India. Their goal is to acquire 1 million customers and capture a 1% market share of the larger MSME lending market within the next 3 years.
Co-lending to SMEs
Collaborative lending is a mutually beneficial model for banks, NBFCs and customers. It allows for the flow of liquidity, through the right type of collaboration, to the last-mile MSMEs. While large banks and financiers have the advantage of capital and low borrowing costs, it is difficult for them to underwrite all segments of MSMEs.
Electronica Finance partnered with SIDBI in 2006 to provide machine financing solutions and enable MSMEs to access government schemes for machinery upgradation. This was made possible through the Credit Delivery Arrangement (CDA) mechanism with SIDBI. Shilpa added: “Over the past 15 years, we have reached out to more than 1500 MSMEs under this scheme. Recently, we have formed co-lending arrangements with a few large PSU banks where we provide last-mile connectivity for underserved MSMEs so that they have access to finance.”
Electronica Finance has partnered with smaller NBFCs to provide micro-enterprises with access to formal credit and include them in the organized financing ecosystem. The company has funded approximately 500 such entities in recent years.
Amit explains that co-lending is one of the main reasons for their success. Large banks are the primary custodians of liquidity. They have accomplished an off-book AUM of 43% from their total AUM of approximately Rs70 billion as of June ‘23 by effectively leveraging their co-lending partnerships.
The most important feature of customer service across the entire life cycle of the loan has been doorstep service thereby ensuring that the borrower has ease of doing business. Shilpa says “We have leveraged technology to ensure that seamless and efficient service is provided to the customer. With our new upcoming app, we will deliver financial solutions to our customers within an hour and will be able to take care of all service-related issues on the go.
UGRO leverages a digital stack to provide convenient access to credit and seamless servicing of the same to its customers. The entire onboarding process, whether it is direct or assisted, is completely digital. The company relies on a data tripod of banking, bureau, and GST records, all of which are digitally accessible.
To ensure swift customer assessments and approvals within an hour, UGRO uses its proprietary GRO Score 3.0. Customers can engage with the company’s WhatsApp bot, Unnati, to avoid traditional bottlenecks such as long queues and frustrating phone calls. UGRO prioritizes transparency, and all documentation is digitally dispatched to ensure clarity, foster trust and promoting fair pricing among its customers.
NPAs & Fraud Control
EFL places a strong emphasis on customer selection to minimize repayment issues. The company educates customers about the advantages of timely repayment and the dangers of EMI bounces, among other things. There are also repayment plans that incentivize timely repayment. Shilpa explained that the company values staying in touch with the customer and, while utilizing technology to enhance its services, still maintains a personal touch. This approach ensures customer centricity, monitors customers’ financial health and handles repayment issues as they arise. As a result, EFL has achieved industry-leading asset quality.
Amit highlighted that their data expertise drives the GRO Score, which helps predict potential losses over the next 12 months. He adds: “We have an early warning system that ensures meticulous portfolio monitoring. Our use of propensity models enables us to engage with customers proactively, which helps to reduce default risks. We use authentic digital data sources such as credit bureau and GST records, which means that the risk of misrepresentation and fraud is virtually non-existent.”
Nucleus is a key partner for Electronica Finance. They use their FinOne Neo solution which provides cutting-edge technology. The software is robust, enabling integration with various value-added technology tools through API pulls and other integrations. The NBFC has developed an app for customers and business partners, designed to be simple, fast, and efficient. The app integrates with various other platforms through APIs, allowing customers to obtain information smoothly and at the click of a button.
Shilpa explains that they will provide sanctions on the go, as well as all other customer information and services, in one app, providing ultimate convenience to the customer. The partner app is also very easy to use and enables partners to share business leads and other data, and pushes back information about leads shared, status of files, and more.
U GRO boasts a highly skilled and sizeable in-house team comprising of 200+ data and technology professionals. While the company does partner with several external vendors for loan management systems that cater to its diverse product range, the bulk of its tech infrastructure is developed in-house. This allows UGRO to create both direct-to-customer and assisted journeys with ease. According to Amit, the company’s digital underwriting process is enhanced by incorporating extensive API stacks from a variety of data partners such as KYC, UPI Validation, or SafetyNet Attestation. Furthermore, the company’s proprietary underwriting model, GRO Score, is also developed in-house.