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The Startup That Started With An IPO | Shachindra Nath @ U GRO Capital
334 Plays3 years ago
Unlike most founders who first have an idea, then build a prototype and then raise funds, Shachindra started big - by directly acquiring a publicly listed financial institution that he transformed into U GRO Capital.
In this episode, you’ll hear about some unique innovations of this fintech platform that is at the forefront of the digitization of SMEs.
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Transcript
Introduction and Podcast Shoutout
00:00:00
Speaker
Before we start today's episode, I want to give a quick shout out to Zencaster, which is a podcaster's best friend. Trust me when I tell you this, Zencaster is like a Shopify for podcasters. It's all you need to get up and running as a podcaster. And the best thing about Zencaster is that you get so much stuff for free. If you are planning to check out the platform, then please show your support for the founder thesis podcast by using this link, zen.ai slash founder thesis.
00:00:27
Speaker
That's zen.ai slash founder thesis.
Mission and Vision of UGRO Capital
00:00:31
Speaker
Hello, everyone. This is Shaachindra Nath. I'm the executive chairman and managing director of You Grow Capital. We are trying to build India's largest small business financing platform in India. And it's very good to be here. Take a minute. This could be a great intro.
00:00:56
Speaker
Small is big is probably the motto of Shachendranath, the founder of YouGrow Capital. YouGrow Capital is an NBFC or a non-banking financial company that is in the business of lending money to small businesses and the business opportunity of lending to small businesses is massive.
00:01:15
Speaker
But at the same time, there is a reason why this is such an untapped market. It's not possible to serve this market using traditional methods and in this episode you will get to hear about some very unique innovations of Ugro Capital because of which they are able to tap into this massive opportunity.
The Unique Approach to Starting UGRO Capital
00:01:32
Speaker
Shachendra's own journey of building YouGrow is no less fascinating. Unlike most founders who first have an idea, then build a prototype and then raise funds, Shachendra started big by directly acquiring a publicly listed NBFC that he transformed into what is today YouGrow. Listen on to Akshay Dutt talk to a path-breaking founder who created an institution that is built to last much beyond him.
00:01:57
Speaker
So actually my first thought was to create, and because I had diverse financial services experience, my first thought was to create a fund.
00:02:04
Speaker
because I've done so much of asset management to create a financial services focus fund, which has the ability to fund other financial services professional to create multiple financial services business. This would be like a VC investing in FinTech. You can put it in any box, but it was basically a pool of capital vehicle. Actually, my idea of a financial services fund, which could do right from an early stage VC investment,
00:02:33
Speaker
to a late stage growth capital in financial services, lending, fintech, asset management, insurance, everything put together. And actually I tried. So I went to all my friends, people who knew me, and everyone said that you are not an investor. And I used to get very confused. What do you mean by you're not an investor? They said, look, and probably they were right. They said, look, first and foremost, Shachin, you are an active operator of a business.
00:03:00
Speaker
Even if we give you capital and you become an investor, for you to give capital to somebody else and wait for him to succeed, you will become very restless because you would like to change things, correct things and do on your own.
00:03:15
Speaker
So don't get into that trap. And second, the investor world, what is typically called the LPs, would not recognize you as an investor. Because if I would have come out of a Blackstone or a Carlyle and would have done series of multiple investments and succeeded in that, I have a track record of investing. I had a limited track record of building businesses. And that's why most of my well wishes said,
Personal Values and Business Alignment
00:03:38
Speaker
I don't know and that was in first six months of 2016 they said no think of a business which you can own and operate rather than you know investing into others business because that's not your core capability actually you know it took a little time you know to hear that feedback first saying look you don't have capability to invest in our business you know but then I realized that probably people are right and then within the broader financial services I had to choose where my you know
00:04:05
Speaker
My heart didn't, you know, where I thought that there is, I can make a change. And that also again came from, you know, I remember this in 2012, my, when my dad passed away, he went back to Banaras, you know, when we took him to the heart, all of a sudden there were almost 2000 people who were waiting there for him to get cremated. And I realized that, you know, we in private sector, we all do a lot of things. We might just earn a lot of money, but we don't get respect. So I said,
00:04:35
Speaker
If you look at the broader classification of financial services industry, investment banking, asset management, high-yield lending, which is the mid-corporate real estate, we are not doing good to society at all. Because there is nothing which you are doing which is creating a real impact. And that's where I felt that if you look at each of the financial services pieces, lending first
00:05:01
Speaker
Because as I said, there has to be an alignment with the provider of the capital and the people who build the business. Lending as a business broadly, wherein you can bring professional capital and you can create exit for them. Because it's a capital business, it's a high churn business. Now, within that, banking is not possible because banking has a very different regulatory construct. And that's why outside banking, this NBFC becomes fairly attractive. Now you call it FinTech, you call it NBFC, you call it whatever.
00:05:29
Speaker
But within that, with my experience, I realized that you have three types of lending opportunities. But the highest and most meaningful impact in India can be curated around small businesses. Because when it comes to consumer financing business, I'm anyway anti consumer hypothesis itself. But anyway, there are large players like Bajaj and few others who have already succeeded in that. Why are you anti consumer lending?
00:06:14
Speaker
fit well with the consumerism, but we are all in that trap. I don't think so that we can do anything about it. Whether I like it or not like it, we are moving towards a very high degree of consumerism, so that's okay. Between the wholesale credit and the consumer and small business financing,
00:06:23
Speaker
No, not consumer lending. I meant consumerism per se, not the consumer lending. Got it. Got it. Got it. Got it. Got it. Got it. Got it. Got it. Got it. Got it.
00:06:32
Speaker
I realize that if I have to design and run or create an institution and my name is recognized for that, there is nobody who has tried to create a very large format as semi-financing business.
The Bold Vision for SME Lending in India
00:06:46
Speaker
And I was very convinced that if I bring professional capital,
00:06:51
Speaker
I would be able to create a scale size wherein this providers of my capital can take exit and new set of investor can all the time keep coming. So that's the core philosophy I started working on. And that's the background of creation of UGRO. While it is a different thing, the way I wanted to create was all very, very difficult. But yeah, finally in 2017, I ended up
00:07:17
Speaker
Raising a straight 1000 crore of capital, which in those times were very, very large actually. Did you raise the 1000 crore on the back of an idea or had you already launched UGRO with some traction? Nothing, on a piece of paper. Well, how did you do that? No, I had nothing. I used to call myself a Pukara promoter with only a pound in presentation, running around here and then trying to get capital.
00:07:46
Speaker
Yeah, actually if you ask, this is like debt capital, right? Like equity. I always, all of it is equity capital. If you ask me if I've ever tried doing it again, I would say no.
00:08:01
Speaker
So, as I said, in your PPT, what was the pitch you were giving to investors? Like you will create an SME lending NBFC. So, yeah, my pitch was that, okay, so if you come to that, my pitch was threefold. First and foremost was that, you know, the opportunity is very large. Second is that, you know, the way the mainline lending institution, and some of this, you will see it get reflected from where I come from.
00:08:32
Speaker
My presentation always used to start that in India, if there is a dentist and there is an IVF clinic and both want loan, the main line lenders would only treat them as doctor, as one category. Little realizing that a dentist may have 10 patients during the day,
00:08:51
Speaker
But an average earning from those 10 patients would be roughly around 20,000 rupees, right? 2,000 aper. Versus an IVF clinic may have just one patient in the day, but that one patient is roughly around seven and a half lakh rupees. But a lender's credit officer, when we'll go for interviewing these two types of doctors, the first question he would ask is how many OPD patients come to your office every day or your clinic every day?
00:09:15
Speaker
And once the IVF clinic would say, sir, one, then he'll say, aree, catch a doctor. So the way I used to say, this is a non-homogeneous sector versus lenders are homogeneous by nature. So unless you have a platform which has an ability to differentiate in this massive non-homogeneous and fragmented customer set, in a homogeneous way, you cannot succeed. So that was my first pitch point.
00:09:44
Speaker
Second pitch point was that, you know, size of the capital is important because finally lending is a business where you have to give comfort to the lenders to us and to the customer. And that's why my second pitch was that I want to create a straight size of big size of capital and I have no problem in getting diluted down.
00:10:05
Speaker
So what does it mean that majority of the founders, and this is my advice to most of them, they are very bothered about what is my end ownership. And I used to think that, look, I have worked for 22, by the time I had worked for 25 years, and after 25
Building a Sustainable Financial Institution
00:10:21
Speaker
years, I had nothing in hand.
00:10:24
Speaker
And if I go and work for another company at that age, you know, what do you get? You get tummies off, you get some salary, nothing, right? So it doesn't matter that whether you are a 20% owner or a 50% owner or a 3% owner, because eventually your 2-3% is a relative term of what size of that percentage.
00:10:45
Speaker
In our kind of business, because we are not capitalist, we can never own a business because of our percentage ownership. We own our business because of our capability and intent of creating scale and building institutions.
00:11:03
Speaker
So second is that I gave this, you know, optionality to some of our private equity investors who came with me saying that you don't have to invest at an expensive price. You come with me at par and be a large owner. I would, whether I'm a 3% or 10% or 5% owner, I would work same way, you know, as if I'm a 100% capital owner.
00:11:28
Speaker
And third was that I wanted to create a structure or a vehicle which is being created for permanency.
00:11:37
Speaker
Not many times, most of the new ventures are created with an objective to be sold to someone. What's your exit method? Somebody will come and buy us. I wanted to create an institution. All of this became a very difficult component when I was raising capital. I said, I want to do it in a listed company format. So, I actually virtually created India's first listed SPAC equivalent.
00:12:01
Speaker
When I said I will acquire a very small listed NBFC and raise all my capital there from true blue-blooded traditional private equity funds so that the entity and the investor's interests are two different things.
00:12:20
Speaker
I'm not designing the business to be sold to someone. Investors would get their exit from the market over a period of time versus the entity would be created to last beyond me. So it is not created that my son or daughters have to come and take it over. It is not created that I have to permanently run it. So I sometimes become immodest to say that but think of this
00:12:43
Speaker
My aspiration was to create a next HDFC equivalent or an institutional equivalent for SME financing.
00:12:52
Speaker
you are listed, you have a large capital, you are run and supervised by an independent board and financial services professionals who want to benefit from creation, they own, go get equity ownership through ESOP structure and will build a scale and it would change hands. When I'll retire in five, seven years, my next level of people would take it forward from there.
00:13:16
Speaker
No, all of this combination. So it's very difficult to put in a few lines, right? But all of this was complex. But finally, I was able to do it. How many nodes did you hear before hearing, I guess? How hard was that process of raising that round? 121. 121 nodes, wow.
Overcoming Challenges and Investor Rejections
00:13:37
Speaker
And you actually kept track. It's not like if you said about 100, but you have that exact number in mind.
00:13:45
Speaker
So day before yesterday, Akshay, I was telling somebody that prior to I started this January, I used to travel business. I used to stay in the best of the hotels. You know, I never had to bother about, you know, you know, what meeting, you know, all of that. When I was on my own, I used to travel from Delhi to Bombay and train. I used to stay for two and a half years in a hotel called Hilltop, inwardly.
00:14:14
Speaker
And I used to stay in that hotel purely because I didn't have money. That hotel, the room used to cost me 2000 rupees per day. And prior to that, I used to stay in Four Seasons at Lower Parale.
00:14:28
Speaker
So when I used to go for pitch presentation and people used to ask me, where are you staying? I used to say, you know, I'm just staying here in Wali, right? So people used to generally think, oh, this guy's staying in four season, right? I remember one day I went for a pitch presentation to an investor whose office was in four season. So he said that, oh, no, so his office was somewhere else. But he said, OK, after meeting, OK, let me drop you to four season.
00:14:52
Speaker
So I sat in his car, he dropped me to fourth season and walked from fourth season to, you know, Hilltop because I couldn't tell him that look, you know, I don't have that much money that I can afford fourth season. So it's tough, but yeah.
00:15:06
Speaker
Wow. How many of us did that last, that whole struggle to raise funds? I won't say struggle, it's very complex, but you know, I was always very convinced that I will succeed. But as I said, I started this right in, you know, Jan of 2016. And, you know, my capital raise, you know, got announced on 31st December 2017.
00:15:29
Speaker
But finally, you know, with all the approvals, because this was a very complex RBI approval and CBA approval for open offer and all that happened in July 18. I first business which we did, our first loan out was on January 19. Yeah. And as you remember, you know, to some extent, I was lucky because, you know, we got capitalized in July 19. ILFS happened in India in September 19.
00:15:58
Speaker
And immediately, obviously, the whole of the lending market in India went for a toss. But fortunately, you know, we had bound up power of the capital to build onto this business. And first year we ran between April 19 to March 19, you know, we
00:16:13
Speaker
We've conserved our capital. We funded it by equity. Then one year of pandemic, actually. But now we've done well. We have a 2,500 crore of asset book. We are doing almost 500 crore a month. We are considered to be the data tripod, what we call the digitization of SME. We are at the forefront of that. Our data tripod based on the writing is accepted by almost every large lender. So, State Bank of India, Central Bank, IDBI, Bank of Baradar, our co-lending partners.
00:16:42
Speaker
We are growing at a rate of 500 crore a month. There are a couple of things I wanted to understand in terms of the playbook that you implemented, which led you to where you are today. So you said that there was a problem of non-homogeneity, like a dentist and an IVF clinic are different, and which is something which traditional lenders don't understand.
00:17:05
Speaker
Which you was part of your pitch that you will solve it. So how did you? All lenders are lenders to us also. So I never use the term that they don't understand. I think so that because they are most of the banks business is diversified by nature and they have too many other things to do. So there is sometimes there is a less focused to do it in this way.
00:17:24
Speaker
Because for a large bank in India, if they have to go there, balance it in a year by 15,000 or 20,000 crore, SME is not the only way they can do it. No matter of focus. But yeah, I wanted to understand how you solved that problem that customers are not homogeneous.
Sector Specialization and Data-Driven Lending
00:17:42
Speaker
Yeah, so two things. One,
00:17:44
Speaker
In 2016, full year, actually we worked with Crystal and we worked with them and to find the pockets of the sector and sub sector for which can give us the scale, but we are still deeply specialized. So we, you know, we worked jointly, actually it's a work done by us. And then we looked at the entire 180 sectors under which small businesses in India operate.
00:18:10
Speaker
We filtered it down to 20 and then we filtered it down to eight. And we said Ugro would operate only in those eight sector. And last year we added micro enterprises as a sector itself. So we said that we will operate in education, healthcare, food processing, hospitality, light engineering, electrical equipment manufacturing, auto component, chemical and electrical equipment manufacturing.
00:18:34
Speaker
And within these eight sector, we operate in 100 sub sectors. So in healthcare, for example, we are not a lender to everyone. We are only lender to small nursing home, dentists, IVF clinic, pharmacy. In education, we are only K-12 and play school. And so in hospitality, we are only to fast food chain, restaurants, banquet hall. So this is the first, which we said we will define the playground.
00:19:02
Speaker
But our playground is large. So we are not playing a basketball. We are playing a game of cricket. The field itself is large enough. So these sectors in sub-sector contribute 50% of outstanding credit in SME for India. But more so, we said that these are the sectors which have five basic base characteristics. These are the sectors where banks' penetration is lower vis-a-vis other sectors, which means that we have a role to play.
00:19:27
Speaker
These are the sectors wherein you don't need massive geographical footprint, other where your costs or objects would become very high. They're concentrated in tier one, tier two cities. Tier one, tier two cities, yeah. So you have to take an agree, which means that almost every village and corner is publicly present. Third, we said we don't want a sector wherein government policy decision can actually affect the business itself.
00:19:54
Speaker
You know, so it's not a question of right wing, left wing, you know, center, middle, you know, these are the businesses which are driven by India's consumption economy. So irrespective of any cycle of the market, these businesses would continue to grow. Yeah. So these are the core pillar on which we build. So that was the first thing. Second, in early 2016, we had this belief that if you walk in into a chroma store today and you want to buy a fridge,
00:20:20
Speaker
You may have only, fridge may cost you 20,000 bucks, you may have only 5,000 or 3,000 rupees in your pocket, but you can still buy it, right? Because when you go to the counter, he asks you this question, you want on credit or you want on, you know, cash. If you want on credit, give you a mobile number on an app and you'll get an yes immediately. And in, I think, so half an hour, you'll be able to, you know, get that loaded to your workout, right?
00:20:44
Speaker
But when it comes to small business, generally everyone believes that I have to go and meet the customer, understand, look at his shop, look at his factory, and then I'll say yes and no.
00:20:53
Speaker
Our belief was that in early 2016, that that is going to change in next year, three years, and actually that is happening now. So first is the focus on what we call our sector specialization, and second is the focus on data-driven underwriting. Why this was happening? Because think of that five years back, I go to a small manufacturer, and he says, you know, I want to give credit to you. Or he comes to us and says, I want a loan from you. For three questions, you will ask, what is your revenue?
00:21:23
Speaker
What is your expense? How much of margin or money you make? Because that is only decided whether you can take more loan or not because your ability to pay back. Answer would be, look, my turnover or my revenue is not official. Come into my office, I'll show you how I generate my revenue.
00:21:43
Speaker
Second, you say, sir, what is your actual expenses in the business? He'll say, look, my expenses are because I don't want to pay tax to the government. And that's why a lot of my expenses are other expenses which I put into the business. So please come and understand my real expense. So finally, lender would say, sir, your revenue is informal. Your expense is more than formal. Sir, please give me a property. I can lend against that because I really don't understand your cash flow.
00:22:12
Speaker
But that's what we call India's journey to a collateral to cash flow based underwriting. Today, what is happening? 90% of businesses, their revenue is formal because GST is a compulsory input for us. If you don't have GST, we don't lend to you. But every time a customer comes, we pull his GST data.
00:22:33
Speaker
And GST data not only tells us about his turnover, but hundreds of more parameter around turnover, what we call the quantitative analysis. Who you sell, whether you do repeat sales, whether your counterparties are good, whether your counterparties are bad, what segment of the market is. So we call it 400 plus parameters around GST, which you can analyze to profile a customer.
00:23:01
Speaker
Second comes the cash flow analysis. So it's no longer required to go and sit with the customer and have hours and hours of discussion to understand his cash flow. We use the tool of what we call digitized banking. You come to us, you give us your bank statement, we digitize that, and our system automatically filters out what is your actual expenses, what is expenses or income which are not related. And then our system also have the ability to corroborate the true data, your turnover data to your banking.
00:23:30
Speaker
Third is what we call the behavioral analysis. So a lot of people don't know that now in India we have 1.2 crore of data or bureau footprint of MSME itself, not the individual but the business bureau trade record. Now that also one is a score and the predictable default analysis on that but bureau also gives you much more deeper insight
00:23:53
Speaker
So we are not those kind of in tech which says that we have to go and look at your Facebook and Instagram and that can tell you whether you are a good person or a bad person, right? So that's not. But it's a real data. So when somebody's business bureau record, it can tell us behavior analysis. So give you an example, if somebody bounces his check on a regular basis,
00:24:14
Speaker
behaviorally he's not a good customer because he doesn't keep cash in hand to pay his emi's in time right so that's a red flag.
00:24:24
Speaker
So when you combine these three, what we call the data tripod, then you have ability.
Innovative Lending Strategies and Tools
00:24:30
Speaker
So today, out of our 450 plus crore of monthly underwriting or disbursement we do, we don't ask any customer his balance sheet, his profit and loss statement, his income tax return. We only need these three things, GST Bureau and banking. And then system says yes and no, and what level of loan the customer can afford. And then when it moves to our credit officer, credit officer have an expert scorecard,
00:24:54
Speaker
which is by sub-sector. So if he is a K-12 school customer, then the credit officer knows that he has to go and ask,
00:25:09
Speaker
because at the early time, the teacher is the most prime, most asset for a K-12 school. There is something wrong and there is a weightage provided to that. So our credit officer will not go and say, sir, I want to go to school, I want to go to school, I want to go to school, I want to go to school, I want to go to school, I want to go to school. No, generally, you know, the credit people go and assess customer's worthiness by asking some random question, which has no meaning, actually. But the thing, you know, we can
00:25:38
Speaker
We have all the gods gift to mankind and we can judge a customer by asking him a random question. No, that's not true. So you ask them questions and find parameter which is operating parameter. So these are the three cool pillars in which we are building this business. You focus on select sector and subsector. Over a period of next 5-7, you build deep expertise around that and being able to differentiate
00:25:58
Speaker
use high degree of data propensity and being able to say yes and no to a customer and how much he can afford basis data. And third, bring that knowledge and IP at the ground level in a template form. And then underpinning that you have to build a distribution to reach out the big customers or broad base of customers.
00:26:17
Speaker
this sectoral expertise or that template for the credit officer that what questions you need to ask. How did you develop this? We are continuously developing it because it will take around five years. The first exercise was done in 2018 actually.
00:26:38
Speaker
We did survey of roughly around 8,000 plus customer and that was done between our crystal outsourcing agencies and our credit officer. We looked at 8,000 plus customer on a rating database wherein we divided 50% pool which is a bad customer, 50% very good customer.
00:26:59
Speaker
You know, so we looked at two types of nursing home, one nursing home, which has ever defaulted and one nursing home, which never defaulted. And we did a survey with both of them and compared the operating parameters, what made one versus other succeed. And so like a phone, phone survey, like someone would call in our physical survey.
00:27:20
Speaker
physical survey, 8000 plus physical survey. And basically that we defined what is called the operating parameter matrix. And now we continuously refine it, this is the portfolio data, right? So we have x portfolio across all our sector and sub sector. And wherever we see a little bit of stress, we go back and say, what operating parameter we should have looked at, you know, which we should have avoided this, when somebody succeeding that so it's a continuous journey.
00:27:47
Speaker
This playbook of sectoral templates, is it something which you conceptualized it or is it something which you had seen others do and so you knew that this is how we have to do it? How did this surprise you? It sounds very unique to me. I've never heard of any company using this approach and investing so much. You must have invested a lot to get 8,000 people surveyed.
00:28:10
Speaker
Every fifth startup has a unique story to tell, you know, and in fact, in some of, you know, you know, messy classes, this is a, oh, try getting your idea to be relatable to your own personal journey, you know, because investors like to have a complete fall, right?
00:28:26
Speaker
Most of them are nothing but replication of some platform, some other market, and you are just replicating over here. But obviously, people like to hear it that way. No, this has happened because between 2005 to 2010, I have seen multiple types of alternative lenders or NBFC succeeding in this idea in different pockets.
00:28:52
Speaker
So there are companies in India which are very deeply sector focused largely in education. So we have Avants, we have Vartana, we have multiple companies who in education financing, India school finance company, who created financing just on education.
00:29:10
Speaker
Then there are companies which are focused on certain geographies and are succeeding because India is not just one country, right? So you have three or four NBFC lenders who are focused on south in different states and succeeding. There are few in which focus in north. AU, for example, was a focus in Rajasthan as an NBFC and became bank. There are few NBFCs which are focused on certain class of product or type, right?
00:29:33
Speaker
So electronica for machine tool financing in in we have kenara with the small machine financing in south new growth which was for past base financing. So in last decade or so i've been seeing that you know when you deeply and also second.
00:29:50
Speaker
in alternative lenders, which is NBFC. If you look at big successes versus not so successful, anyone who specialized became successful. So, Manapuram in gold loan companies, Sri Ram transport financing, second-hand truck finance, Mahindra financing, Agri financing. So, a broad trend came to my mind over a lot of research. One, if you're not a bank, you have to specialize. Second, the people who are doing specialization are doing only in very small segments.
00:30:20
Speaker
and they're not raising large capital to build a scale. So they will, you know, for them to get to a two, 3000 corrode even asset book, you know, is a 10 year journey. So these two things I combined, you know, we have to deeply specialize and we have to focus on sector. And obviously, as I said, your upbringing and all of that, you know, gave me this idea that why don't we replicate similar hypothesis at scale?
00:30:45
Speaker
Got it, got it, got it. Amazing. Okay. So who was the investor who funded you, like the thousand crore that you raised? So when, you know, 2007, so our capital came from four, you know, first, you know, we did all of our capital in between December 17 to August 18. So first four, it was four PE investors who invested. One is a fund called PAG Asia, which is a $38 billion Asia fund.
00:31:14
Speaker
Second is a fund called ADV Capital, which is a two and a half, around a billion dollar fund, again focused on Asia. Third is a fund called NewQuest, which are now actually part of TPG.
00:31:26
Speaker
which is a very large secondary pea business in India, and fourth is a fund called Samina Capital, which is based out of Dubai, but is a Mina Region Private Equity Fund. So these are commercial pea funds, which have been investing in Asian regions for a very long period of time. Then in mid-July or August, I think we did a public market raise, we did a QIP.
00:31:47
Speaker
So in PMV MetLife, we actually invested capital in that and they are a long-term shareholder to us, multiple other market. And last, we raised around 80 odd crore from few family offices. That was more to give people sense that, you know, I'm not, I can, it's not this, I can raise only capital from professional P investors, you know, I can raise capital from family offices as well.
00:32:09
Speaker
You said that the plan was to acquire a listed NBFC. So at the time of these conversations around fundraise, you had identified that acquisition target. So tell me that then. When you got the commitment to acquisition. Yeah, so that was more transactional actually. So as I said, that might be just to invest about that. This is my idea.
00:32:32
Speaker
You know i want to acquire it you know i want to do this business in a listed company and the first question was why you want to do that so you have to go back into this and saying because he was not necessary like to be listed from day one right. They were rather big business to get build and then floated in the market and so that they can do price discovery.
00:32:51
Speaker
But I was quite convinced that the quality of governance, transparency, and the longevity will happen in this format. So once I get a sense that, not on a dotted paper, but once I got a sense and comfort that yes, there are investors who would back me for this, I started looking for a vehicle.
00:33:12
Speaker
Actually, and that became very challenging because I thought, you know, when you go on, you know, Google up saying listed NBFC, you know, sub 100 crore market cap, there are roughly around 50, 60 names would appear.
00:33:24
Speaker
which are listed, but NBFCs, but hardly any business. And then you think if you have capital, then what is the big problem? You just go and make an offer to somebody and you can buy it out, right? So actually, when we did this, we realized that actually there are very far, because most of these listed, small listed NBFCs are being used or they exist for some other purpose, either investment vehicle or it is some group's business or something other.
00:33:52
Speaker
But to find a listed vehicle which is really truly clean, have no regulatory problem, nothing was a challenge. I was just lucky. Actually there was a point of time I was getting very frustrated. We did diligence of almost five actually.
00:34:06
Speaker
And finally, we came across this, you know, NBFC called Chokani Securities. The owner of that was, you know, a old gentleman, you know, who has kept it only as an investment vehicle for himself, had no uses of it. You know, his son was willing to do something else. So, you know, finally, you know, he said, yeah, that's fine. You know, I would own a little bit of this on a continuing basis, but you guys can buy it out.
Acquiring Chokani Securities and Distribution Strategy
00:34:32
Speaker
Okay. And for this, you would have used like an investment bank to help find and like close it. Okay. Your own legwork, like you would like cold call owners and say, okay. Yeah.
00:34:54
Speaker
Obviously, I spent a long time in the financial service industry. I have a lot of people who are well-wisher and friends. I won't say that they didn't help, but nobody formally did. As I said, for two years, I used to stay in this hotel hilltop for what? This is the work I used to work. I used to go bombing Monday morning.
00:35:15
Speaker
stay till Thursday, go around to every investment bank and say, okay, why don't you talk to this guy, meet up with this one, then you go and pitch. And again, you have to, I didn't have money, right? So you have to go and say, as if there are a lot of people backing you, you have a lot of capital and I want to do it. Knowing that, you know, these are two comps, things running on site, right? I get away, kill, then I go to investor, then investors have to do, you know, you know, I have to do diligence. So it's too much of tying down. Every
00:35:43
Speaker
Every day I used to think whether this would ever happen or I'm just wasting my time. I don't know. But somehow I felt, no, this is definitely possible. If you like to hear stories of founders, then we have tons of great stories from entrepreneurs who have built billion dollar businesses. Just search for the founder thesis podcast on any audio streaming app like Spotify, Ghana, Apple Podcasts and subscribe to the show.
00:36:15
Speaker
So you like, you first created one entity from which was funded by the PEs and that entity then purchased? No, no, no, no, no, no, no, no, no. So everyone came into the Chokane simultaneously. Okay, okay, okay. And you got some equity at probably a lower compensation than the investors or something like that? No, sir.
00:36:38
Speaker
But you're like the founder, no? I mean, so you would have got some like founder equity, so to say. No. So I was very clear. For people to back me, I didn't need anything. Whatever is my capital, I would invest and let investors invest with me. So you invested at the same price as all the P's? Yeah, more or less.
00:37:04
Speaker
Once the investors came in and this company got acquired, then you did a QIP. What is a QIP? QIP is a form of a type of a public capital race. You file a prospectus and you go to the public market, mutual funds and other investors who can fund it.
00:37:22
Speaker
Okay. Okay. But there's not like the retail, you're not tapping retail here. No. Okay. Okay. Okay. Got it. Got it. So like now, you know, around 2019 is when you had the capital, then probably your challenge was to build a distribution muscle. Because by 2019, you would have built those templates and you would have built the systems for underwriting and the data mapping and all of that would have got done by then.
00:37:48
Speaker
So tell me how you build distribution muscle. And first, what is your target company size? Are you looking at what turnover of companies to give loans to? So we look at from 1 lakh rupees to 3 crore rupees of loans. Typically, these are customers who have turnover up to
00:38:13
Speaker
Broadleaf up to five crore, but maximum up to 15, 50 knot crores, right? Like one crore onwards, like one crore to 15. Oh, no, actually 25 lakh rupees onwards. Okay. I have no idea what this is. Which means you can't really do physical distribution then, because this would be a very large number, like 25 lakh rupees. Like how did you mean distribution muscle? Like that's what I would understand. We are building.
00:38:40
Speaker
No, so lending is a combination of digital plus physical. So we are very heavily, physically focused business. We are now 1000 plus people. In the last 12 months, we have added 750 people and we are adding almost 50 people to 75 people every month. So having done that, first and foremost, as I was saying that July, we raised capital and RFS happened in September of 2018. And
00:39:07
Speaker
It was virtually a freeze on lending business in India, especially for non-banks, right? So which means that- That was because they didn't have money. That's why it was a freeze, right? It was not like there's a RBI mandate or something like that. No, it was just, yeah. The tap got turned off by the banks, so they could not leave. Yeah, most of them, yeah. So because, you know, it was what we call layman moment for India, right? Because the largest financial institution just, you know, fall in like a, you know,
00:39:37
Speaker
pack of cards. But anyway, for us, because we had base capital available, we said we will use this time to build. Our distribution is designed to service the need from this one lakh to this three crores customer set. And we do it in four different ways. First, we said we will service Prime customer.
00:39:58
Speaker
what I mean by prime customer, customer who would not give me initial losses on my balance sheet. So it's a customer which is very rate sensitive, very low yield, but highly secured customer.
00:40:12
Speaker
But because we were funded up by equity, we said that's fine. You know, like low risk customers, like people with credit history, group credit score. Some 10% interest rate or 11% interest rate, right? See, what is lending business? We borrow at 9, we lend at 14, we earn 5%. And then that 5% has to manage our cost of credit, OpEx, everything, right?
00:40:37
Speaker
But you can afford to do that if you have a large capital base because you're not, you know, finally, because every business is evaluated on the basis of return on equity, return on asset, and higher that is more the valuation, your investors are happy and everyone is happy. So our distribution we designed first, we said we opened nine location in India, which is the top metro location. We built our platform called Grow Plus, which helped the intermediaries or loan intermediaries, which is called DSS, 900 plus of them to come on our platform.
00:41:06
Speaker
and log in the customer need or files and get approval for 60 minutes through our digital platform. And then during the pandemic, we evolved our distribution in four-fold.
00:41:19
Speaker
We analyzed this, you know, 22 states, almost 7,000 pin codes, 25 peer set lender, you know, data analysis and basis that identified five states, which is Telangana, Karnataka, Tamil Nadu, Rajasthan and Gujarat. And we are now entering MP as well. When we said we'll build our micro enterprise business. So our first channel is what we call the branchlet channel.
00:41:41
Speaker
which consists of prime customer branches which are now 14 in eight states and micro enterprises which are 79 location in five states and that is growing to 280 plus location. Second, our channel is what we started building is what we call the ecosystem. What does ecosystem mean is that we realize that there is a hundred billion dollar credit gap within the supply chain ecosystem. So think of you're a dauber
00:42:06
Speaker
And if you're supplying something to the dauber, you will get financing because people will believe the dauber would pay you on time. But if you are a wholesaler of a dauber and a distributor of a dauber or a retailer of a dauber, to purchase material from daubers, you are dependent upon either dauber to give you a working capital limit, which we sell you on Udhara, or you have to borrow from the bank. But borrowing from the bank is very difficult.
00:42:34
Speaker
So it specializes on what we call the value chain ecosystem financing. So if you're a retailer of a dauber or a proctor, gamble or any Mac manufacturer, our data tripod decide on an independent basis how much credit you can take. Then we analyze the data of your historical sales propensity between you and the manufacturer and whether there is any credit participation from the manufacturer is coming to us.
00:43:01
Speaker
and basis that we automate credit. So that's our first, second part of distribution, which we call ecosystem supply chain. Second, our ecosystem supply chain is what we call the machinery financing, standard machine financing business. Generally, the belief is that if you sell a property against loan, it's not safe. But normally, as a hotel name, because property, if the customer defaults, you have to go acquire that property, sell in market, and all of that is very cumbersome exercise.
00:43:27
Speaker
But there is always a small machine component in any manufacturing, which is called CLC machine. And that machine actually has a self value. If customer defaults, you can take the machine, refurbish it and then resell in the market. Why we call it ecosystem? Because we are dependent upon an ecosystem of OEMs, which are the manufacturers.
00:43:47
Speaker
because they have the sales distribution network, our credit teams would sit there. One, it's like a car financing. When the customer is coming to buy a machine, we will untap, provide financing of the machine. And for some reason, if the customer fails to repay, our OEM will help us to repossess that machine refurbishing and sell it. So that's the second part. So the way you should think about UGRO is highly sector focused digital branchlet channel and ecosystem, which is a supply chain machine.
00:44:16
Speaker
Third of our channel is what we are saying is a platform called GrowXtreme, which is we are building India's largest co-lending platform.
GrowXtreme Platform and Co-Lending Innovation
00:44:23
Speaker
What I mean for a general listener to say, our belief is in India that money is in a prerogative of banks. Because banks are considered to be risk-free or fail. We will not fail because governments would bail them out.
00:44:43
Speaker
But banks' ability to then use that money to distribute in the market is very difficult. So our GrowXtreme platform actually helped the banks to do co-lending with us on the asset which we are originating. But also on our GrowXtreme platform, we have now 30 plus Fintech and a small NBFC, which are integrated through an API with whom we are doing co-lending. And our eventual goal for a very large bank
00:45:11
Speaker
to be able to do co-lending with one of my fintech partner which is integrated through us. So we can channelize the capital from a large bank to the end customer either directly through our engine or through our partner's engine.
00:45:27
Speaker
And fourth, which we are now launching, is a card solution, which is a GST-based credit card, wherein anyone who has GST data can come and log in into our system and get up to 5,000,000 rupees of credit limit on a card base. So this is the fourth set of engine. You know, we are still early days. We have said our mission is to take 1% market share, 20,000 crore of asset book by 2025. And that's a very steep task. So we are still working on solving for that.
00:45:57
Speaker
So let me recap. So one is you have the prime business, which is branch-led and which is also fed by DSA's, right? Yeah. Okay. And then you have supply chain financing in which the retailers and, you know, like further downstream from a manufacturer, you are giving essentially like a BNPL service to them. Like they can buy goods and pay later.
00:46:27
Speaker
Yeah. Okay. And then you have like the machinery financing, which is again, like a BNPL, like you can buy a CNC machine and pay in installments similar to what somebody would do at a chroma for a fridge.
00:46:42
Speaker
Yeah. Okay, okay. And then Grow Extreme, this I want to understand a bit more. Is this a consumer portal where consumers can come in? It's just a B2B portal where on the one side, suppliers of funds and the other side, people who want to give loans like FinTechs, they are getting connected. Yes. Okay. Okay, okay. So, essentially, you are helping FinTechs too.
00:47:10
Speaker
Get capital. Yeah. So the way I say like a payment gateway helps FinTechs to not have to talk to banks, but just get a payment gateway. That payment gateway takes care of integrating with all the different banks. So something like this would help a lending-focused FinTech that they don't need to go and talk to 15 different banks to co-lend or NVFCs to co-lend. They just collaborate with you and the same convenience of a payment gateway you're giving like a lending gateway in a way to FinTechs. Yeah.
00:47:38
Speaker
And today we are providing our own balance sheet to them, but eventually we would like our banks to provide balance sheet support to them. Okay. This is a pretty powerful play in itself. I mean, you know, I call it a multiplier impact, right? So not only we are building a lending platform, but we are helping.
00:47:59
Speaker
for many and many lending platforms to get power of capital through us. Yeah, I mean, because some of the most valuable fintechs are companies which power their connections. Like say Stripe in the US is probably the highest valued fintech because it's powering those connections. And so similarly, you're building like a version of Stripe for powering lending connections.
00:48:26
Speaker
Yeah, so you're right, but the only thing is that we are listed, we are profitable, we focus on return matrix, we focus on, you know, gross NPL ratios, capital adequacy, versus a lot of VC-funded businesses are only selling future and we will get to know about the real sustainability of those businesses over a period of five to seven years. That's the orientation difference.
00:48:50
Speaker
I want to understand GrowXtreme better. Can you help me understand how the product works? Do they need to supply this is my target audience to whom I'm lending? How is that underwriting happening?
00:49:07
Speaker
Yeah, so we only deal with only fintechs or small NBFCs who are in SME folk, you know, a small business segment. So we will not touch consumer, we will not touch personal loan. So if you are a fintech and regulated, that's most important. You have to have some regulatory. You should be fintech with a small NBFC. And suppose you are lending to customer base of a Swiggy or a Zomato, right? Or restaurants attached to Swiggy and Zomato. So you are underwriting credit basis some data. We will integrate through an API.
00:49:38
Speaker
We have a defined scorecard, which is a digital scorecard. So once that Fintech would, through an API, the case would come into our system, the data would be retested on our scorecard, and then we will lend through that Fintech to a Swiggy customer.
00:49:58
Speaker
We will have a differential rate, so they might be lending at 22%. We will agree to pay fees of 6-7% to the fintech for origination and all of the hard work.
00:50:09
Speaker
And but if intake may provide some form of a credit support. So in case of a loss happening to a customer, some portion of the loss they will absorb first. That is one side of the leg happening today. Other side of the leg is that today, you know, an IDBI is integrated with the GrowXtreme platform and a customer being, you know, land in our prime branch channel, IDBI is co-lending right now with us.
00:50:36
Speaker
Our eventual goal is that an IDBI or a bank should be able to not only lend for a customer which is originated from our Prime branch or our Micro Enterprises branch, but should also be able to co-originate and lend to a FinTech which is lending to a Swiggy customer through our API integrated platform. Okay, so GrowXtreme is essentially
00:51:00
Speaker
going to be connected with every part of the business, like these distribution channels, which we just discussed, each of those, the banks would be able to access and decide that, okay, I want to allocate 50 crore of capital for micro enterprise and that 50 crore then can be distributed. Yeah, we are in a very early stage because you know, you're trying to
00:51:27
Speaker
People sit in very different understanding for a large public sector bank to be able to understand FinTech doing a Swiggy customer restaurant. It's not something which will happen over a period. This is not solved. A lot of people like to play this is all technology related solution. No, that's not true.
00:51:46
Speaker
it is all about behavioral analysis for a for a large banks to understand and be you know agreeable to send you know lend to a customer segment which they have never done before technology is only an enabler it is first the acceptance of that so this would happen over a period of time that's why
00:52:07
Speaker
With that fintech, if I have done business on my balance sheet for a year, and then when I go to a large bank and say, look at this, I have done with this fintech for one year. This is the portfolio. This is the track record. This is the loss ratios. And this is how we have done it. That gives a confidence to a large bank saying, right? And then we have to say that, sir,
00:52:32
Speaker
you know, then we are behind it, by protecting or giving our balance sheet support.
GST-Based Credit Card for SMEs
00:52:38
Speaker
So that is the way it would happen. Okay.
00:52:40
Speaker
And help me understand this GST-based credit card. Essentially, looking at GST returns, which would tell you how much revenue the business is doing, you would issue that card. Yes. And then because we have what we call a margin analysis by sector and sub-sector, so GST gives you which sector and sub-sector the customer belongs, you make a presumption of base margin, which on a particular turnover, a small business would definitely be making
00:53:08
Speaker
And based on that margin, you set up a credit limit. The credit card needs a bank to issue it. Like an NBFC can also issue a credit card. No, we cannot do. We have to rely on somebody else. So there is a PPI license holders and the PPI license holders, we can do a wide-label card with the PPI license holder. Our NBFCs can't
00:53:33
Speaker
It's a regulatory, you know, RBI gives different type of licenses. A PPI is one type of license which allows people to issue card. At the back end, there is a bank as an issuer because finally there is to be banking. And so I don't want to bore your audience with the very complex jargon about technology and regulation around that. But theoretically, think of there is a bank which is issuing a card. There is a technology provider which is facilitating that. And we have white labeled and we do rest of the work.
00:53:58
Speaker
Okay so for the customer you know you see this now all of the so you have an amazon credit card which is not an amazon card no that's an actically i see a card or you have an airline credit card so there are many people who issue card which they are not a card issuer and the back end there is a bank which does it but you white label for your customer segment.
00:54:19
Speaker
So the credit card revenue for you would be the merchant discount rate. You would earn some part from that, like when you issue a card, plus the interest. Like if somebody doesn't pay in that 30-day window or whatever, then there is an interest charged to them. So that would be your earning. Yes, and also interest.
00:54:40
Speaker
If their customers and also we'll give option of customers to converting into a term loan. See, one of the problem for small businesses that they need money for say only for 15 days, but unfortunately we have to borrow for one year.
00:54:54
Speaker
because you know, lenders lend it for a fixed term basis, which means for the rest of the period, they are paying interest unnecessarily. This card solution is a solve for that. That is, when you need money for 15 days, borrow for 15 days through a card and then you pay it back. But at some point of time, if you want to convert, so suppose you've taken a 5 lakh rupees of limit on a card, but now you think that you would not be, you know, every card gives you this optional of converting into EMI, right?
00:55:19
Speaker
You can convert to a term loan which can be paid over a period of two years in an EMI. This card can be used for even doing a bank transfer, for example, paying salaries. Yes, it can. This card can be issued to the business entity and can be used for any business expense purposes.
00:55:38
Speaker
If I want to pay salary using this card, how would I do that? There is a limit and there is a credit loaded to that. You pay for anything what you want. You need a payment gateway to use a card. This will be all integrated.
00:55:54
Speaker
So back end of this would be like any card which you have in this market trade. Got it. Okay. Okay. Okay. All right. So what is, you know, in the long term, what do you think will be the split between these different channels, like the prime channel, micro enterprise, supplies and financing ecosystem?
00:56:12
Speaker
So branchletchannel would consist of 70% of our asset book. So 2025, 20,000 crore, 70% would still be from branchletchannel. Roughly around 20 odd percent would be our ecosystem machinery plus supply chain. Around 6% to 8% would be our
00:56:35
Speaker
our partnership in alliances, it can actually take 60, 20, which is 80 and around 15 would be our partnership in alliances and 5% would be the digital channel, which is the card solution. Okay. So what does a branch here do?
Operational Hubs and Profitability Strategies
00:56:52
Speaker
A branch is not like a bank branch where a customer will walk in, right? A branch is rather a place where the DSA can interact with
00:57:00
Speaker
The prime branches were in our sales credit ops collection set. So when a DSA logs in a file on our platform, then for the 990 DSA, there will be sales force of around 100 people, which goes and extends because DSA understands our product type.
00:57:20
Speaker
and help that customer onboarding, you know, as clarification and all of that. Credit would interact with the customer to do, you know, local underwriting, going and meeting with the customer and collection post-dispersment would help in terms of customer need to be reminded and collected, right? In a micro enterprises, actually all of our origination itself, so there is a large sales force which goes out and, you know, find customers.
00:57:43
Speaker
then the credit underwrites and say yes and again same collection so this is the job of it yeah how do you define a micro difference sub 25 lakh rupees loan sub one sub 2 crore turnover okay and uh is it profitable to service them with the sales force like over longer run yes okay okay okay
00:58:06
Speaker
This is the yield when your prime customer comes at the yield of sub-11, where your micro enterprise customer comes at around 18% yield. What about if someone is searching online? Let's say I search on Google like loan for my business. Will I eventually end up at Ugro? And what will be that journey for me? In six to eight months time, you will not know.
00:58:28
Speaker
it in what way? Like you'll start online. Yeah, in six to eight months time. If you go to Google search for this, you see my name, you come on our website, you'll be able to do all that journey. The system would ask your GST and banking, and then you'll get an on-tap credit and somebody would follow up and give you the credit. It would happen. Right now, we are doing it in private domain for
00:58:57
Speaker
So for a certain select set of our segment of the market, we do it. But we are not great. We don't fancy that we have to digitally market it and then customers would come. What we believe is that in S&E businesses, you have to have a direct reach to the customer versus a customer which is coming through these digital journeys.
00:59:18
Speaker
So that whole DSA ecosystem is pretty well established in terms of helping businesses to find credit. Like these DSA's would have relationships with businesses and they would constantly be calling them up and saying, and whoever says yes. We call grow partners and these partners of ours are not typical traditional DSA's. This can be referral partners, chartered accountants, tax consultants, who have the needs of customers who have been servicing for a very long period of time.
00:59:48
Speaker
See, understand this, we are coming out of an era wherein every small business used to believe that if he can save 30-35% of tax rate, that's his real income, right? Because margins in the business is 10 to 15% and tax saving was 35%, so the real margin in 50%, right? Which means to save the tax, the most reliable partner was a chartered accountant or a tax consultant.
01:00:17
Speaker
And that's why SMEs generally, for all their need, when it comes to a financial need, confide with their chartered accountants or tax consultants. That is getting over over a period of time because now SMEs are understanding that they cannot remain an informal economy. They will remain informal and actually expansion of credit to them would help them to grow faster.
01:00:44
Speaker
So, a 10% margin of 1 crore revenue is only 10 lakh rupees, but if the 1 crore turnover company can get a 50 lakh rupees of loan and that can increase the turnover to 3 crore, the income is 30 lakh rupees. Gradually, people are getting this logic now. So, the prime sales team is essentially trying to onboard chartered accountants, tax consultants, etc. and saying that...
01:01:12
Speaker
and service them. So Prime sales is a B2B2C sales force. Micro enterprises is a B2C sales force. So help me understand the asset book number that you're talking about. What is that?
01:01:28
Speaker
mean in terms of comparisons? Like you said, you're at 2,500 crore today. How does that compare to other NBFCs? And you want to be 20,000 crore by 2025. How would that compare? This number by itself may not help someone understand what it means.
01:01:49
Speaker
Sorry, I think so. As of today at 2500 crore, if you look at the listed universe, we would be, you know, so there are two, you know, so there are four or five NBFC which are in the range of 4000 plus crore of asset and after that there are big ones.
01:02:10
Speaker
which are all above 20,000 crore. It goes from 20,000 crore to one lakh, 50,000 plus crore. So there are tons of things. A bajaj would be right. Bajaj finance, then Chola, Sundaram, Sriram, transport finance, you know, many of them like that. So I think the next year, we would graduate to the league wherein that, you know, we'll be done.
01:02:34
Speaker
Behind the top ones, because the top ones are all 25,000 plus crores, and we'll be just below that, in the bracket of 5,000 to 7,000 crore of bracket, right? Who are the peers in this bracket, 5,000 to 7,000 bracket? None actually, because all of them are bigger.
01:02:52
Speaker
So you have, you know, currently, I don't want to name them, but there are two, three, which are in the range of 3,000 to 4,000 crore, right? So we are there, right? But remember this, that all those 3,000 to 4,000 crore have an existence of almost 15 years. We have an existence of only two and a half, three years, right? So next year, we'll graduate from there. In 2025, when we hit 20,000 crore or 17,000, 18,000 crore,
01:03:19
Speaker
Only dedicated SME financing would be the largest in the country. And are there any fintechs who are like doing your 2000 crore plus asset? Most of them are partners to us on our grow extreme platforms. We have crossed most of them.
01:03:39
Speaker
But some of them would grow. Actually, it would be not fair on me to give name by name. But see, there are a lot of people who are promising. There are a lot of people who are raising a lot of capital, much an expensive valuation than where we trade today, because the other thing I said is public market. Different investors said VCs look at it very differently. Yeah, so this is a massive, large market.
01:04:05
Speaker
there should be a play for at least 100 plus UGRO equivalent players. So I don't think that is ever going to be a challenge. This is not a game of competition. This is a game of how many of them can exist and do it, this question. In FinTech, I guess, Katamook would be looking at this space which you are, like SME or micro enterprise learning. I don't think there's any other big name that I can think of.
01:04:34
Speaker
Look, as I said, I don't want to comment. There are two sets of players. There are a lot of players who have some form and base customer engine and they are not profitable and they want to now add credit to become profitable.
01:04:54
Speaker
Yeah, it can be a payment platform, it can be a marketplace, it can be an accounting, you know, software provider. A lot of people, you know, who are promising that I have a million customers, can I give, you know, 50 lakh rupees per customer and that's why my book should be this much. That's a promise, right? And this is that, you know, I need to raise $500 million today.
01:05:17
Speaker
But our approach is that customer acquisition on a non-credit parameter for solving non-credit solutioning and adding credit to that is a two completely different businesses. I have not seen a non-lending platform to succeed in a non-lending environment.
01:05:41
Speaker
I think that the jury is out. People who have base of customers, sometimes I also wonder, should I go and acquire somebody who has an existing customer base of, say, a million SME customers so that I can funnel credit to them? But then today, through our engines, the number of customers who are coming to us, we are not being able to service all of it. Because at the end of the day, I need banks and financial institutions to lend to me, to being able to lend to others.
01:06:09
Speaker
It is just not a game of customer acquisition. It is a game of being resilient, being able to control credit quality and being able to borrow on balance sheet to lend to others.
01:06:25
Speaker
Okay, so it's not a demand problem. You need to build supply and in order to build supply, you need to have a reputation of process-controlled collections. So what is your collection strategy?
01:06:43
Speaker
So look, it's a physical plus digital again. We do a lot of massive data analytics around our customer. Again, goal is tripod of data. So the bureau, the banking, we give an early advanced signal of customer behaviors. And basis that system triggers different kind of collection strategy.
01:07:02
Speaker
Almost 98% of our collection is digital, right? So we hit bank account and collect money from there. We are not a cash collection company. But there... Customer gives some sort of mandate which allows you to... Yeah, money from the bank account. But, you know, our EWS system is saying that this customer has bounced his cheque to three of his lenders. So it's an early warning signal.
01:07:26
Speaker
which means that it would trigger to our collection team to go and have a conversation and ensure that we get prioritized or what other support we can provide before we become defaulted. That's our collection strategy.
01:07:40
Speaker
use data analytics to provide early warning signal and then trigger collection strategy basis that.
Resilience During the Pandemic
01:07:48
Speaker
What is the EWS system? Early warning signal. What is the health of your portfolio? What is the NPA percentage?
01:08:00
Speaker
Yeah, so I think so. One good thing about pandemic to us is that in 2000, remember, I remember 2019 when I used to make this presentation to people about sectoral approach, data analytics, data tripod, India is changing collateral to cash flow.
01:08:37
Speaker
And then when now we say, look, it worked for an event which was never ever imagined. And look, relatively our portfolio has held on. So today we are at almost 2% of gross NPA.
01:08:53
Speaker
Net NPA would be 1.2% collection efficiency, 97%, 98%. Restructuring, very low. All of that parameters, on a relative term, we do much better than any of our peers set. That gave confidence to our lenders that these guys, for a completely unplanned event, could still hold on to their portfolio quality. That has been put for us. Pandemic has been put for us only from that context.
01:09:23
Speaker
Not that we were very confident from day one. Without pandemic, we would have been at 1% gross, but most pandemic, we are at 2%. What was the pandemic impact for you, both positive and negative?
01:09:38
Speaker
Did it help you get like disbursed more? No, I don't think so. It's not that. No. So I think the pandemic positive impact was that we are able to prove our model to the markets. Again, we... Like you got stress tested. The pandemic helped us. It's taken five years for people to stress test and the seasonality of portfolio. We got a stress tested only.
01:10:01
Speaker
That has gave confidence to our lenders. Second is that we had a pause of almost seven months. We used that pause to build our infrastructure because we still had capital capacity. So we grown our distribution infrastructure, we grown our digital infrastructure, technology, all the processes and all of that. Otherwise, sometimes when you start, you don't never stop. You just start struggling with the operating processes. So that was second big impact.
01:10:35
Speaker
There is a general resistance in the lending industry that a lot of people will say that digitization is not possible. So for example, if I tell you that you can take a loan and actually you don't have to walk out of your home and sign something on a pen and paper but you can get a loan.
01:10:52
Speaker
Pre-pandemic, it was considered to be impossible. No, the regulation, the law, the technology was all there. But by force, now we have adopted it. So we are giving in certain segment of the market, we are giving loan without actually, no wet signature at all. This general, I used to go and tell him a credit officer, he said, I don't want to do this. I don't want to do this.
01:11:19
Speaker
This whole off-site thing, we'll go to Goa and meet in these big halls, 100 people coming together and doing off-site bonding. Actually, not true SEO bonding. I wanted people on a team call, a Zoom call, also bonding now because there's no other choice.
01:11:40
Speaker
So today, 50% of our PD, which is personal discussion, don't happen in a physical way. It happens digitally. There are outsourced agencies who go and record videos of the premises and everything.
01:11:55
Speaker
The pandemic's full multiplier impact on digitization is very high now. Got it. OK. You said you have an NP of 2%. Again, can you help us understand what that number means in context of how much does a bank have as an NPA? What does this number mean? Is it above industry standard, below industry standard? Yeah. Generally, it varies. But I think the banks,
01:12:25
Speaker
Public sector banks would have it in the range of 12% to 18%. Wow. OK. Yeah. So that's the highest point. And then variety, degree of. This should be lowest in the industry. I must say that. Amazing. OK. So what is your market cap right now? Roughly around $1,500 gross.
01:12:51
Speaker
And how has that, like, what has been the trend there? Like, at what pace has it grown? No, it has not grown. I think so because, you know, one of the challenges is that public market investors, you know, the mutual fund, you know, I, these are, they don't give us, so I mean, you know, there are a few fintechs who have never made profit in their life.
01:13:16
Speaker
One of them actually says, please don't ask me when I make profit for next five years. A few VCs have funded them and those VCs have taken their price artificially. When they went to the market market, I don't know what metrics I don't really understand. Since they have floated, then every day their price keeps coming down and finding the public market investors are taking loss on that.
01:13:41
Speaker
But when it comes to us, obviously, people compare us to an NBFCR, which is already in existence for 25 years.
01:13:50
Speaker
and then they think this is some skill. I thought that public market is a very smart place and they would play the growth which we will demonstrate over a period of time, right? Because why public market has to go and buy so expensive for things which we are not proven? We are proving every day, right? So you buy, buy so cheap and be part of my growth journey, right? Somehow that has not happened, but that's fine. It's okay. I'm patient. I think so.
01:14:14
Speaker
But we've done relatively last three, two quarters, I've seen much more improvement, you know, we used to trade below. So the parameter and so that you have asked this question.
01:14:25
Speaker
The market mean is what is called a price-to-book trading multiple. And most of our peers would trade at around 3.5 times price-to-book, which is my network divided by number of shares, which is your book value. And then there is what is the multiple market provides you. We are trading at 1.5 times still. What are the challenges of running a publicly listed company?
01:14:48
Speaker
that, you know, things that somebody who's never run some something that they should be aware of, like, what could be the pitfalls, and what could be the things to avoid, and, you know, what have been your own learnings that that would help other people running a publicly listed company? Look, obviously, see, I, you know, I have run businesses of a scale. So it has not been a challenge for that, for me personally, but and like, yeah, it was,
Regulatory Challenges and Future Investments
01:15:19
Speaker
And also I've seen businesses of size and all of that. So for me, it is not a personal challenge per se, but yeah, it's an overload of regulation, compliance, you know, another, you know, not many other things, what you can do, what you cannot do, so on and so forth. So my suggestion is that, you know, choose, you know, at a point, if you are a, you know, if you're a financial services and a balance sheet led business, being listed helps because people get faith and trust in the transparency and public disclosure which you make.
01:15:47
Speaker
But if you're not a financial services business, choose it when you really need it. Otherwise not.
01:15:54
Speaker
Okay. So what are your personal things you want to do within the organization as the CEO to hit that 20,000 loadbook target? What will be your focus areas? Will it be investment in technology or will it be in recruitment and talent acquisition? What will be those things that you will personally have a lot of focus on?
01:16:22
Speaker
So our roadmap and how we'll get there, what components would contribute is very, very crystal clear. So first, we have to continuously focus on our data analytics and technology, and we have to keep investing for that because this is an ever-evolving
01:16:40
Speaker
Second, we have to grow our liability side, which means more and more large lenders have to come to us to funnel our growth. And third, we have to keep working and making our distribution profitable. So last year we have invested very heavily in our micro enterprise infrastructure. So today we have 79 locations contributing to 20 odd growth. So our focus is that that get to a point of break even and start contributing.
01:17:09
Speaker
Whatever base, so this combination of continuous focus on data analytics and technology, continuous focus on building a profile and trust among lending institutions.
01:17:20
Speaker
And third, keep focusing on making our distribution more profitable and being able to service the customer would take us there naturally. So what does investing in data and technology give you? What number would it move? If it's a lever that you're moving?
01:17:41
Speaker
Is it the NPA rate which gets moved by investing in data analytics or what is it? Or do you get more profitable? Like you're able to do better pricing of loans? Together, being able to filter between good and bad customers.
01:17:59
Speaker
Second is that being able to price your risk is all a function of data analytics. Saying yes and no to customer in 30 minutes time or 10 minutes time versus taking seven days. And second, whether you should lend it 13% or 17%. And what is the projected loss ratio is a function of data analytics.
01:18:21
Speaker
Third is protecting your balance sheet, which is what I call about the EWS system. And eventually this leads to what we call in better income-opex ratios. Because our OpEx to our income ratio would be superior to conventional lenders because we are not wasting too much of time. Help me understand what is the income-opex ratio?
01:18:43
Speaker
For 100, what is your expense to earn 100 rupees if your expenses 50 rupees or 70 rupees? If my comparative traditional lender have a 70 rupees of ratio, I would have 15 rupees over a period of time.
01:18:59
Speaker
If you like the Founded Thesis podcast, then do check out our other shows on subjects like marketing, technology, career advice, books and drama. Visit the podium.in for a complete list of all our shows.
01:19:20
Speaker
Before we end the episode, I want to share a bit about my journey as a podcaster. I started podcasting in 2020 and in the last two years, I've had the opportunity to interview more than 250 founders who are shaping India's future across sectors.
01:19:35
Speaker
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01:19:56
Speaker
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