This lending platform's tech helping firms get capital on tap

Small business lending platform U GRO Capital is using data science and technology to create a scalable and templated scorecard to shift collateral-based MSME lending to on-tap financing. The company believes that the shift in technology infrastructure would play a pivotal role in changing the MSME lending landscape in India. Shachindra Nath, Vice Chairman and Managing Director – U GRO Capital, in an exclusive interview with Bizz Buzz, says: "True to our belief, the OCEN framework and Account Aggregator network are now supporting new age business models. GRO Score, our AI/ML driven proprietary scoring model, and our strong underwriting framework have been developed to increase touch points and maximize our MSME reach through multiple curated MSME funding programs. It enables initial credit decisions in under 60 minutes, improves TAT, and has the potential to meet the needs of India's credit starved business segment."

The cash flow-based lending model is in a nascent stage in India. How do you see its evolution in the near future?

Our lending system has traditionally been based on security. In ancient times, most lending was done based on jewellery or land as collateral. This collateral-based lending mindset has evolved over centuries and generations. It does, however, it has its own pros and cons. If someone has mortgaged their family jewellery or their residential house, the borrower will face significant repayment pressure. However, it has nothing to do with his or her cash flow or repayment capacity. This has resulted into higher NPA into our lending universe. The lending ecosystem is gradually realizing that unless proper cash flow analysis is done and repayment schedules are based on predictable free available cash flow, the risk of delinquencies will remain high. Some lenders have recently begun to focus on cash flow-based lending, but it is still at a nascent stage. The problem of high delinquency among Indian lenders can only be solved by developing underwriting frameworks that can predict borrowers' future cash flow. It will take time for large lenders to abandon the traditional method of underwriting, but the realization is unmistakable. Although it may take some time, this is an idea whose time has come.

Tech-based lending has yet to make inroads into the MSME space. How do you see it evolving?

Among the organized financiers, there are three types of MSME lenders. The majority of MSME financing comes from large traditional lenders, where MSME underwriting is still done traditionally. The second category is fintech lenders, whose universe is very small and the issue they are grappling with is that they are lending money without meeting the customer and without creating a collection infrastructure, resulting in very high delinquencies. Then there are Data Tech Lenders, such as U GRO Capital, who have a capable tech platform, an expert data analytics team, and a robust collection infrastructure. While this space is also very small in comparison to the MSME borrowing universe, Data Tech lenders are faring far better because of their superior customer underwriting with the use of data science, and collection infrastructure around the customer which helps in keeping asset quality in healthy condition. The way things are evolving, traditional large lenders will begin collaborating with data tech players to leverage their expertise in underwriting and collection. It will be a win-win situation for everyone as large lenders have the advantage of capital, low cost of borrowing while Data Tech lenders will assist with underwriting and collections. Co-lending is a step in the right direction.

How do you see the co-lending model evolve, especially with respect to the MSME lending space?

U GRO Capital is a pioneer of Lending as a Service in India. While co-lending is a new concept for Indians, regulators are constantly assessing the space and making regulatory changes to make this model a success.

Large banks and financiers have the advantage of capital as well as low borrowing costs, but it is difficult for them to underwrite all segments of MSME. It is in their best to collaborate with Data Tech NBFCs that have developed expertise in some of these MSME segments. It will aid larger financiers in improving asset quality. It will also benefit NBFCs, which will be able to onboard a higher volume of customers while deploying less capital and earning a spread on the portion taken by other financiers. U GRO Capital has been an active participant in the country's co-lending ecosystem, having signed 10+ co-lending partnerships with distinctive financial institutions. Our multi-channel distribution platform and co-lending orientation has allowed us to enhance our reach in MSME financing. The advance utility of data and technology has allowed us to attain high operational efficiency as well as quality credit disbursal. The total volume in the co lending space is expected to be around 25000-30000 crores this year. However, in the next two years, we expect co-lending to surpass volumes of at least one lakh crores.

Observers feel that India's lending space has to move away from the traditional methods of evaluating creditworthiness basis income documents & collaterals. What is the potential roadmap for the same?

While the general perception is that the lending industry has moved away from traditional underwriting methods, reality is far from it. Most large traditional lenders continue to base credit decisions on security value, audited financials, and other factors. Only new age lenders, including banks, use other criteria to evaluate customers. At U GRO Capital, we use a balance sheet or profit and loss statement to assess a customer by matching their banking and bureau scorecards to generate a single score, which is then supplemented with GST data as an external input. In the last year, proprietary scoring model (GRO Score) has processed over 21,000 applications, over 67,000 bureau records, over 45,000 bank statements, and over 14,500 GST records. Machine learning algorithms used in underwriting enable us to synthesize large amounts of information to derive meaningful insights from unstructured data. We continue to place innovation at the heart of our strategies in order to launch unique initiatives and provide effective credit solutions to MSMEs. We believe that the industry will gradually abandon traditional underwriting methods in favour of newer benchmarks.

How will technology provide India's unserved and underserved segments with access to easy credit?

At U GRO Capital, we firmly believe that utilizing data analytics and technology in various operational aspects such as origination, underwriting, portfolio monitoring for early warning signals, and collections can assist this segment in achieving rapid and sustained growth. By introducing and enhancing E-Sign Application, E-Agreement, E-Nach, and IMDS for MSMEs, we have improved digitization across the entire customer journey and touch-points. We are upgrading our underwriting model, GRO Score 3.0, to derive power insights and better underwrite this segment by combining the power of bureau, banking, and GST data. We will soon launch GRO X, a revolving credit line for all eligible MSMEs via a purely app-based journey, for our direct digital channel. It would allow MSMEs to use their sanctioned credit limit through a variety of payment channels, including UPI and bank transfers. It will also allow them to present a QR code in order to receive payments from their customers in lieu of repayment of the facility.

How will green financing in the MSME segment help in contributing towards achievement of the UN's SDGs?

The MSME segment contributes 50 per cent of world GDP, while it accounts for approximately 30 per cent of GDP in India. MSME employs over 11 crore people in India alone. The UN's targets cannot be met unless the MSME sector contributes. However, there is hardly any incentive for MSME to migrate or modify themselves to become ESG compliant. The lending universe has to make sure that there are enough incentives for them in terms of availability of liquidity and cheaper rates so that it motivates MSME towards the migration.

Can India see a robust 'Lending-as-a-service' marketplace in the future?

U GRO Capital is revolutionizing MSME lending through its Data analytics prowess and robust technology architecture. We have been pioneers of Lending as a Service (LaaS) in India and have accelerated our expansion through co-lending and co-origination partnerships. Our increasing off book AUM of 29 per cent as of September 2022, demonstrates that our credit scoring model and underwriting framework are widely accepted across the banking industry. The importance of LaaS is recognized by the MSME lending ecosystem. Both the government and the RBI are keeping a close eye on the MSME sector and acknowledge the fact that the problem of small businesses can be solved by co-lending and co-origination coupled with a data centric, technology-enabled approach. To support MSMEs, the RBI will continue to amend regulations in response to the needs of various stakeholders.

How will India's MSME segment benefit from a robust 'Lending-as-a-service' ecosystem?

The main beneficiaries of 'Lending-as-a-service' ecosystem are the MSMEs. Since banks make up a bigger portion of the overall amount of credit supplied, interest rates are lower than they would be through a typical NBFC lending program, allowing MSMEs to obtain the necessary credit faster and at a more affordable rate. Modern fintech and data-tech NBFCs are using a digital strategy to better understand the underlying client. The co-lending ecosystem is strengthened by technology. In contrast to traditional lending methods, data-tech NBFCs use digital platforms. Technology-driven algorithms are used reduce the cost of acquiring customers, and newer models based on diverse parameters such as cashflows, banking behaviours, GST returns are deployed, which can significantly improve underwriting standards. The ability of NBFCs to recover delinquent customers in a timely and efficient manner also benefits the entire MSME lending ecosystem.