Things weren't looking very bright for Mahaveer Prasad, a small-time tea-seller in Jaipur. Let alone his earlier plans of expanding the business, keeping pace with the rising cost of his children’s education at an English medium school was proving tough.
Like most from his socio-economic stratum, he had already borrowed money from relatives and friends to construct a new house, among other things. So what were his alternatives now? Local moneylenders, who charge an exorbitant interest rate of up to 50% per annum, and banks, which ask for hefty collateral, proof of income and a dozen other documents, something that vendors and handymen can rarely furnish.
No points for guessing where they end up borrowing from, only to find themselves in the vicious circle of interest, principal and never-ending repayments.
But just as Prasad was contemplating biting the bullet, he was approached by the sales team of Finova Capital, a Jaipur-based non-banking financial company (NBFC) that lends to the financially excluded, and the unorganised micro, small and medium enterprises (MSME) sector.
Prasad was able to get a loan of Rs 5 lakh at an interest rate of 22% per annum. There was a small mortgage alright, but the loan was sanctioned in three days with very little documentation.
He had got a lifeline, at least for now.
Lending to the unorganised workforce and MSMEs is a sizeable, but very tricky, bet. However, founders Mohit Sahney and his engineer-cum-entrepreneur wife Sunita Sahney are veterans who understand the game inside out.
With Finova Capital Pvt. Ltd, which they founded in 2015, the duo is leveraging its deep understanding and expertise of mortgage-lending. For example, Mohit, who comes from a family of bankers, is a 17-year banking veteran, having led the mortgage business of ICICI Bank in Mumbai. He has also headed the private-sector lender's Rajasthan zone operations, which armed him with a thorough understanding of semi-urban and rural credit.
Mohit feels most banks focus on Tier I and urban markets, and give semi-urban areas short shrift. Even for the handful of banks that do operate in Tier 2 and Tier 3 cities, the key focus area is deposits, not lending.
And that's how Mohit spotted the opportunity.
Addressing the gap
Over the last two years, several online lending startups have sprung up, including some in the area of personal loans, a few in advisory and others in micro-finance. Though startups like Indifi, IndiaLends and Zest Money are catering to SME financing, the financially excluded and the unorganised MSME space is largely ignored.
As such, Finova's unique positioning in terms of its customer base addresses an important, and hitherto-overlooked, segment. Its client base spans small-time manufacturers, handymen and service providers working a 30-35% margin, such as electricians, plumbers, carpenters, paan-walas, milkmen, laundry persons, and hairdressers.
The firm extends loans against mortgages, typically taking 2-3 days to process a loan application. It charges an interest rate of 21-25%.
Currently bootstrapped, Finova started off with equity of Rs 10 crore and a term loan of Rs 30 crore. It currently has a loan book of Rs 17 crore, and aims to close this year at Rs 22 crore. So far, it has extended loans to 260 customers. It is in talks with investors to raise funds.
Finova competes with local moneylenders, who charge an interest rate of 40-50% per annum, and unstructured NBFCs, which charge 26-30%.
Finova feels MSMEs have huge credit demand, but the widest credit gap given banks' focus on big-ticket loans and a general tendency to stay away from the segment.
Besides, banks are reluctant to offer credit to first-time customers. Often, they ask for a tonne of paperwork, including documents like income certificate and property registration papers, which MSMEs find tough to furnish. That is ironic, given "MSMEs contribute nearly 8% of the country’s GDP, 45% of its manufacturing output, and 40% of its exports,” Mohit says.
However, determining a client's creditworthiness, particularly in the unorganised space, can be complicated. First, it is tough to establish to determine whether he or she has borrowed money already and, if so, how much. Second, often because the ones seeking credit live on the fringes of a city, running a background check can be tricky.
“You are taking a call on someone who does not have a proper record. We could be the first ones lending them money, so we need to be doubly, even triply, sure about that particular person,” Mohit explains.
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