I have written about it six months ago, but it’s worth sharing a high level introduction to the thesis again in case anyone reading has never heard of the company before.
A whopping 30% of India’s GDP comes from the MSME sector. They constantly need working capital to function, and yet don’t have access to loans from banks. A part of this is due to the difficulty in lending to the MSME sector; it’s notoriously hard. They don’t have predictable revenues and banks have a hard time separating risky businesses from potentially good loans. This is the tip of the MSME financing iceberg.
As a consequence of this, there is an enormous credit gap: a demand of 20,00,000 Cr. of loans that MSMEs do not have access to. The RBI in 2018 introduced a framework to address this gap, called co-lending. This is where Ugro comes into the story.
NBFCs usually have better access to customers (including MSMEs) than banks, a better way of assessing risks in smaller businesses than banks, but they also don’t have the money that banks do. NBFCs make money by borrowing from banks at 7-10% and lend to customers at 17-20%, profiting on the spreads.
Co - lending allows NBFCs to pick good customers to lend to, and “sells” 80% of these loans to the larger banks, charging a fee on these loans. In this way, everyone’s happy. MSMEs get loans, banks reach a crucial untapped market, NBFCs profit as important middlemen.
Ugro is one of these middlemen that offers lending as a service. They (claim to) have a smart way of differentiating good MSMEs from bad ones, and also have built their entire model around co-lending, wanting about 40% of their loans to be done through it.
So if you step back and look at this business, it has an enormous addressable market. The jockey and management team comprises quality not usually seen in a 1000 Cr. market cap company, and they are a data driven fintech firm. This is what one likes. On the flip side, MSME financing is the hardest nut to crack. If they grow too fast with an imperfect underwriting model, bad loans will wreck the company. They also were incorporated in 2018, and don’t have a proven track record. (management is incredibly experienced)
If you’re interested in the MSME sector, MAS Fin is a company that has the same addressable market, has a proven track record over ten years, and also has 20% of its balance sheet in co-lending. I’d recommend studying that before Ugro as I think it’s a lower risk play.
Sharing some links on this:
I shared some thoughts on co-lending below
There was also a nice piece written on the IIFL thread
I’m always happy to discuss Ugro, co-lending and the sector. There is so much more to say, but I’ll leave it as an introduction. 