I had a conversation with the head of co-lending at a large PSU bank. They have interacted with Ugro daily for the last two years.
Key pointers from the discussion:
On Co-Lending
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Co lending uptake from PSU banks has been slow due to skepticism about the MSME segment in the wake of covid. Finally after the second wave resolved, co lending has picked up to an industry size of around 25,000 Cr. today. The formal landscape is around 400,000 Cr. and can be easily reached in 10-15 years.
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There is a split between private and public sector banks on co-lending. Public sector banks want to partner with large NBFCs and are keen to have a social impact: formalisation of credit, bring more people within the purview of a bank, without compromising on asset quality. Private banks in comparison want to partner with small niche NBFCs, where they see co lending as a way to create a product, and lend to a segment they haven’t already tapped (example: Trucap and HDFC).
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Banks have daily reviews of portfolio quality on co lending, and set collection efficiency targets for NBFCs, and have close discussions on all aspects of the book frequently. If something isn’t right, they slow down. Conversely, if things work, they will scale relationships.
On Ugro and the Competitive Landscape
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Tech integration is extremely important in co-lending. RBI regulations require co-lending to be done on the same day as disbursals. This cannot be done by manual entries at scale. Ugro very early understood this and were ready with an API stack, middleware and a digital platform. They were an early mover/leader in the space, and this alone is not an advantage today, as everyone else has had to invest and build to get to the same stage.
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Bank and NBFC have to simultaneously underwrite the loan. NBFCs have proprietary scorecard models, and do not disclose the workings to banks. Ugro’s approval ratings were very low in the early stages of the relationship. Today, the approval ratings under co-lending are up 8x from the early days. Rejections are due to a difference in interpretation of policy, and 70% of loans sent from Ugro’s side are accepted by the bank, and is a great number in the bank’s eyes.
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There are several things Ugro does right in the bank’s eyes.
a. Relationship was slow in the early days until bank got comfort in Ugro’s collection mechanism and quality of the book that was passed on. Did secured lending initially, but now have started to do unsecured.
b. Middle management is very good, no one has left in the last couple of years. This keeps the bank happy, as there is continuity in working relationships. They have brought on more quality people, and have become more stringent with regulations and underwriting.
c. A loan that is sourced doesn’t differentiate which bank it goes to. Ugro is very good with knowing what exactly the bank wants, and sending them the correct loans for their requirements.
d. There is no USP today on a product / segment. The market is very large and can accomodate lots of players. Working culture is more important to the bank than a lot of things investors look for like USP. There is no complaint with Ugro at the moment, no challenges and Ugro is upfront in their discussions with the bank. They constantly ask what kinds of expectations and ratios the bank wants in their secured/unsecured book. Softer USPs are the ability to bring the right pockets of people into formal credit.
e. Religare was a non issue. Regulators have no complaints, company has managed to raise a lot of capital from a good investor base. Management is known in the industry and is capable.
f. Another highlight is the digital collections system, where collections are based on NACH/e-NACH, and documents are digitally signed without physical copies. Cash collection has a lot of compliance risk. Peers like Paisalo have fallen behind in this respect.
g. Co-lending discussions start with an expected credit cost of the product, and then targets are calculated in reverse. As an example (not actual figures), if you are pricing in 5-7% stage 2 NPAs, then collection efficiency targets are around 93-94% initially. These are then recalculated on the product and life cycle.
IIFL and SBFC were also discussed as really good names in the industry. SBFC was called an excellent company. Capri Global has poached good people from IIFL and has built a book quickly.
Lastly, by regulation, direct assignment can be classified as co-lending. A lot of PSU banks talk of scaling the co lending book, but it’s DA that gets scaled, not true co-lending. It’s important to focus on this distinction amongst stakeholders in the future.
Disclosure: invested and biased. These conversations rarely are made public, and I’d like to give back to the community.