We’re in the Underserved, Not Unserved Market: U Gro Capital VC & MD

Chokhani Securities was renamed U Gro Capital after Sachindra Nath – the former CEO of Religare Enterprises acquired the company in December 2017. In an interaction with Trade standardNath – the vice-president and general manager of U Gro, tells Manojit Saha that the increase in interest rates will have no impact on the demand for loans from its customers, who are mostly micro, small and medium-sized enterprises.


With RBI excluding Mahindra Financial, do you see NBFC’s recovery being affected in general and U Gro in particular?

There is an unserved market and an underserved market. We are in the underserved market. All of our clients have existing lines of credit, they are credit tested. 99% of our collections are made through the banking system. Our entire collection is in-house and everything we outsource is largely recall systems. We don’t need to pick up a physical check or cash. The RBI action will impact some segments of the market but not us. In our case, most loans are secured by physical collateral, real estate. It’s not the agents who do it. Recovery is mainly done through the courts.


U Gro’s capital primarily lends to small businesses, particularly the MSME sector, and has grown rapidly, albeit from a low base. Do you think the growth momentum will also continue in the second quarter?

We have given the figures not only for this year but till 2025. Our target assets under management by the end of this year (FY) should be Rs 7000 crore. We should be around Rs 4300 crore by the end of September.


Do you think rising interest rates could dampen demand for new loans?

The segment in which we operate, the premise is that data could transform all credit to MSMEs in India. So that we can reach the level of consumer financing. Second, we operate in a customer segment with turnover between Rs 10 lakh and Rs 5 crore. The 8 sectors we serve are all from the consumer economy – healthcare, education, food processing, hospitality, etc. Our view is that the interest rate pass-through is not as high as the credit demand requirement for working capital and term loans. So we don’t see that as a challenge. In addition, a large part of the costs related to the increase in interest rates is borne by the NBFC and not by the end customers. We do not expect new loan rates to increase.


Your cost of funds must have increased. How much would that be compared to say May. You recently raised funds through NCD at an interest rate of 10.5%. Are they cheaper than bank loans?

In the same group. As you know, we are technically a three and a half year old organization. On the liability side in India, we have two strands. One of them is made up of about 10 NBFCs that are part of a large corporate group. Their cost of borrowing is linked to filiation. For companies like ours that are self-sufficient based on quality of capital, governance, management team, our capital costs would remain high in the first five years. It will gradually come down over a period of time. We are seeing a gradual decline in the cost of funds even though interest rates are rising because our initial cost was higher.


Do you have a fundraising project?

Given the growth rate, we said we were going to raise capital. We will keep our leverage below 4x. If we reach Rs 7000 crore of AUM of which 35% is off-balance sheet, then our additional capital requirement would be Rs 300 crore to RS 400 crore. We will raise it in the third or fourth quarter.


Many lenders see stress in accounts that have been restructured during the Covid period of the MSME sector? What is the percentage of loans in the restructured portfolio that are in trouble — for which repayment is due?

We allowed restructuring exercises for businesses where we believed a revenue recovery would occur post-Covid. Restructuring will not serve the purpose for accounts that cannot survive. Our restructured portfolio is around three and a half percent. Nearly 90% of the portfolio is up to date. In the hospitality portfolio, and a very small portion of the restaurant which is unsecured – around Rs 10 crore is under pressure and we believe it would not return.

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