Banking is not the only profitable business model: Former Religare CEO

NBFCs have to start believing that they are not banks and can't compete with them which means that they have to do what I call the hard tier-2 work, he said

It’s unlikely you would have read much about UGRO Capital, which has raised ~958 crore from a clutch of private equity (PE) firms and family-home offices. It’s executive chairman, Shachindra Nath — former chief executive officer of Religare — has got this buy-in without the backing of a corporate house at a time when many non-banking financial companies (NBFCs) are gasping for air. Nath spoke to Raghu Mohan on his business model, which is not to stress on asset growth unduly, but will see significant co-lending play. Edited excerpts.

You have struck out on your own with an NBFC at a time when the only other new player is one backed by a business house — Kirloskar Capital led by Vimal Bhandari…
 

I had decided not to go to another promoter-led business because in financial services, capital and governance are paramount. When you run a business for a large corporate, you can't control the way it would want to do things. I wanted to build a sizeable equity base having started with nothing in hand. I was trying to raise about Rs 1,000 crore capital. In the PE world, they are all willing to put capital for an existing platform for buy-outs, but hardly anybody was willing to back an idea. As for Bhandari, he is leading a very different kind of business.

What was your pitch to investors —how different an NBFC is UGRO?
 

There are only two kinds of business models — a diversified large NBFC and a niche. History tells us that in the last three decades, large diversified NBFCs have not delivered value to either the shareholders or to the market. Because ultimately, if you're not a bank, you need to solve commercial problems. Anyone who has tried to do so — whether it is Shriram Transport that solved the problems of second-hand truck owners; Mannapuram for small borrowers who have only gold as an asset; or Mahindra Finance for agriculturists buying tractors — has outperformed. For the last decade or so, you will see that bulk of the new capital has been going towards the creation of this market. Roughly $1.5 billion; and mainline media missed this trend. Four large PEs have invested Rs 170 crore each; we did a qualified institutional placement when we had not even started commercial operations when the likes of PNB Metlife and Abacus came on board. We also got in Rs 80-100 crore of family offices money like from Jaspal Singh Bindra, executive chairman of Centrum Capital. In all, we raised Rs 958 crore by way of capital.

How do you view the lending side? 
 

I divide it into three parts — consumer, small- and medium-enterprises (SME) and wholesale. Consumer needs require parentage like a Bajaj or Kirloskar because it takes 10-15 years to scale up. Wholesale is a business which is about regulatory arbitrage. What banks can’t do, you do it through an NBFC, and that’s why you have seen some big names that have never created equity value. And that is why small enterprises have been under served with a $300 billion-plus dollar credit gap. We looked at almost 180 segments, and then designed ourselves only to eight. We lend only to healthcare, education, food and beverages, hospitality, chemicals, auto-components, electrical equipment and manufacturing; and then we design through further sub-specialising. 

Would you become a deposit-taking entity or look at a small bank licence for a stable funding base?
 

NBFCs have to start believing that they are not banks and can't compete with them which means that they have to do what I call the ‘hard tier-2 work’. We are not underwriting credits with specialisation; on-balance sheet borrowing is not the only solution. Our pool of assets is attractive for banks to either buy from us or co-lend with us. Ultimately, we are in the business of generating results for the shareholder. The only solution to that is not to become a deposit-taking company or a bank. I don't know why there is a perception that being a bank is the only way to have a profitable business-model. If that was the case, all banks should have been very profitable!

So, you originate (loans), don't keep them on the books, but sell down…
 

Don't compete for assets on your balance sheet; do so on the capability to underwrite a specialised class of customers which others can't underwrite. Whether you refinance, whether you sell-down or whether you get a co-lender. Most banks would rely on the capability of an NBFC and co-lend with it. State Bank of India has set up a large division for co-lending. The Reserve Bank has issued a circular, which says that co-lending for banks will qualify for priority sector. And a real partnership between banks and NBFCs will emerge wherein the latter will originate to be serviced by large lenders.

And where do you get the underwriting skills for this?
 

It has been a challenge; we will institutionalise that process. SMEs contribute to 38 per cent of our GDP. It is such a large sector that you cannot possibly specialise in everything; it is very hard to train 10,000 people. We took this 180-sector dataset and selected the sectors that have a macro-economic defence system for the next 10-15 years. Then we did the sub-sectors and have a technology platform to build on the expertise which is centralised, driven by analytics and delivered and executed by people. We plan to service loans between Rs 1 lakh and Rs 10 crore. We will do so on our own for Rs 50 lakh to Rs 3 crore; for below Rs 50 lakh, we have partnered with other NBFCs to co-lend. For above Rs 3 crore, we are partners with large banks and will co-lend with them. 

What you have raised for the NBFC is just short of the Rs 1,000 crore required for a new private bank. How much do you hold in the company?
 

Well, one of our US-based investors remitted the money on a bank holiday, so it didn't come through! I hold four per cent.