Scale with proper capital allocation is critical: APAC Financial founder

APAC Financial Services is among a clutch of non-banking financial companies started by former bankers servicing the micro, small and medium enterprises segment. The firm’s founder, Gunit Chadha (a former chief executive officer of Deutsche Bank for the Asia-Pacific), told Raghu Mohan that chasing scale for its own sake has its pitfalls. Edited excerpts from an email interview:

It’s been four years since the rollout of APAC Financial. How has the journey been so far?

We have built significant digital and physical infrastructure to cater to the credit needs of MSMEs (micro, small and medium enterprises) in the semi-urban and rural areas. My belief is that all deserving firms should focus on growth instead of being constrained by access to capital. We are present in 93 towns across south India, Maharashtra and Rajasthan, with 14,000-plus customers. Our goal is to impact the lives of 100,000 MSME customers over the next four years.

We have developed an in-house origination, underwriting and customer service technology platform called “Alpha.” And our API-first tech platform enables us to analyse customer data across 600-plus datapoints, conduct rule-based underwriting, paperless verification and disbursement. This has translated to superior quality and digital outcomes. For example, we have over 99 per cent in digital and banking collections. Our app, communication and customer service centres are entirely vernacular-enabled.

A spate of new NBFCs have come up of late. There’s a view that you can make a difference only with scale, and this is seen as being directly related to valuations. Does this not distract from the bigger picture?

I agree with the view on scale. There’s a Rs80-trillion MSME credit gap in India, which grows year on year -- this is the size of APAC’s opportunity and there’s ample room to scale. Delivering credit to our customer segment has a high difficulty factor. And the resultantly strong pricing power, once efficiencies of scale kick-in, return on equity grows significantly, is the key driver of valuation in my view.

Now, notwithstanding Covid, APAC has grown 75 per cent annually over the last three years, and expects to grow 100 per cent in FY23. Growth is strong, and getting stronger across multiple unit metrics. But one caveat: it’s critical that scale is achieved with disciplined capital allocation, as historically several NBFCs have mis-allocated capital to achieve assets under management, which hurts them down the road.

It’s said that while new financial entities may hold lofty ideals at inception, it is often private equity (PE) investors who call the shots, and then matters take a different turn. Your views.

I think PE investors are critical stakeholders in the growth journey of most startups. Transparency and high governance build trust, which provides the basis of achieving incredible shared goals together. It’s the Board which should call the shots, not the promoter, or PE investors. I can say with confidence that our PE partner -- Multiples Private Equity -- and us have shared a highly respectful and rewarding relationship, from inception to this day. Investee companies must treat PE capital with respect, as PEs are answerable to their investors too. It’s a fiduciary business, let’s not forget that.

And having witnessed many cycles, I am clear that APAC’s focus is neither on footfall, or eyeballs, nor in growing the top line with expanding losses in the bottom line. We respect capital, be it from self, leadership team or our institutional and other investors. And as much as from banks who have provided us with attractive leverage. And, therefore, since inception, we have been disciplined on our mantra of building APAC by balancing the GQP (growth, quality and profitability). We genuinely believe we are a strong and sustainable growth-oriented firm to partner with, with authenticity and fairness. In FY21 and FY22 preserving quality was a priority; in FY23, the pendulum has shifted sharply towards growth.

Why has NBFCs co-lending with banks not taken off the way it was imagined?

While APAC has chosen so far to not go for a co-lending model, I do think things are changing for the better, albeit slowly. For co-lending volumes to increase, we need further alignment between banks and NBFCs on target market and credit-assessment methodology. Banks have been very active in buying securitised pools from NBFCs, which is similar to co-lending after six months’ track record. Hence, I remain optimistic about co-lending. It’s naturally a win-win for both, since NBFCs are good in sourcing while a bank has access to much cheaper funds.

What more can be done to make life fairer for NBFCs vis-à-vis banks?

One key aspect is to create a level playing field between banks and NBFCs when it comes to ease of recoveries. DRTs (debt recovery tribunals) are helping banks to recover dues under unsecured loan categories and in cases where security cover is not adequate -- or recourse under the Sarfaesi Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002), is not applicable.

Unlike banks, NBFCs don’t have the benefit of approaching DRTs. Extending DRT jurisdiction benefits to NBFCs would immensely help us. Additionally, banks and housing finance companies (HFCs) have the benefit of the Sarfaesi Act for claims of Rs100,000 and above. NBFCs have Sarfaesi Act benefits for claims of only Rs2 million and above. Reduction of the threshold limit to Rs100,000 from Rs2 million will bring NBFCs on a par with banks and HFCs.