Secured Vs Unsecured Loan Mix: Ugro Capital's Strategy
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00:00Let me, though, quickly welcome on board Sachindranath,
00:11founder and managing director at YouGrow Capital.
00:14Welcome, Mr. Nath.
00:17First off, many congratulations.
00:1910,000 crore in AUM breached.
00:22Where to from here?
00:24In terms of growth, what can you expect going forward
00:28on this higher base?
00:30Yeah, I was listening to you.
00:31It sounds so bad.
00:33But actually, when you look at businesses,
00:35businesses have little correlation to the stock market.
00:38I think so.
00:40What is most heartening about YouGrow
00:42that it's a company which has reached 10,000 crore AUM.
00:46And we are a pure play MSME financing company.
00:49In 2022, we were 1,300 odd crore.
00:53So we have seen, since we began in 2019,
00:57we have seen both ILFS crisis, the COVID crisis.
00:59But still, in three years, we have gone to 10,000 odd crore.
01:03And within the broader NBFC market,
01:0610,000 crore of pure play MSME AUM
01:08put us roughly around fourth largest or third largest MSME
01:12financing company.
01:13So our whole view have been that India's MSME market requires
01:18a very large institutional play and large lending
01:22institution around it.
01:23Same thing what we have seen in consumer financing,
01:25the gold financing, second-hand vehicle financing.
01:29India definitely need a large MSME financing company.
01:32And we have both demonstrated the capital
01:35raise, three round of capital, almost 2,800 crore
01:38of total capital.
01:39We have demonstrated a very large co-lending business.
01:42Almost 50% of our business is in form of co-lending
01:45or off-balance sheet.
01:46And we continue to build from where we are, actually.
01:49We have said that starting 2026, this company
01:53would continue to grow at 30 odd person every year.
01:57Right now, our entire focus is to expand.
02:00Out of our four vertical, we are expanding
02:03our micro vertical, micro enterprises vertical.
02:06In 2022, we were 25 location.
02:08We added another 50 location in 23.
02:12We are now roughly around 150, 170 odd location.
02:17And we should be 250 plus location end of this year
02:20and 400 location next year.
02:23In our customer segment, which is 15 lakh
02:25to 15 crore turnover, we continue
02:28to see very strong resilience.
02:31If you read our MSME Sambhak, which we do along with DNB,
02:34we are seeing a strong formalization of economy.
02:39The movement of informal to GST is happening
02:42at a very strong pace.
02:44We are seeing very strong cash flow
02:45coming in the banking system.
02:47And we are seeing the bureau records getting matured.
02:51So I think we would, at the end of this year,
02:55we have grown 3,000 crore of AEM every year.
02:58We were 3,000 odd crore in 22.
03:01We were 6,000 crore in 23.
03:03We were 9,000 odd crore in 24.
03:06We should add more than 3,000 crore end of this year
03:10and more than 5,000 crore end of next year.
03:14Right, so tailwind being strong, that's
03:17the one takeaway that I take out of this,
03:20at least the first part of this chat.
03:22And the other piece is that you will add roughly 8,000 odd
03:25crore of AUM on the 9,000 crore AUM
03:27that you have in the next two years.
03:31Talk us through.
03:31One and a half.
03:32Yes, OK, so two and a half years.
03:34Talk us through.
03:35One and a half.
03:36One and a half, apologies.
03:37So FY26, is that the right way to look at it?
03:40Yeah.
03:40Got it.
03:42And so talk us through how asset quality holds up.
03:47And before asset quality, actually,
03:49talk to us about how loan growth is shaping up
03:52and what segments of the balance sheet or where
03:57are you lending to?
03:58What are the levers there?
04:00So look, we service four customer segments.
04:04As I said, of the total 90 lakh crore gap in India,
04:09we believe that 90% of that credit gap
04:12belongs to this customer, which is in the trading turnover
04:15of 15 lakh to 15 crore.
04:17And we service most of them through four distinct channels.
04:21Firstly, what we call the prime channel,
04:23today, which constitute roughly around 50% of our asset block,
04:26where we lend to businesses which
04:29are in the trading band, turnover band,
04:31or between, say, 2 crore turnover to 15 crore.
04:34Average ticket size on the secured loan
04:35size of around 1 crore.
04:37Business loan of around 17, 18 lakh rupees.
04:41We then focus on what we call productive asset financing.
04:45We do CNC, printing, packaging, plastic, molding,
04:47and rooftop solar.
04:49Third is we do what we call through partners
04:52and embedded financing.
04:54And last but not least, our entire micro enterprise
04:57is vertical.
04:59If you look at the construct of our total loan book today,
05:0250%, as I said, is our prime customer segment loans.
05:06Around 10-odd percent is our micro enterprises.
05:0810-odd percent is around our partnership and alliances.
05:12And the balance is the machinery and few others.
05:16Where it would change, in the next 8, 7, 6 quarter or 8
05:20quarter, this micro enterprises loan
05:23would become roughly around 30% of our total loan book.
05:26So the entire, so it is not the volume number,
05:29but the growth, new growth will come from our expansion
05:33of our micro enterprises.
05:34And also, that is what is expanding our ROA as well.
05:38Because this is roughly around 80%, 90%
05:40secured yield business.
05:42So the whole expansion, coupled with our entire digital
05:45and data technology infrastructure,
05:48is expanding our business.
05:51So when you get to 17,000 crore, Mr. Nath,
05:54I'm going to rephrase this.
05:55Where does micro enterprise go, which is maybe 2% lower
05:59than your blended book in terms of yields?
06:04So therefore, where does this particular component
06:07of the book go, which is currently at 10% of your book?
06:11So, I'm not putting the number of 17,000 crore.
06:14I hope that we surprise the market more than that.
06:18So our expectation is more than that,
06:20because we are building infrastructure now.
06:23We have said that we will expand our portfolio yield
06:26by 150 basis point.
06:28And that is happening through our micro enterprises loan,
06:31which comes at an average yield of right now
06:33at around 20 odd percent.
06:34We are hoping that with the expansion and growth volume,
06:37the yield will be a little bit compressed
06:39for that segment of the market.
06:41But our overall portfolio yield,
06:42because of sheer reconstruction or change in the mix
06:46from a 10% of the current loan book,
06:49which is around 1,000 odd crore,
06:51when it get to 30, 35%,
06:53so roughly around 7, 8,000 odd crore,
06:57this will increase the portfolio yield by 150 basis point.
07:01Got it, okay.
07:02And just talk to us about what component of your loan book
07:06of 10,000 crore now is secured versus unsecured.
07:10And as it goes from the current 10,000
07:13to maybe 17, 18,000 crore,
07:16how does secured and unsecured really shape up?
07:20So we have maintained what you
07:22in your common paradigms call unsecured loans.
07:25We have maintained that roughly around 30%.
07:27Now, the definition of secured is multiple types.
07:31So our loan book has certain component of secured
07:34by mortgages, which is property,
07:36secured by machinery, secured by receivable and cash flow.
07:41What we call the hard collateral-led loan
07:45is roughly around 60 to 70 odd percent.
07:47And it will continue in that way,
07:49probably it will improve.
07:51So we expect that our secured by collateral,
07:54hard collateral will go up from the current
07:58of 70 odd percent to 75 odd percent.
08:01And that is sheer function
08:02of our micro enterprises vertical growing now,
08:04which is largely secured.
08:06We don't do anything else there.
08:09You have to differentiate this,
08:10what you call so unsecured loan.
08:13The business loan segment to micro enterprises,
08:16while there is no collateral attack,
08:18but it is done on the basis
08:19of the cash flow of underlying customer
08:21and also you get credit guarantee cover.
08:23So most of our unsecured business loan resides
08:28in our co-lending bucket,
08:29wherein there is a credit guarantee.
08:31So on our 20%, there is credit guarantee.
08:33And for the banks which takes these loans,
08:35also there is credit guarantee.
08:37So at least from that perspective,
08:40these loans are not unsecured
08:41because there is a credit guarantee from CGTMSB,
08:44which comes on these loans.
08:45Take your point.
08:46Now, just wanna talk about asset quality
08:49because this is one pocket,
08:50small businesses where it's been
08:54a tough couple of quarters.
08:57What is different in your book?
09:00Are you seeing pain at this point?
09:03Just talk to us about what's happening on ground.
09:06So I think the MSME financing,
09:07you should divide in three parts.
09:10First is businesses which are new to credit.
09:13Second is what we call the underserved market.
09:16These customers which are between 15 lakh turnover
09:18to 25 crore turnover.
09:20And third is the over-served customer,
09:22which is larger MSME.
09:24Whenever the customer trading turnover
09:26between 25 crore to 200 crore,
09:28that's a bank customer.
09:30We believe that that customer segment
09:33have little competitive advantage to the larger corporate
09:36and that's why they remain under pressure.
09:38But this, the middle,
09:40and that's why I would urge for media to read
09:44this 25,000 customer survey,
09:46which we do along with DNB
09:49and we publish the health of these customer segment.
09:52This is a customer segment
09:53where the cash flows are improving.
09:55In tier two, tier three, tier four economies,
09:58these customer are getting more formal.
10:00Their GST turnover volume is increasing.
10:03Their banking cash flow is increasing.
10:05So we are seeing, you know,
10:07very anti-cyclical behavior for micro enterprises customer,
10:12both in services and manufacturing for that bank.
10:15Obviously, we see there is little bit of over leverage
10:19happening in the business loan segment
10:21as it has happened also in the retail segment,
10:23but it is nowhere near to the consumer,
10:25retail, personal loan segment,
10:28and it is still very manageable.
10:31Credit guarantee also helps us a lot in that segment.
10:35We continue to believe that we will be able to manage
10:38this business in a 2% overall blended credit cost
10:41because we construct the portfolio in that manner
10:44because different product lines,
10:46so secure prime customer, you know,
10:49have around credit costs around 0.5%.
10:52Business loan is around 2.5% annual.
10:54Micro enterprises is 2%.
10:56Machinery is around 1%.
10:58Embedded financing and partnership loans are less than 1%.
11:02So we make sure that we blend the portfolio percentage
11:05in a manner that we can maintain
11:07through the cycle of credit costs
11:09between 1.5% to 2.5% and median being at 2%.
11:13We are at 1.5% of credit costs,
11:16and we believe that our 4% ROA bridge
11:19has these four parameters.
11:21Our blended portfolio need to go up by 150 basis point.
11:25Our cost of borrowing to come down by 75 basis point.
11:29Our OPEX leverage to give benefit of 0.5 basis point.
11:31And our credit cost would go up by 0.5%.
11:34And that's why this will move from 2.5% to 4%
11:38in the shorter, you know, into 10 quarters.
11:41Very specific.
11:43What gives you the confidence
11:44that the credit cycle likely will not turn?
11:48And if it does turn,
11:49your asset quality will remain unaffected at 2.5%,
11:52capped at 2.5% in terms of credit cost.
11:56So you have to look at from the macro
11:58and then we have to look at our selection criteria.
12:00I think the way India's growth trajectory
12:03is the services segment and the manufacturing segments
12:06at the bottom of the pyramid.
12:08We, unless there is a reversal of our growth rate
12:11at the GDP start happening,
12:14if India continues to grow at 70%,
12:16MSME would continue to contribute between 30 to 40 odd percent
12:20and the bottom line pyramid of the MSME economy
12:24will continue to perform well.
12:25So we are not seeing,
12:26and also there is massive government push
12:29to expand the credit and make MSME economy more healthier.
12:33So if you look at this year's budget,
12:34the amount of emphasis which has been done on MSME
12:38is, you know, unprecedented.
12:41So we are not, first, we are not seeing any macro headwind
12:44when it comes to MSME.
12:45Number two, we select, you know, today,
12:48if you look at in last 15 quarter or so,
12:51we have maintained login to disbursement ratio
12:54of around 30 odd percent,
12:55which means for every month when we disburse
12:57around 600 to 700 odd crore of loan,
13:00we're almost four times of that we originated,
13:02which means that our both machine and human
13:05have been able to eliminate the customer
13:07where we don't see good solid cash flows.
13:11So 50% of all of our loans, you know,
13:13are rejected by machine, which we call gross score,
13:16and then 20% get rejected by our credit officer.
13:19And as long as we maintain that
13:21and we continue to remain in the same portfolio mix
13:24and select the customer
13:25and keep expanding our physical footprint,
13:28I think so we'll be in this range itself.
13:31My last question is with regard
13:33to geographic concentration.
13:35Now, I know we've spoken more about risks
13:37than about the positives,
13:39but you've captured the positives very well.
13:41So I wanna try and focus in on that one risk,
13:44which is geographic concentration.
13:46You know, are you planning to diversify
13:49or are you more comfortable
13:51with the way you currently appraise geographically?
13:55So YouGrow is India's only MSCB financing company,
13:59which has crossed the bridge of North and South divide.
14:03Most of our peer set are either South focused
14:06or North focused.
14:07YouGrow is a national footprint company.
14:10Our micro enterprises business,
14:12we started from Tamil Nadu, Telangana,
14:14Karnataka, Rajasthan and Gujarat.
14:16Now we have expanded in UP, MP, Andhra, Maharashtra.
14:20And our prime business is around,
14:23you know, further into larger cities and towns.
14:26So we operate 30 odd location across the nation for prime.
14:30We operate around these seven or eight states,
14:33which is both North plus South.
14:35We do a very deep data analytics
14:37of all loan portfolio of all our peers
14:39and that's why we exclude certain number of states.
14:42We have waited for three years for UP,
14:44you know, economy to prosper and become stronger.
14:47And that's why we have entered.
14:48We still don't go to Northeast.
14:50We have not still exposed to Bihar,
14:52not many other states which, you know,
14:54otherwise, you know, look very attractive,
14:56but we think so that the cultural aspects
14:59of MSME and economic progression, you know,
15:01in places like Bihar, Odisha is still not fairly strong.
15:05So I think that we are well diversified geographically.
15:08Our journey from the current to this year of 250
15:11to 400 location is in these eight states.
15:15And after that, we'll see how, you know,
15:16different geographies span out.
15:18Okay, great.
15:19Thank you so much, Mr. Nath for, of course,
15:21giving us that lens on not just, you know,
15:24you grow, but also talking to us
15:26about the industry at large.
15:27Thank you so much for that.
15:29Thank you so much, Harsh.