Northern Arc readies to bolster direct lending business

NARAYANAN V Chennai | Updated on November 24, 2020 Published on November 24, 2020

Bama Balakrishnan, COO, Northern Arc

Focus to be on loans to small businesses, consumers, microfinance, mid-market lending to emerging enterprises

Northern Arc Capital, a non-banking finance company (NBFC) that provides access to debt for under-banked individuals and enterprises in India, plans to strengthen its direct lending business to focus on small business loans (SBL), consumer loans, microfinance and mid-market lending to emerging enterprises.

“Over the last six months we had a sizable disbursement on this (direct lending) book. In fact, on a cumulative basis, we have close to fivelakh loans, which have been disbursed through this platform, of which, we have done close to three lakh loans in the last few quarters. So, there has been a reasonable amount of traction in Q2,” Bama Balakrishnan, COO, Northern Arc, told BusinessLine.

Also read: Northern Arc structures and executes Nabsamruddhi Finance’s first PLI investment

Northern Arc creates a platform to connect millions of borrowers to mainstream debt investors through a combination of capital, products and partnerships. It has structured several innovative products in the Indian market, including Multi-Originator Securitisation (MosecTM), covered bond, and pooled loan/bond issuance.

Under direct lending, Northern Arc has two segments: (1) Retail, which includes small business loan (SBL), consumer and personal loan, and microfinance, and (2) Mid-market, under which it provides structured credit lines for working capital needs and term loans for capital expenditure.

“Put together, the direct lending business contributes close to 20 per cent of the overall AUM, which has grown significantly over the last three years,” Balakrishnan said, adding, “while the retail portion accounts for 10-12 per cent of the AUM, about 7-8 per cent comes from the mid-market segment.”

The NBFC expects its direct lending business to account for more than 25 per cent of its total AUM over the next two years.

In partnership with over 30 lending institutions, Northern Arc has disbursements over ₹1,300 crore under direct lending. Some of its partners include Lendingkart, Capital Float, and Udaan for small business loans, and ZestMoney, Early Salary, and Krazybee for consumer and personal loans.

“Our average ticket size in case of microfinance loans is ₹30,000 and for consumer and personal loans it is ₹25,000-30,000,” Balakrishnan said, adding, “Although we provide small business loans up to ₹20 lakh, a large portion of our loans under this category is under ₹5 lakh.”

Under the Mid-market, Northern Arc offers structured credit-lines for working capital and term loans for capital expenditure focussed on emerging businesses across sectors like healthcare, logistics, food & agriculture, clean energy, education, IT/ ITeS, and B2B services with an average ticket size of ₹10-12 crore.

Also read: Northern Arc Capital facilitates external funding for Asirvad Microfinance

Balakrishnan said that the current AUM of the Mid-market is about ₹200 crore, and the segment is expected to stay at 7-8 per cent of the overall AUM. The retail AUM, currently around ₹350 crore, is expected to scale up to over ₹500 crore over the next two to three quarters.

“We are certainly hoping to scale up disbursement on the retail piece where we hope to see some growth over the numbers that we had last year and to build the AUM to at least another 15-20 per cent in terms of growth, provided the risk metrics hold and credit offtake takes place,” she added.

On fund-raising plans, Balakrishnan said, “We were able to raise sizable liquidity in H1 and we also have a healthy pipeline for H2, which includes both domestic as well as offshore lines. So, we are fairly confident that the liability side will be supportive, both in terms of quantum as well as the cost of funding that we are looking for.”

In May, Northern Arc raised $50 million in debt financing from US International Development Finance Corporation (DFC) to support its growth, meet the liquidity needs of its institutional clients as well as lend to small businesses and individuals.

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Published on November 24, 2020
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