As interest rates harden due to RBI’s actions on the repo front to tackle inflation, the coupons from non-convertible debentures (NCDs), too, have risen in recent times.

Reflecting this trend, the NCDs of U Gro Capital Limited (UGCL) offer fairly higher coupons compared to the fixed deposit interest rates on offer from highly rated NBFCs (non-banking financial companies) and banks.

UGCL is a technology driven platform that lends exclusively to small and medium enterprises (SMEs).

UGCL’s NCDs come with tenures of 18-36 months, and coupon rates of 10.15-10.5 per cent. The NCDs are now open for subscription and close on September 22.

Given the reasonably attractive rates, should you invest in these NCDs? Here’s what you must know before making that decision.

U Gro Capital NCDs

U Gro Capital is rated A-/ Stable by CRISIL and Acuite A+/Stable by Acuite ratings. In general, ‘A’ rating suggests adequate degree of safety in timely repayment of principal and interest, and low credit risk.

The firm provides secured and unsecured loans to SMEs. These are usually for purchase of machinery, business loans as well as supply chain and merchant finance. Loan against property is a popular form of loan offered to businesses.

With high emphasis on analytics, UGCL claims to collect and collate considerable data from credit bureaus and bank statements of borrowers so that it can arrive at fairly robust lending decisions.

Besides direct lending, UGCL offers co-lending services to small businesses in partnership with major banks such as State Bank of India, Bank of Baroda, Indian Overseas Bank among others. It also has tie-ups with many small finance banks and other NBFCs.

UGCL aims to transition to ‘lending as a service’ provider. It has 95 branches.

In fact, the NBFC has been focussing on increasing the ‘off-book’ component—an asset light model of not taking loans on its own books—of assets under management (AUM) . 

From just one per cent of the total AUM in April 2021, off-book loans accounted for 21 per cent of the firm’s AUM as of June 2022. This arrangement helps as the main lender takes the hit on its books in case of defaults and not UGCL. Therefore, lending as a service reduces risks for the likes of UGCL.

How U Gro fairs on key parameters?

UGCL’s AUM rose sharply to ₹3656 crore as of June 2022, a 166 per cent increase over June 2021. Loans originated has more than quadrupled to ₹1359 crore over the same period. Other key factors to note:

-         The Gross NPA and Net NPA ratios have remained in a relatively stable to declining mode, and were at 2.13 per cent and 1.57 per cent, respectively as of June 2022.

-         The cost of borrowing has declined marginally to 10.5 per cent, which is a good 200-250 pts more than top-notch AAA-rated NBFCs.

-         The yield on the portfolio is at a healthy 16.7 per cent

-         Collection efficiency is at a reasonable 93.3 per cent

-         Restructured assets were at 3.3 per cent of the AUM.

What should investors do?

Given the risky space that UGCL operates in and its credit rating, a higher coupon rate is necessary to justify the high risk. In this light, the coupon rates on offer appear attractive.

Payouts are made on a quarterly basis for the NCDs of 18 and 27-month tenures and on a monthly mode for the 36-month option.

Nevertheless, risk-averse investors can skip the offering. They are better off investing in low-risk deposits and debt funds.

But investors with a high risk appetite and a surplus after exhausting other safer debt avenues can deploy small sums in these NCDs. The minimum investment required is ₹10,000. It is important even for those with an appetite for high risk to keep exposure fairly small as UGCL’s business is to lend to small businesses, which is inherently risky.

Investing in the 18-month tenure may be a good idea in such cases as the lock-in period is not too long and the rates are quite attractive compared to the 6.5-7 per cent on offer from relatively safer fixed deposits of the likes of Bajaj Finance and a few other quality NBFCs and small finance banks for a similar tenure.

Payouts & tax implications

The coupon is 10.15 per cent for the 18-month tenure. This is the interest rate at which quarterly payouts would be done. The equivalent annual yield for the series of quarterly cashflows is about 10.5 per cent.

The interest received from NCDs is added to your income and taxed at your slab. These NCDs would be listed on BSE and NSE. If held for more than a year, the capital gains are taxed at the rate of 10 per cent.

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