A tech and touch play to lend to small enterprises

“When you keep meeting entrepreneurs day in and day out, the traders and small businessmen, somewhere the bug bites you,” says G Madhan Mohan, Managing Director and CEO, Prayaan Capital, on why he quit a well-paying bank job to start his own venture.

His Co-founder, Akash S Chelvam, Chief Operating Officer, Prayaan, chips in that with some people you are on the same wavelength. There is not much to be said, but the execution speaks for itself. The execution aspect was something that neither of them spoke about. But they were sure that whatever be their plan, a lot of emphasis would be on execution. “That is how this partnership came together and that is how we work together. A large part of the execution comes from the passion that drives us,” says Akash.

Serving MSMEs

At the time they decided to form Prayaan, Madhan accepts there were a few NBFCs serving the micro, small and medium enterprises. The demand for credit from MSMEs was so high, says Madhan, that they were confident they could carve a niche for themselves. Studies have estimated the demand for credit by MSMEs at ₹4 lakh crore, while the existing players are just scratching the surface. More players will only enlarge the pie.

Nearly 85 per cent of the MSMEs, adds Madhan, do not even have a signboard and a majority of them are in villages. The Salem cluster (in Tamil Nadu) alone, he says, has more than 1.5 lakh powerloom weavers. These powerlooms are in small villages. They don’t have any signage, but are a great economic activity.

Madhan says they decided they will be different and constantly engage with their borrowers. Most lenders, he says, forget about the customer once they have sanctioned the loan and as long as the repayment happens regularly. They tend to get in touch with the customer only when they feel that the customer may want a top-up loan, typically around the 10th month. A lot can happen during this period – a new lender can come and wean the customer away or the customer may be going through a low without you being aware of it or the customer may want other products or need some kind of assistance. “It is extremely critical to be in regular touch with the customers for us to understand their needs and for a better long-term relationship,” he says.

Prayaan Pragati

According to Madhan, Prayaan has adopted a touch and tech approach to do its business. Apart from a branch network to garner business, Prayaan has an app – Prayaan Pragati – through which the customer can submit an application for a loan. There is a physical connect that happens through sales officers who approach a potential customer, but even then the customer has to download the app and fill in the details.

“We want to bring some kind of neo-banking experience to this segment,” Madhan explains. There is a high brand recall, there is a loyalty that gets built because Prayaan Capital goes beyond merely sanctioning loans. The company plans to give its customers a number of value-added services, including tying up with mainstream banks to offer its customers CASA facilities or any other banking products. All that will be done through the Prayaan app.

Madhan and Akash put in about ₹5 crore of their own money when they launched Prayaan Capital and raised about ₹8.5 crore from Accion, friends and family. Their first customer was a powerloom owner from Salem for whom they sanctioned a loan of ₹3 lakh. Prayaan’s loans vary from ₹1 lakh to ₹20 lakh – unsecured loans of ₹1-5 lakh, secured loans of ₹5-20 lakh. The loan tenor may vary from 18 months to 72 months and the interest rate is in the early to mid-20 per cent range.

According to Madhan, they have sanctioned ₹8.5 crore of loans and hope to close the year with a loan book of ₹15 crore, with an average ticket size of ₹4 lakh. Prayaan has six branches in Tamil Nadu and will open three branches in the first quarter of next financial year, including one in Tirupati and two in Tamil Nadu. The company is in discussions with large NBFCs for co-lending options.

Ways to assess

Madhan points out that though most of their customers are new to credit, there are various ways to assess them and sanction loans. For instance, he says, the cash flow that the business generates. It is important to validate the cash flow claims with surrogates that are available. If it is a flour mill owner who has come for a loan, one option would be to check the electricity bill. Or, if it is a small tea shop owner, invariably the person would maintain a small notebook of daily expenses. That would give an idea of how much the person earns every day. Or a welder who makes grill gates will have a worn out diary in which he draws the design of the gates and notes down the quantity of metal he will require. These are all good enough surrogates, according to him.

He says Prayaan will be a ₹100-crore company by the end of next financial year and the biggest challenge he sees is in getting skilled manpower. Prayaan hopes to raise a pre-Series A round of about ₹21 crore ($3 million) in the next few months and a larger Series A round later.