The more than two decades of experience in the financial services sector, a majority of which was with a leading non-banking finance company and a short while with a housing finance company, laid the foundation for D Arulmany’s journey as an entrepreneur. When he decided to venture out on his own, he was clear that it would be in financial services.

He founded Veritas Finance Pvt Ltd in April 2015 to lend to small businesses, a vast majority of which were outside the formal banking system. The challenges were many, but Arulmany was confident that his experience would hold him in good stead.

Everyone from banks to financial institutions to government is trying to reach out to them. But the heterogeneity of the segment prevents a one-shoe-fits-all solution. The profile of each borrower is different. The only way is to meet them individually, understand their income, know their ability to repay and then lend to them, he says.

For a bank, used to lending to the formal sector, putting in place a system to lend to the informal sector is cost prohibitive. “That is why the segment remains under-served,” he says.

Branch-based lending

He believes that the only way to bring the small businesses into the formal financial system is through branch-based lending. These small business owners understand the business of borrowing quite well; after all, they have been tapping into informal money lenders at usurious rates for their needs. The small businesses – vegetable shops, provision stores, small restaurants, barbers, fruits and flower sellers – need money to upgrade. That is what Veritas Finance provides.

It is a year since Veritas started operations and it has adopted a hub-and-spoke model for its operations. By this fiscal year-end, its first full financial year of operations, Veritas will have covered Tamil Nadu and Puducherry. Next April, it plans to expand to Karnataka, Andhra Pradesh and Odisha. “Odisha is an under-banked State and one of the key States where we could have a lot more meaningful impact,” he says. It has 200 employees and next year, plans to have 1,000 as it expands.

With about ₹13.6 crore as capital from himself, PS Pai, former chairman of the Murugappa group, and employees, as initial capital, Veritas raised ₹30 crore from Lok Capital and Caspian last year. It lends to the small businesses at 18-24 per cent and the loans are for about five years, with the property of the owners as collateral.

Veritas, according to Arulmany, is working on a pilot programme to service the short-term working capital of these small businesses. The next step, he says, is getting into housing finance.

“We focus on businesses with cash flows. We are looking at service industries,” says Arulmany. “Our comfort with the customer comes from the cash flow that we see from the business.”

Veritas is not looking at the manufacturing sector because it is prone to erratic cash flows, he adds.

Big challenge

The real challenge in the business, according to him, is the ability to assess the customers and the ability to replicate the model across different customer profiles and geographies. No two customers are the same and it is not possible to have a template for profiling the customers. If there are 100 customers, they have to be assessed in a hundred different ways, he says and adds that is one of the reasons for financial inclusion not happening at the speed it ought to.

“We assess not only the earning capacity of the customer and the intention to repay – the intention gets assessed through various means – and all of these are very different. There are companies trying to deliver credit without assessing the customer, using technology and his social media profile and activities. The segment we are targeting is 95 per cent micro-credit, without any formal borrowing. It is all cash payment. This segment is approachable only through a touch model,” says Arulmany.

Another challenge for the business is building a pool of talent and retaining it, building a strong value, ethical funding and transparent business. Financial services, he says, is a capital intensive business.

Veritas will shortly begin discussions on the next round of fund raise and hope to complete the process next year.