Navigating the debt capital market for NBFCs

Her profile on the organisation’s website refers to her experience in the financial services sector and mentions that she is an avid biker, sky diver, sailor, trekker and mountaineer. Ask Kshama Fernandes, Managing Director & CEO, IFMR Capital, about her hobbies and her face lights up. She recalls a cross-Atlantic voyage she did on a sailing boat late in 2016. In fact, she was the one who helped put together the diverse team of eight people – four women and four men – who did the sailing in 21 days, starting from Los Palmas in Spain and ending at St Lucia in the Caribbean.

Kshama says it is in her nature to take risks and try out such adventurous activities. She does not believe in competitive sports, but believes in testing herself out always. “Unless we take risks and venture beyond the obvious…it is personally important for me to push myself, whether it is on the business front or the personal front…,” she says.

The sailing event was a major milestone for her. “…it is one of those experiences where once you are out there in the ocean, you know that the only way is on the other side and you do what it takes. It is a fantastic experience in team building. I helped put the team together. I got in touch with the skipper first and we put the team together,” says Kshama, a certified sailor.

She adds that it is an important lesson in how you learn to trust another human being. “These are not people I know,” she adds. The team broke into two groups of four each; while one group manned the deck, the other group would try to sleep; the two groups worked in and four- and six-hour shifts. The team went through several storms, one of which was particularly bad, she recalls. That is just part of the deal, she says matter of fact and adds, the team, which included two Canadians, three Britishers and a Fin, got along brilliantly well. “When you are sleeping, you have to have 100 per cent confidence on the guys who are on the deck to know that they will do what it takes,” says Kshama.

How does the experience help in her professional life? “The feedback I got from my skipper was that I am a great team person. When you are in the middle of a challenge, it is never about an individual. It is about how you work together as a team. You may be the smartest sailor, but once you are out there in the middle of the ocean, your skills lie in making all those people come together and work together as a team. Individual bright sparks are good in certain areas, but if you want to take anything to scale and achieve big success, it is the team that counts,” asserts Kshama.

She leads a 120-member team at IFMR Capital, a non-banking finance company that links debt capital markets with NBFCs – or originators as IFMR Capital refers to them – that lend to the financially under-served. IFMR Capital works in five sectors – micro-finance, affordable housing finance, commercial vehicle finance, small business loans and agricultural finance, with a little bit of activity in the financial technology space.

“We take these NBFCs, evaluate their systems, processes, governance, risk management and audit practices and connect them to mainstream capital market investors. We are playing the bridge between these underlying financial institutions and mainstream capital market investors,” she says.

IFMR Capital does a due diligence of the originators, invests in the debt or stands guarantees for their loans to demonstrate its skin in the game and connects these borrowers to debt capital markets, which would have otherwise been out of their reach. “We work with 110 originators across these sectors,” says Kshama. What is common to all of them is they have developed capabilities to appraise the credit worthiness of their borrowers but face challenges in accessing capital. IFMR Capital, according to her, works with over 100 investors in India and abroad and has done about $6 billion of financing with more than 500 capital markets rated listed transactions.

In a sense, she adds, IFMR Capital is bringing the rigour of financial markets to these sectors, with many of the transactions getting rated and listed on the exchanges. She points out that IFMR Capital places a strong emphasis on MIS (Management Information System) and reporting. “We are pushing the originators in a certain direction and saying if you adhere to the highest standards of MIS and transparency, if you bring the highest standards of governance, which means well conducted board meetings, an independent director on board, audited by the top audit firms, high standards of risk management and transparency, I can take you to the capital markets. Once I connect you to the capital markets, the access to supply of debt will be predictable, continuous and you will be able to grow your business at a certain level.”

This has really worked well, according to her, as the moment the originators know they can access debt in a smooth manner, the way they run their business changes. “It has taken us eight years to build this,” she says and proudly adds, “zero default on all of our transactions.”

IFMR Capital, with a presence in 530 districts of the country, has raised about $100 million in private equity investments, starting with LeapFrog’s investment in 2014, followed by Fidelity and Standard Chartered Private Equity in the last quarter of 2016. IFMR Capital invests in the originator’s debt and in individual tranches that it may raise from the market, and most often it is the second-loss investor.

It works with a range of originators and thanks to IFMR Capital, these originators have seen their assets under management multiply several times in 3-4 years.

According to her, IFMR Capital started out with the micro-finance sector, which still accounts for nearly 35 per cent of its book, but has seen sectors such as commercial vehicle financing and affordable housing finance sectors grow. Its initial activity was restricted to three or four States, but is now active in more States.

Even at the peak of the crisis in the micro-finance sector, she says IFMR Capital was able to bring debt investors to put in money in the sector because of the strict risk assessment – the risk assessment team at IFMR Capital makes up a third of its total team – and also because it was able to demonstrate to the investors that there was no contagion that happened out of Andhra Pradesh, where the crisis broke out.

Again, Kshama says, “our skin in the game made a huge difference.”

On IFMR Capital’s future, she says the challenges that it has addressed over the last 5-6 years continue. Access has got better and a lot of the sectors are far more recognised today than they were earlier. It is looking at growth in two ways. One, by way of more depth in the existing sectors by bringing on board more originators. It is also seeing the emergence of new originators in the small business loans and affordable housing finance sectors.

“We are seeing our presence in the existing sectors deepening and we are also potentially looking at adding new sectors over the next few years. I don’t have exact visibility on what those new sectors might be.” Besides, it is looking at doing a lot more work on the capital markets front in terms of creating knowledge, understanding, clarity, newer instruments. “You will see us coming up with lot of new capital market type of transactions, new structures which meet the requirements of our investors plus which add value to an underlying originator,” she adds.

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