Saying ‘Aye’ to lending to bottom-of-the-pyramid units

Sanjay Sharma and Vikram Jetley, both with years of experience in the banking sector, were convinced that there was a business opportunity in catering to the bottom of the pyramid, during their stint in Ujjivan, a micro-finance institution. They looked at two opportunities – affordable housing finance and lending to micro-enterprises. They surveyed micro-enterprises in six manufacturing clusters in five cities – shoes and garments in Delhi, shoe making in Agra, brass casting in Aligarh, sports goods in Meerut and lac bangles in Jaipur.

They met more than 300 micro-enterprise owners to get a better grip on their problems – why they were not able to get funds; repayment issues; and, what kind of security will be available for the loans. “We decided that instead of affordable housing finance, where a lot of companies were operating, we would prefer to be in the micro-enterprise space. It was a wide open space and a path less travelled,” says Sanjay.

The groundwork

They formed Aye Finance in July 2013, with ₹3.5 crore of their money and another ₹1.6 crore from friends and family and obtained an NBFC licence in March 2014, after which they started lending to micro-enterprises. The founders decided to do something different. Realising that the micro-enterprises may not have the required documentation or records for them to appraise their credit-worthiness, they went and studied the dynamics of the clusters.

They looked at some of the operating parameters – how many units there are and how many employees each unit has; employee productivity; the suppliers of raw materials; and, the profile of the buyers.

With these details, says Sanjay, it is easy to re-create cash flow. For instance, in a shoe-making cluster, each enterprise maintains a record of the number of pairs of shoes each employee makes. The units will have records of how much they paid each employee, which gives an idea of cash paid out. There are some industries where inventory can give an idea of the total cash flow.

“We cross validate all this information with the ratios we have. We do a reference check of the buyer and the supplier. Since we are in the cluster, we understand who the buyers and sellers are. That in essence is our method, but it has been highly automated,” says Sanjay. Aye Finance uses an Android-based platform that is linked to the cloud. Papers are not used. Loan applications are filled in on tablets. Photos are uploaded.

All this is integrated to credit bureau and KYC checks, after which the application moves for under-writing.

According to him, Aye Finance has used automation to bring down its costs and collects its repayments through auto debit into the borrower’s account.

“After four years, we have more than a ₹500-crore book. We have given close to 60,000 loans,” says Sanjay. The average ticket size is ₹1-1.25 lakh and it has a few loans that are more than ₹5 lakh. “We have stayed true to the story of lending to micro-enterprises and we are quite proud of that,” he adds. The collections are robust and NPA is less than 2 per cent; even during the demonetisation period it never crossed 3 per cent.

The sweet spot

Vikram says that Aye Finance had six branches in the first year and ended the year with a portfolio of ₹4 crore, which went up to ₹33 crore in the second year, more than ₹130 crore in the third and ₹470 crore in the fourth year, 2017-18. It expects to end this year with a ₹1,000-crore book. “Since we understand clusters well, we have products that are suited to the cluster. Our sweet spot is between ₹1-3 lakh. Most of our customers have a monthly turnover of ₹3-5 lakh,” he says.

According to him, these customers have a fast inventory rotation cycle and make ₹30,000-40,000 a month.

“Their expectation is, if they can get a loan where they can pay an instalment of ₹7,000-8,000 a month; these are typically 18-24 month loans,” says Vikram. Sanjay adds that the interest rate is between 22-28 per cent a year, whereas the micro-enterprises were paying up to 60 per cent a year when they borrowed from the informal sector.

“Although we have followed an intuitive way of lending, there is a lot of data science that we have built in, because we know costs will come down only because of data science and the efficiency of under-writing will improve,” says Sanjay.

Nearly two-thirds of the loans are without collateral; only when the loan amount is more than ₹3 lakh, does Aye Finance ask for a collateral. Its cost of funds is about 13 per cent and lends at 25-26 per cent, giving it a 13 per cent net interest margin. The company turned profitable in the fourth year of operations.

Apart from the loans, Aye Finance is building the entire credit history for its borrowers that it will share with the credit bureaus and will also help the micro-enterprises in finding bigger markets for their products.

According to Vikram, Aye is diversifying into other products and will shortly get into bill discounting.

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