Small is beautiful

KM Rajendra began working at Namaste Exports in 1989 when he was just 13. “I worked for₹150 a month as I had no other option since I had lost my parents quite early,” he recalls. Over the years, he moved up the ladder to emerge as a team leader of self-help group Ashraya, run by well-known social entrepreneur Neelam Chibber. But the urge to run an independent enterprise kept getting stronger. Today, the 34-year-old is the proud owner of leather company VK Designs, which he runs from a rented unit in Bengaluru’s Koramangala. He has 23 employees and clocks a turnover of₹3.5 lakh every month. “I have achieved all this because I got an unsecured loan of ₹3 lakh at the right time,” says Rajendra.

Similarly, Ashok Kumar, who supplies bags made from banana rope to an Ikea vendor (Ramesh Flowers) in Bengaluru, needed working capital to buy banana bark. Despite being an account holder with ICICI Bank, he could not get a loan because he did not meet the bank’s lending criteria. “I had started off in 2010 by investing ₹3 lakh of my own money, but I needed to invest in buying bark. I finally got a loan of ₹3.5 lakh, which helped me keep my business running,” says the 47-year-old founder of Harita Enterprises. Kumar’s business currently earns ₹2 lakh a month.

Then there’s R Ramesh Kumar, who runs an auto ancillary unit, Sigma CNC Products, at Hosur in Tamil Nadu. Although Sigma has an annual turnover of ₹2 crore, the firm has a perennial need for working capital since the business needs a ready inventory of steel and aluminium rods. “Even though I have an overdraft facility at the bank, the documentation and time taken by them to increase the limit is too much. I can’t afford to sit on an order. I have to ensure a faster turnaround,” points out Kumar, who finally got ₹5 lakh as working capital within four days. Once he repaid that, he got another ₹6 lakh as working capital loan and a further ₹2.5 lakh term loan to purchase a profile projector.

The common thread that links these three entrepreneurs is a relatively new non-banking finance company (NBFC) called Kinara Capital, run by Bengaluru’s Hardika Shah. For someone who has spent over two decades outside India in strategy and management consulting with Accenture, getting into the SME lending space was more about providence than a conscious decision. “I had left India in the late 1980s for completing my undergrad in the US. It was only in 2003 when I was setting up the delivery centre for Accenture in Hyderabad that I came in close touch with the undercurrents in the economy. Here was a nation that had many skilled engineers who were ready to take on the world and there were others who were ready to do anything to get a job,” recalls Shah.

But it was her close interactions with social enterprises at Santa Clara University’s Global Social Benefit Incubator programme in the US and, later, a four-month project for Acumen Fund in India that showed her the way forward. “All these engagements were done during my vacation break at Accenture but went a long way in influencing how my future would shape,” says Shah, who later went on to complete an executive MBA from Columbia University.

By this time Shah was clear that dearth of financing was a big issue for SMEs in India, but wasn’t sure what was the right model to address the issue. “I spent two months in late 2009 travelling in India talking to anyone and everyone — from microfinance CEOs, private equity investors, venture capitalists and bankers to small business owners in villages and in cities — to understand whether the microfinance model could scale to meet the needs of micro and small enterprises,” says Shah.

The takeaway: the microfinance model could not address the issue of dearth of capital for two major reasons. One, the maximum sum that could be lent by a MFI was ₹50,000 and, two, since MFIs work on a joint liability model, many stakeholders were averse to signing up for loans over ₹10,000. “The challenge was to set up a model that was scalable, low cost and yet could service the need of micro enterprises,” says Shah, who decided that setting up a for-profit NBFC focused on small businesses would be the right model.

 Shaping up

To begin with, Shah raised some capital from friends and family. To skirt the cumbersome process of setting up an NBFC, she acquired a New Delhi-based NBFC, Visage Holdings & Finance, for around ₹60 lakh.

“Though our legal name is different, Kinara is our operating brand name,” says Shah, who then quit her job at Accenture to make Bengaluru her new home. In the second round of finance, Kinara roped in impact investors such as Unitus, Halloran Philanthropies and John Ayliffe.

By November 2011 Kinara was ready with a ₹3 crore capital to kick off its lending operations.But, more importantly, Shah was clear that  Kinara’s strategy would be to plug into the supply chain of companies and self help groups. “Such an approach reduces our cost of acquisition and also helps us become part of the entire supply chain fabric,” says Shah, who tapped into the networks of Industree, Mother Earth and Villgro to begin with. “By plugging into networks we get customers to open their supplier list and see how the flow of money takes place, relationships that clients share, and how strong the businesses are,” she adds. Unlike other NBFCs, Kinara, besides its focus on SMEs, ensures that most of the loans go towards creation of fresh jobs. “All things being equal, if we have to choose between two proposals, the one that will have the highest social impact in terms of job creation will score better,” says Shah.

Today, Kinara has a loan book of ₹1.12 crore, largely driven by three major products: term loans, working capital loans and bill discounting. “All our loans are in the ₹1 lakh to ₹10 lakh range and carry an average interest rate of 22-24%,” says Shah. But don’t SMEs baulk at the relatively high interest rates? Shah is quick to point that private lenders — the biggest source of funding to smaller enterprises — charge 3-4% per month. Rajendra of VK Designs, who repaid the initial loan amount and has since availed of a fresh term loan, agrees: “It’s not easy getting money from private lenders and the rates offered by Kinara are not costly.”  Till date, Kinara has sanctioned 50 loans in two sectors — manufacturing (auto parts and artisan products) and agri-retail. The NBFC hopes to end the current fiscal with a loan book of ₹4 crore. 

Interestingly, unlike other NBFCs, Kinara is not looking at branch-based lending and is instead focusing on a hub-and-spoke model of growth. “We need to preserve capital for our core operations rather than splurging it on creating brick- and-mortar assets,” says Shah, who is operating out of a three-bedroom house in Bengaluru.

To keep costs under check, Kinara has invested in creating a strong management information system on the cloud. “Besides me, there are just two other employees, one who handles operations and the other finance. Unlike the MFI model, we don’t have agents going to collect repayments as we take post-dated cheques,” points out Shah, who is looking at maintaining operating margins at around 40-50%. 

The way ahead

For now, Kinara has the capital to grow its books but it will need to rake in more moolah if it has to scale up. But the founder is clear that any new investor has to be completely aligned with her objectives. “We have a built-in social investment clause as part of the shareholders’ agreement that ensures that our investors are not just aligned to the monetary part of the transaction but also identify with the social objective,” says Shah. More importantly, her current set of investors have also agreed to a five-year moratorium — a clause not all would easily agree to. “I don’t want someone breathing down my neck; I need enough time to build a business that should, at the end of the day, stand for the objective that it had set out to achieve,” says Shah as she rushes back to her office for a meeting with a prospective investor — Omidyar Network. If Kinara manages to seal a deal with the philanthropic investor in the coming days, it will only mean that Shah has truly got the momentum going in her favour.