By financing the supply chain and mitigating risks in new ways, Hardika is creating new architecture to lend to the millions of small and medium enterprises without collaterals or credit history. She is providing enterprises with the critical support that has a huge multiplier effect of moving them up the value chain and to attain full economic citizenship.
The New Idea
The debt gap for micro and small enterprises in India is about $198 billion, growing at 11% per year. Falling in between large businesses and individuals, these enterprises are neither serviced by traditional banks nor by microfinance institutions due to the perceived risk and lack of collaterals.
Hardika is addressing this ‘missing middle’ market through an approach that lowers the risks of lending to this market. Chief among her strategies is extending the principles of self-help group (SHG) finance to small enterprises. She recognized the upstream and downstream supply chain partners for small enterprises can be leveraged the same way peer-groups are for SHGs: to provide security and increase transparency. Drawing from this insight, she has built new financing model that provides debt capital loans in the range of Rs. 1 lakh to Rs. 10 lakh ($2000- $20,000) to small business that hedges risk by financing a supply chain. She works with network partners (buyers, trade organizations, franchisors, etc.) across supply chains to source and fund micro and small businesses in manufacturing, artisan products and agri-retail. In addition, she has also influencing upstream supply chain partners to value their partners and support the growth of their smaller business partners by setting up ‘guarantee funds’ or financing the asset purchase. By plugging into supply chains, she is building systemic trust with the borrowers to manage risk and create a low cost / high leverage model that grows with its partners.
Alongside scaling her work to create more sustainable businesses and jobs, Hardika sees that a partnership with traditional banks will leverage and bring together the finance available with traditional banks and her strength to quickly diligence and service customers. Towards this, Hardika is working to build strategic partnerships with banks that will leverage her model to reach more small businesses.
There are 30 million small and medium enterprises (“SME’s” or enterprises with a turnover of less than Rs. 2 crores) in India employing over 69 million people. Launched typically by first generation entrepreneurs, who worked up the ladder from being unskilled labourers, most of the workforce in SME’s comprises skilled / semi-skilled labour that lives in the fringes of poverty.
These small enterprises, particularly those in the manufacturing sector and those with order-driven services, are in dire need of financing because of longer working capital cycle and higher capital expenditure.
SMEs have repeatedly been emphasized as ‘priority sector lending’ by the Reserve Bank of India and banks are required to meet certain targets in lending to SMEs. However, only about 5% of these enterprises have access to the capital they require. The 171 banks operating in India with 76,000 branches and over 12,000 non-banking financial companies (NBFCs) have failed to serve the needs of SME for multiple reasons.
First, traditional banks are unwilling to make small ticket loans to these micro and small enterprises due to the perceived risk of such businesses especially without some form of collateral. Financial institutions insist on immovable collateral (in the ratio of 125%-170%), which most SME’s lack, to hedge against risk of default,. Moreover, the determination of loan size based on the average turnover over the last three years, does not meet the needs, or fit the growth curve, of fast growing SMEs. Second, with minimal financial literacy, SME’s find it very difficult to navigate the bureaucratic processes and tedious requirements of banks. With multiple reviews, it takes 4-6 months minimum for a bank to process loans. This delay makes it very difficult for SME’s to rely on banks for timely access to finance. Third, the cost of acquiring and maintaining accounts is very high and banks have limited information on micro enterprises and no access to alternative tools for assessment. As a result of the conservative policies of banks that minimize both credit risk and cost of delivery: an estimated 37 % of the overall debt demand is unviable for financial institutions.
Separately, microfinance institutions have also been unable reach SMEs due to regulations. Microfinance loans in India are capped at Rs 50,000 ($1000) making them unsuitable for financing the growth and expansion of a small business. Additionally, targeting only women, microfinance fails to reach a majority of SME micro-entrepreneurs who are men.
Even the few NBFCs that do address SMEs focus on providing asset finance (primarily transport), and margin finance to the sector. They are rarely the primary source of finance to the sector, due to limited access to adequate growth capital, inadequate credit default support and lack of regulatory mandate to target SMEs. As a result, short term financing (working capital, bill discounting) which is most needed is not adequately available.
Due to these gaps in financing, informal finance dominates the sector, 95% of which originates from non-institutional sources such as family, friends, relatives, and family business. Most SME’s turn to local moneylenders for quick finance who charge annualized interest rates that range between 80%-100%. This not only has an adverse effect on their business growth, but also their ability to generate employment and compete effectively in the market.
To address the financing needs of the growing number of SME’s, Hardika realized that it would be critical to introduce financial products that cater to working capital and short term loans based on current turnover of the SME. Further, they should be flexible to allow cycles of specific industries to be factored into. With these principles in mind, Hardika began exploring alternative forms of security and product mixes that would be viable.
Comparing the US and Indian business cultures, she saw that while the former was transaction-based, the latter was relationship-based and this offered opportunities for her . Further, supply chains in sectors such as manufacturing were largely decentralized; for instance a large automobile company has preferred suppliers for various parts and these suppliers in turn outsource certain steps in manufacturing the part such as annealing (heating metal and cooling slowly) to multiple SMEs. Each of these SMEs also outsource simple tasks such as cutting to smaller SMEs. In this way, for just one kind of automobile part there can be three to four levels of suppliers who work to create the finished product. The companies lower down the value chain develop trust in one another by working together over several years and have an interest in ensuring their suppliers are viable. They are less dispensable to each other than they are to the auto giant that could easily replace its preferred supplier.
Hardika saw opportunity in tapping into such networks of trust to provide the financing they needed to grow. She saw that by lending to multiple SMEs within a chain, she could both, acquire borrowers and get more reliable referrals for clients. Diligence of clients across a supply chain would also provide her with a clear sense of their incomes, receivables and outstanding orders- increasing transparency. At the same time, it also created a form of peer- pressure to ensure repayment as SME’s are cognizant that knowledge of their default to partners upstream or downstream would have an adverse effect on their business relations.
With this insight, Kinara Capital (the organization founded by Hardika) provides term loans, short-term working capital loans and receivables financing facility to producers and providers across the value chain for asset purchase or working capital needs. The products have also flexible terms (ranging from three months to 36 months) that factor in the income cycles and diverse requirements of SMEs. Most importantly, the customer-centric processes and supply chain integration enables Kinara to complete the loan process at an average of 10 days.
Hardika also introduced a unique risk assessment methodology. She introduced psychometric testing for the first time in the financial sector India. This not only helps her assess the integrity of the micro-entrepreneur and their intention to pay, but also mitigates risk of possible bias among her employees in identifying credibility of a client. In addition, she also reviews their credit rating on CIBIL and assesses their cash flows based on current invoices. She also mitigates risk by limiting her exposure to each borrower’s network and avoiding suppliers that only have one buyer.
Since 2009, Kinara has identified several channel partners that can provide her with these supply chain networks. In addition to working with supply chain partners in the automobile sector, Kinara works with the retail chain Mother Earth to provide the financing they need. Ashoka fellow Paul Basil’s Villgro has also partnered with Kinara for providing loans to their network of village entrepreneurs. As on date, of the 300 loans disbursed, SME’s account for 91% of Kinara’s loans, franchisees for 6% and artisans for 3% . 62% of the financing is towards long-term loans and over 33% is towards receivables financing all at the interest rate of 24%.
By providing access to capital for micro and small businesses, Kinara Capital enables job creation, increase in entrepreneur incomes, and creation of sustainable businesses that lead to economic development. By tracking data from the time of application and conducting periodic checkpoints across the loan cycle to capture changes, Kinara has assessed that every loan provided generates 2-3 net new jobs and improves incomes by 15%-25%. Also, it has been instrumental in creating positive credit history for many first borrowers.
Hardika has also been successful in engaging franchisors that are well capitalized to support the growth of their partners along with Kinara. For instance, she has convinced a client to set aside a portion of the commission (20-25%) into a guarantee fund. On one hand this serves to act as an additional security mechanism for Kinara in case of default. On the other, it acts as a saving plan for SME’s. Similarly, she has also tied a partnership with a modular kitchen manufacturer to finance the asset purchase of their partners downstream and Kinara finances the working capital / short term loan needs of their downstream supply chain partners. Such actions that formally acknowledge symbiotic relationships between partners, further strengthens the network of trust and promotes mutual growth.
In order to reach more SMEs in the long term, Hardika sees Kinara Capital working with commercial banks as a direct sales plus (DSA+) agent wherein Kinara would originate the bank loan and also help banks service based on its risk mitigating methodology. This would enable taking advantage of the large capital of banks and Kinara’s timely and efficient process efficiency in identifying reliable borrowers. In addition, this would also help banks generate more business and meet their priority sector lending targets.
Hardika had strong inspirational figures in her parents – her father overcame his struggles with blindness to become the first visually impaired professor in Bombay University. In India, there was no quota for people with different abilities for professor positions and every year her father would have to re-state his case for employment at the educational institution where he worked. Despite his personal challenges, her father also opened a shelter for blind women and equipped them with the skills to become economically independent. Hardika’s mother is a strong independent micro-entrepreneur who constantly launched new businesses.
Hardika’s passion for history and literature grew while assisting her father's review of student papers. She recollects spending most of her childhood in Mumbai between the center run by her father and the library, reading. As there were few quality opportunities in India for her to pursue her education in liberty arts, she moved to the US to pursue her undergraduate studies two unusual subjects - arts and technology. Earning scholarships and working multiple jobs, she saw herself through college.
Upon graduation, Hardika was enterprising in getting Accenture to offer her a position, despite visa restrictions. Starting from a small back-end technology role, Hardika worked her way up to lead major accounts from Singapore and Australia During her Accenture stint, she set up their delivery center for a software giant in India. She proactively conducted a study to convince the senior team at Accenture to shift the centre from another city to Hyderabad so that they would be close to the client’s office and have significant expansion opportunities. She led the process of setting up the Accenture’s first office in India- at Hyderabad and brought in major accounts including Microsoft. In a significant incident that reflects her commitment to respecting her fellow co-workers, she once stood up to a senior executive from a major client’s office for yelling at one of the Accenture employees at the risk of losing the client. However, her action eventually won the support of the client and her senior management as well as the admiration of executives from competitor firms as this incident set a firm precedent for clients against misbehaving with their employees.
During her stint in Accenture and through other platforms Hardika connected with various social enterprises. From 2005 to 2011, she was a Business Mentor for Santa Clara University’s Global Social Benefit Incubator. She mentored about 10 social enterprises and evaluated their business model, market segmentation, competitive landscape and value propositions. She also created a short-term pro-bono consulting arrangement through Accenture Development Partnerships where employees worked on the ground for 6 weeks with GSBI alums and Acumen investees including Ashoka fellow Satyan Mishra.
Her consulting background had trained her to look for gaps when evaluating businesses and she saw that lack of access to capital was a key barrier preventing organizations from expanding. After completing an executive MBA program, she did a three-month discovery in the Bay Area, San Francisco to understand why microfinance wasn’t meeting this need. She developed a pilot with Indus Tree Crafts, which taught her that one had to be close to the customer to manage the business. Her family was now settled in the US with her, but she decided to move to Bangalore, India to set up her venture.
She didn’t have a financial services background but her experience working with social enterprises and her intrapreneurial projects at Accenture gave her the confidence that she could succeed.