Here we speak with Mr. Piyush Khaitan, Managing Director, NeoGrowth Credit Pvt. Ltd. on the mission of NeoGrowth and how the performance has stacked up so far.
Q.How important is “helping small businesses” to NeoGrowth,and why do they need help?
Ans. The mission of NeoGrowth is to make small businesses more successful.By count, about 70% of all loans given by NeoGrowth are to proprietorships, and another 19% are to partnership firms. Just 11% of all loans are given to incorporated entities. This distribution itself reflects the small business nature of NeoGrowth’s customer base.As part of our business launch preparation about two years ago we commissioned a market study by Technopak Consultants in order to understand the market, customer profile, and their financial needs and available avenues. We found that most often the only choice for them is borrowing from either family & friends, or from the neighbourhood moneylender. As we went forward in our lending activities, we realised that many small businesses we spoke with were first time borrowers, both in their personal and in their business capacity.12% of all loans given by NeoGrowth fall in this category. They did not have sufficient credit history to get a score in order to assess lending risk using traditional metrics.This meant that they would be refused loans by traditional lending institutions. Still another 16% of persons we have lent to had a score of less than 625.This is considered as a high risk score by any measure, and again, no traditional lender would deal with them.
Q.What is NeoGrowth doing that is different?
Ans. Looking at the challenges such borrowers face, we felt that NeoGrowth should come forward and help these businesses access growth capital, and actually build their credit profile over time. We decided to appraise credit differently from most financial institutions.We developed our own scorecards, and methodology with excellent results allowing us to lend too many such businesses so that they now constitute a significant portion of our customer base.The under-writing framework of the NeoGrowth method is built on a mix of understanding cash flows as well as other key factors impacting business viability.We constantly use new data to refine our scorecards, and back test our credit models. NeoGrowth’s entire product proposition is based on documented historical flows for the last 12 months at a minimum, as well as a repayment method where Neo Growth has a direct and independent access to customer’s cash flows.This allows NeoGrowth to evaluate customer credentials on very © different terms.Thanks to AdvanceSuite , our proprietary platform and risk management system, we have the ability to understand financial trends on a real time basis before the lending decision is taken.Performance expectation models developed on the analysis of different industry verticals allows NeoGrowth to arrive at a segmented approach in determining customer exposure. Credit Bureau data continues to be an important part of the decision making process, and helps understand the customer intent/behaviour towards repayment.We pay far more attention to the underlying data, rather than to the score itself.Cases where intent to pay is suspect due to recent derogs in the bureau continue to be a key reason for rejection. Over-all approval rates are around 50% with bureau declines contributing to half of all our rejections.
Q.How has all this worked out so far in terms of results?
Ans.The results have been dramatic.All the more considering that our loss-rates are well in control. • 50% of all borrowers who started with NeoGrowth with Insufficient/No credit History (CIBIL -1 to 5) are now in the >700 bucket.This puts them right into the Financial Mainstream, and they can now look forward to getting credit cards, car loans and housing finance as well. • We now move to the other category, borrowers who were generally considered default grade (CIBIL <625); we find that 28% have already improved scores to between 625 and 700, while another 16% have moved into the >700 category.
Q.What are the key learnings from these results?
Ans.Two main takeaways: • Social Impact Lending and Good Business Practices are not mutually exclusive.You can lend to so-called high risk segments after applying other risk filters beyond Credit Bureau scores. • It is easier to build Credit History from scratch rather than to repair a damaged score.It will take about 2 years for most borrowers to transition from the <625 bucket to the >700 bucket and rebuild their credit profile. We should also keep in mind that whenever a new loan is taken, at first the credit score declines, and only after some months of timely repayment does the score start to improve. In light of this, the above results are all the more encouraging.
Q.What does NeoGrowth plan to do going forward:
Ans. • We will continue to focus on neophyte borrowers, on borrowers who otherwise meet our credit criteria, and work with them to build their credit profile. • We will invest in communication and training to counsel all borrowers on how important it is for them to maintain good credit discipline, and how a win-win relationship with lenders can be built.No case is so bad that it cannot be retrieved.All it takes is commitment and patience. Please note: • In order to get meaningful data, we have analysed only deals funded by NeoGrowth that have been fully paid off already. Deals funded, and still live have been ignored because it requires a certain vintage of a loan to materially impact the credit score. • Any borrower’s credit score is a reflection of his overall credit behaviour, and not dealings with NeoGrowth alone.How much credit he has availed from other sources, and how he has performed there will also have a positive or negative impact upon his score