I am all set to leave for Bangalore at the end of this week to begin my work with Kinara Capital. Kinara Capital is a start-up social enterprise that provides access to credit to small enterprises in India with the goal of supporting local entrepreneurs, increasing incomes, & creating sustainable businesses. There are 26 million small enterprises in India who struggle to obtain financing to build and grow their businesses. Only about 5% of these enterprises have access to the capital they require. In fact according to a report released by the International Finance Corporation (IFC), part of the World Bank Group, the debt gap alone for small & micro enterprises in India is about $198 billion.
There are investors willing to invest in equity but these investors generally overlook small enterprises unless there is a huge potential upside. Furthermore, for these small & start-up enterprises equity is a very expensive way of financing their business especially when their capital needs are only seasonal or cyclical. The debt financing available in India generally consists of commercial lending from traditional banks as well as microfinance loans from microfinance institutions. Traditional banks, including international banks like Citibank & HSBC or Indian banks like ICICI & HDFC, generally have strict lending standards and are unwilling to make small loans to these small enterprises especially without some form of collateral. The underwriting process would be just as costly for issuing these smaller loans and would be perceived to be much riskier and therefore the traditional banks tend to put their funds to work elsewhere. Microfinance institutions have stepped in and have been willing to provide some of these smaller uncollateralized loans. There are a number of large microfinance organizations present in India including SKS, Equitas, & Bandhan and the microfinance industry as a whole in India has about $2-3 billion in outstanding loans according to the Economist. However, based on the regulations in place microfinance loans are capped at 50,000 rupees or just under $1000 making them difficult to use to finance growth in a small business. The other option for small enterprises is local money lenders or loan sharks who have been known to charge annualized interest rates in excess of 100%. There is an obvious funding gap here between microfinance and commercial capital that could be filled by a formalized lending process to small enterprises and would greatly benefit the enterprises involved.
It is this gap in the current financing ecosystem that organizations like Kinara Capital seek to fill. By providing uncollateralized loans in the range of $2000 to $20,000, Kinara provides access to credit for the millions of small enterprises who are left out of the current financing system. Kinara currently has outstanding loans of approximately $400,000 with a repayment rate of 100%. This type of repayment rate is unheard of in traditional lending, not to mention uncollateralized lending. Kinara has accomplished this level of success through their innovative lending practices where they seek to utilize and integrate into existing supply chains allowing them to have a better understanding of the relationships and businesses that they are dealing with. In addition Kinara has a strong focus on the customers they serve and even provides financial management training and business diagnostics to their borrowers. With their current success Kinara has a vision that in 5 years they will have a loan portfolio of $100 million, have funded 20,000 small enterprises, creating 100,000 jobs and impacting 1 million lives. There are certainly challenges involved in reaching these goals including raising capital and the ever changing regulatory environment for Non-Bank Financing Companies in India but I am excited about the prospects of this young start-up social enterprise.