Nishant Malhotra Founder of Middle Road OPC Pvt Ltd & The middle Road platform on the evolving Sustainable Finance sector

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Podcast Episode 7: Shilpa Pophale, Green Funding, Masala Bonds & Social Impact

                           “MSME sector contributes 40% of the jobs in India” Shilpa Pophale

In Episode 7, Nishant Malhotra founder of The middle Road, chats with Shilpa on rise of green machine lending in India. Electronica Finance Ltd is a leading and world-class NBFC non-banking financial company based in India and a pioneer in green machine finance and other micro-lending services. The NBFC provides machine loan, business loan, working capital demand loan, emerging enterprise loan, institutional loans, among others. It recently raised $14M from Encourage Capital, a New York-based impact investment & advisory company. The company has more than 50 branches across India and boasts of $180M gross loan portfolio. The company operates in green micro-lending in small and medium enterprises segment and futuristic in incorporating energy-efficient loan portfolio. Further, another impact investor responAbility invested in its $10M green masala bond. The company got incorporated in 1990 and is part of the SRP Electronica Group. Electronica Finance Ltd is a partner of Small Industries Development Bank of India (SIDBI), the principal development financial institution in India serving Micro, Small and Medium Enterprises (MSME) sector. SIDBI partnership a critical enabler for Electronica Finance Ltd.

Ms. Pophale was awarded “Women Entrepreneur of the Year” by World Women Leadership Congress in 2014 and has completed leadership and the Venture Capitalist Development program from the Harvard Business School and Indian School of Business respectively. She is instrumental in promoting the “Creating Success stories for businesses” initiative within her organization. Under her leadership over the last decade, Electronica diversified into other concentric areas in micro-lending, increasing asset size to $0.18B ($180M) from 0.01B $10M), the Profit After Tax has grown by 18% (CAGR) and net income by 23%. The non-performing assets are less than 2%, a marvellous record considering the industry average NPA is 10% (public banks, private sector banks and NBFCs). 

Nishant Malhotra, Founder & CEO of The middle Road interviewed Ms Shilpa at her office. 

Hello Ms Shilpa Pophale, thank you for joining The middle Road for the Podcast. This is Nishant Malhotra, Founder and CEO of The middle Road.

My discussion with Shilpa covers gamut of topics from Electronica’s rise in green machine lending, foray into other micro-lending sectors, prudent risk management system in keeping non-performing assets less than 2%, tie-up with SIDBI within the Micro, Small and Medium Enterprises (MSME) sector, tapping capital markets for fundraising through first Green Masala Bond issue for NBFC in India, investment of $14M from New York-based impact investor Encourage Finance Ltd. and Electronica’s Customer Social Responsibility initiatives especially Udaan project in catalyzing equality education for less privileged women including women with disabilities and Meeta project for enabling social entrepreneurship. Listen to the Podcast here

Ms Shilpa talks about the journey almost over three decades, the holistic motivation behind green financing within the MSME sector. She stresses Electronica’s core focus within the SME segment, their core competency in understanding this segment for machine financing, among others. Shilpa further chats about their business model in keeping low NPA’s. Electronica offers only secured loans with an emphasis on cash flows from the business.

The loans have an LTA value between 20 to 30%. LTA simplified under loan parlance signifies the loan amount compared to the asset example commercial building value offered as collateral. A 20% LTA would mean a loan of $20 for $100 of collateral asset.

Green financing is a huge enabler in promoting sustainability in India in the manufacturing sector. India is committed to reducing one-third of carbon emissions between 2005 to 2030 and manufacturing industry contributes about 45% of greenhouse emissions.                               

The Indian government is giving a significant thrust in expanding MSME, which contributes 29% of GDP to 50% under the $5T economy target.  This would create 50M jobs in India. MSME is also the largest contributor to employment in the US and European economies. In the US, micro-enterprises contribute 95% of the 28M US companies tracked by the census.1 Micro and SME segment have different definitions based on the countries and geographies. Micro enterprises here include small businesses based on revenues, employee strength etc. In the US alone 30M SMEs account for 67% of net new private jobs in recent decades.2 

The second section in the Podcast deals with fundraising initiatives.  

Q. Shilpa, your company today is a leader in green machine lending in the SME sector and raised the first green masala bond issue (for NBFC) of $10M in partnership with the climate fund manager and impact investor responsAbility. Encourage Capital, a New York-based impact investment & advisory company invested $14M in your venture. There are a lot of firsts here, and you are a leader in driving sustainability and enabling and innovative social change and impact in microlending sector and a partner of SIDBI.

Electronica Finance Ltd. took key innovative steps in raising Capital through Global Capital Markets.

Masala bonds are offshore rupee-denominated bonds issued by Indian entities for raising Capital. They are similar to Dim Sum bonds of China and Bulldog bonds of UK. Masala refers to the gamut of spices used in Indian cuisines; a term used by IFC for designating these bonds. IFC is the first global issuer of the Green Masala Bond. IFC also issued the first renminbi-denominated green bonds at London Stock Exchange. These bonds give foreign parties to take exposure to Indian currency through these bonds.

These bonds transfer the risk of the currency fluctuation to the investor and come under the external borrowing route in India. An essential feature of these bonds is to raise Indian currency in international markets, and investment in these bonds suggests a bullish view on the Indian currency. These bonds are listed on the London Stock Exchange. 

The minimum holding maturity of these bonds is one year for borrowing up to $50M. These bonds are the right way of diversifying risk and bringing down-weighted weight cost of Capital. (Masala bonds Aviral Agarwal and Darshan Jain). Electronica Finance Ltd, a Pune, India based non-banking financial company and a pioneer in machine finance raised $10M from impact investor responAbility through green masala bond.”

Encourage Capital is a prestigious impact investor and advisory firm formed through a joint venture of Wolfensohn Fund Management, founded by former World Bank President, James D. Wolfensohn, and EKO Asset Management. The impact investor recently closed a $100M solar fund to finance rooftop financing business. Indian government wants to target a 100GW by 2022, which includes 40GW of rooftop solar but as of March 2019 only 3.5GW had been implemented. A research conducted by Encourage Capital estimates $9B potential for 15GW of rooftop solar installation. The Encourage investment would aid Electronica’s foray into this sector.

Listen to the Podcast here.

Further Shilpa discusses her vision going forward. A key initiative is in the micro-segment example tea stall vendors. The investment here would range on an average of approx $8000 substantially less from other segments. Investment amount in machine lending is on an average $40,000 and $80,000 for institutional lending. The major expansion strategy over the medium term (5 years) is to target tier 2 to tier 3 cities in India. 

                                             “39% of the global population has no formal education.”

The third section of our conversation is on the CSR activities. Udaan project along with tie-up with a non-profit Niwant Andh Mukta Vikasalay based in Pune for educating women with disabilities is creating a substantial social impact. One key strategy which stands out is the sustained support to women in honing their skill sets through ongoing mentorship programs apart from education. Meeta is another key initiative by the company. 

Electronica Finance Ltd. is not only a leader and visionary in enabling a sustainable social change and impact within the micro-lending sector but also innovative in using tools for raising Capital, driving the best global business practices. The podcast is a fruitful discussion with Shilpa on emerging trends in green machine lending especially in Micro, Small and Medium Enterprises (MSME) sector, key facets of raising funding through capital markets in sustainability etc. 

 

Few References:  

https://en.wikipedia.org/wiki/Micro-enterprise

https://ustr.gov/trade-agreements/free-trade-agreements/transatlantic-trade-and-investment-partnership-t-tip/t-tip-12

Masala bonds Aviral Agarwal and Darshan Jain