Kshama Fernandes: Finding credit for the worthy
Growing up in a coastal village in Goa can indelibly imprint the choices one makes. This is evident immediately; Kshama Fernandes, managing director and chief executive officer of non-banking financial company IFMR Capital, picks the Varqui Crab—layers of crab meat and tandoori shrimp in filo pastry—as an hors d’oeuvre for our lunch. We are at Varq, the Indian restaurant with its eclectic and often surprising preparations of familiar food, at the Taj Mahal Hotel on Delhi’s Mansingh Road. The seafood, she declares, is a “much fancier version” of the fare that was dished out to her during a childhood spent in Cansaulim in South Goa.
“I would wake up in the morning, go for a run on the beach, and sometimes chat with the fisherfolk as they pulled in their morning catch—it seemed like a very beautiful world to me back then,” says Fernandes, 48. Her life is now far removed from the pastoral setting of a Goan village. But her work, which involves connecting non-banking financial companies (NBFCs) and microfinance institutions (MFIs), also known as originators, to last-mile borrowers, who are excluded from the purview of mainstream finance, takes her back to the realm of those who live on the fringes of formal systems—the disenfranchised. “I’m familiar with the trenches,” she admits, “and the last 10 years or so of my journey at IFMR Capital have been about building a financial institution that is a bridge between mainstream capital markets and the excluded sectors.”
IFMR Capital, which works in sectors like micro-finance, housing finance, small business loan finance and commercial vehicle finance, is an articulation of the idealism and business acumen of people like Bindu Ananth and Nachiket Mor, who left ICICI Bank to set up the IFMR Trust in 2007 in Chennai. In 2008, when IFMR Capital was set up as an institution that would link small financial companies that lent to the underserved, to mainstream markets, Fernandes, who was professor and head of finance at the Goa Institute of Management, joined it as the chief risk officer. “Those were the early days. IFMR Capital was built on the belief that at the grass roots there are many borrowers and enterprises worthy of credit. I often say that poor borrowers do not necessarily mean poor credit, but are classified as that, because we don’t know how to evaluate them. And in some sense I feel that if there isn’t much happening in the financial inclusion space, it’s because we haven’t found the ways to do it,” she says.
Soup arrives at the table; Fernandes, predictably, has opted for the Lobster Rassa, a hearty shellfish broth. She speaks of Goa yet again, as her fount of perennial optimism in a life of constant movement and flux: “My transition from academia to risk officer and then from risk officer to CEO has been fascinating. Working as an academic and then translating that knowledge into a lot of what we do today came very naturally to me,” she says, adding, “What Goa gave me was the positivity, the innocence and the ability to have a wide-eyed look at life. Cynicism would not have helped.”
It is that “wide-eyed” approach to capital markets that Fernandes also brought to her 2016 TEDxLeiden address in the Netherlands, interspersing it with stories of grit and resilience. There is, for instance, Anandi, who lives in a village in Odisha, and was denied a loan by a bank in the city—she had no bank account, no income statement and no credit record because nobody had ever lent to her. She was finally given a loan of Rs50,000 in 2012. She used the money to lease a pond outside her hut and breed fish. She sold the fish and repaid the loan six months later. She availed a second loan, leased two ponds, and transformed from a helpless housewife to an organic aquaculturalist.
Fernandes’ talk also mentioned other borrowers like Paramesan Gowda, a 48-year-old who runs a sandwich stall outside the Bombay Stock Exchange (BSE). Gowda too had no means to prove his creditworthiness, so before Essel Finance Business Loans, an NBFC, offered him a loan, the credit officer stood next to him for two days in a row and counted the number of sandwiches he delivered each day to all 24 floors of the BSE building. Based on this calculation, a balance sheet and profit and loss statement were created, and a two-year loan worth Rs30 lakh was sanctioned. He repaid the loan in 13 months.
“Anandi and Paramesan are examples of what timely finance can do—it can give a person control over his or her life,” says Fernandes, as the main course arrives. We are having the pan-seared sea bass in a mango and coconut curry, with hints of basil and pine nuts. Her conversation veers to the past again. “Back then, there were no tarred roads in Cansaulim. Village roads led to the beach. The big trucks that would arrive to collect the fish and take it to the market couldn’t drive up to the beach. So the fisherfolk would carry baskets of fish to the trucks. As children, we would stand on the path from the beach to the trucks, and the fisherfolk would throw some fish in our direction,” she recalls. The memory makes her smile, but she is quick to swerve to the here and now, to IFMR Capital: “We’ve done Rs40,000 crore of financing since inception. That’s not a small number for the sectors we work with.”
The selection of originators, or high-quality local institutions that empathize with the financial needs of people like Anandi and Gowda who find it hard to access traditional capital markets, is key to building a sustainable ecosystem of inclusion.
Fernandes elaborates upon the guidelines that IFMR Capital adheres to when picking an originator. “If I were a capital market investor and wanted to invest in these originators, what are the things I would look at,” she asks rhetorically. She explains that good governance, transparency and robust management information systems (MIS) are key to forging an alliance with an originator. “Having high-quality auditors is also important, so one can make sure that the company is following best practices as far as reporting is concerned. A strong second line of command—ensuring that the company has more than one visionary to execute strategies—is also vital. Maintaining very good operating standards and risk management are crucial as well.”
She says the financial feasibility of the company isn’t the only evidence of its worthiness. “If the guidelines I have discussed are met, eventually the financials add up,” she says, adding, “When one builds a financial institution, then one is building a lot of credibility—that is if one wants to be a financial institution that’s going to be around for a very long time.”
IFMR Capital’s efforts have enabled it to lend to around 110 originators and serve around 24 million end borrowers, in a market worth Rs14 trillion. It has also invented new structures such as multi-originator securitization (Mosec)—a pioneering product, not just in India but also in international markets, which brings together small originators to form a critical mass to draw an investor. Says Fernandes: “When we launched the multi-originator securitization in around 2009-10, we were dealing with a class of very small to mid-sized originators. But we knew that we could never take them to the capital markets because they were too small. A mutual fund may not be interested in a Rs1 crore deal, and won’t understand what a microfinance originator is, what a small business originator is, what an affordable housing finance originator is. So we did a few things. We put many small originators together to form a large portfolio, say Rs100 crore—something we could take to a capital markets investor.”
It comes as no surprise that Fernandes won Accion’s Edward W Claugus Award in October, for her exceptional work in creating a financial ecosystem for the underserved. Accion is a global non-profit that has pioneered financial inclusion.
As the restaurant’s signature dessert—apple kheer—is placed before us (with additional helpings of jalebis wedged in a blob of rabri, and malpua stuffed with shredded carrot), Fernandes remarks that indulging in the sweets will mean “an extra hour at the gym”.
She is as committed to fitness as she is to financial inclusion. And she constantly seeks the electrifying adventures of the grand outdoors. Last year, despite a tail-bone fracture that made it impossible for her to sit down, she embarked upon an almost 10-hour jeep ride in the mountains, from Shimla to the base camp at a small village called Janglik, for the trek across Buran Pass. She undertook a vertical descent from an altitude of 15,000ft across an ice wall and rock face, using rope, axe and microspikes. “If I didn’t climb mountains and cross oceans, I wouldn’t be as enthusiastic about my work as I am now,” she says, spooning up her dessert. She proves that prudent risk-taking can spur one towards the unexplored, both indoors as well as outdoors.