Mumbai: Structured finance provider Avendus Finance, the non-banking finance company (NBFC) business of KKR-backed Avendus Capital, plans to start financing small and medium enterprises (SME), a senior company executive said.

Avendus Finance provides customized financing solutions for mid-market businesses such as growth financing, sponsor financing, recapitalization, asset financing, bridge funding, acquisition financing, pre-IPO financing and project funding.

It now plans to enter SME financing by lending to vendors, dealers and distributors of mid-market businesses.

“The SME business that we have conceptualized is anchored around high quality mid-market businesses. We are going to look at mid-market businesses and then look at their value chain—the vendors, the distributors and dealers—and provide financing to them on the strength of the mid-market anchor. The philosophy is still the same, which is that we understand mid-market ecosystem extremely well and, therefore, would like to play to that strength of ours," said Sandeep Thapliyal, managing director and chief executive officer at Avendus Finance.

Supply-chain business is understood very well in the larger/top end corporate segment and many banks/NBFCs have built businesses in that segment of the market, but no one has managed to segment the mid-market supply chain the way Avendus is looking to do, added Thapliyal.

“Lending to a Maruti dealer or a Tata Steel dealer, for example, is a business which every bank wants to do, as part of their channel financing business," he said.

The entry into SME financing, expected by June, will help diversify Avendus Finance’s business and add another pillar of growth for the business.

Thapliyal added that the size of the opportunity in SME lending is huge and the ability to scale up is higher than in structured credit.

“There is a huge opportunity out there. Some of these businesses, which are smaller vendors of mid-market business or dealers, don’t necessarily get adequate credit from formal channels and, therefore, they need to tap into informal channels of credit which are inherently expensive," he said.

Of the almost $2.65 trillion Indian economy, the portion of SME output is almost a trillion dollars, across services, industry and agriculture, he said.

“The thumb rule is that 20% of your turnover is for which you need working capital funding. So, essentially that makes it a $200-250 billion dollar funding requirement for SMEs. Now, even if you think of 10% of the market as an addressable market share, then that itself is a very large market at around $25-30 billion," said Thapliyal.

There is limited formal credit availability for these businesses and it is largely the PSUs that are funding them, he said, adding that given the recent trend of slower lending growth of PSU banks, it is creating a large opportunity for new lenders to come in and gain market share.

These loans that Avendus Finance plans to disburse to SMEs will be in the form of working capital loans of Rs50 lakh to Rs2 crore.

Thapliyal expects Avendus Finance to build a book of around Rs8,000-9,000 crore in the next five years in its SME financing business.

Avendus Finance will close 2017-18 with a loan book of around Rs750-800 crore. It expects to close the latest financial year with a book size of Rs2,000 crore, across structured credit and SME financing.

Close