At Caspian Debt, our mission is to enable the growth of professionally managed companies that can achieve in a responsible, sustainable, and transparent manner positive social & environmental impact. We provide customized collateral-free debt to companies set up by first-generation entrepreneurs in highly impactful sectors such as Food and Agriculture, Education, Healthcare, WASH, Financial inclusion, Microfinance, Affordable Housing, Clean energy states Avishek Gupta | Investment Director | Caspian Debt to Niloy from BISinfotech. During this candid chat, Avishek also shares about their lending process, criteria, and how they’re vitally looking into lending money and expanding its strategic focus across newer sectors. Edited Excerpts Below.
1. How did Caspian Debt deal with the lockdown maintaining the demand and facing the heat of supply chain slowdown?
Even before the lockdowns started, we asked the employees to start working from home and reorganized our processes to enable that. On the disbursals front, while we stopped new client onboarding at the end of the previous financial year, we continued disbursing loans in cases where clients had credit limits from us. Immediately after lockdowns were imposed and for the entire period after that, we remained in close touch with our SME and financial institutions clients to gauge the impact on their businesses. In parallel, we transitioned our entire credit evaluation process into a virtual due-diligence based process. We also developed an in-house COVID risk framework and evaluated each of our company basis the framework. Using that framework, we were successfully able to implement the RBI and Govt directives around giving relief to customers through repayment moratoriums on a selective and objective basis. We also participated in the govt supported ECLGS programme via which we funded existing clients that met the govt specified criteria. Most of our portfolio companies had to shut operations during the initial period of lockdown but immediately after that, the companies dealing with agricultural commodities and health care services started growing rapidly. We re-started onboarding new clients towards the end of June 2021. In the process of making new loans, we considered the covid risk framework to assess the immediate risk due to covid in addition to the normal evaluation that we do. We managed to stay financially strong and liquid to ensure continued support to our clients and were able to raise funding from both existing and new partners.
2. What is your lending process and what are the criteria and portfolios do you look into before choosing companies for financing?
At Caspian Debt, our mission is to enable the growth of professionally managed companies that can achieve in a responsible, sustainable, and transparent manner positive social & environmental impact. We provide customized collateral-free debt to companies set up by first-generation entrepreneurs in highly impactful sectors such as Food and Agriculture, Education, Healthcare, WASH, Financial inclusion, Microfinance, Affordable Housing, Clean energy.
We look for companies that have attracted VC funding with a proven business model and path to profitability or profitable bootstrapped companies.
We evaluate companies on their Governance and Management, Processes and Systems, Business and Operational Risk and Financial performance. Our lending process includes inviting applications on our digital platform from the companies which go through initial evaluation for impact, governance and financial performance. Once the companies clear the initial evaluation or pre-due diligence phase it receives an indicative term sheet within 10 days of receiving the application. Once the terms are accepted, the companies go through the in-depth due diligence of business model, operating processes, review of customers, suppliers and management depth. In normal times, due diligence involves a physical visit to the company’s premises. The investment team puts up a credit note after satisfactory due diligence, which is approved by our credit committee which sanctions the loan. Legal documentation is carried out after the sanction. On completion of legal documentation, the loan is disbursed. The entire process from application to disbursement is completed in about 60 days.
3. A lot of startup companies are dominating sustainable and green technology and energy space. Bidding investments can always be a risk hence, how Caspian Debt is playing a pivotal role in pioneering investments while making sure to create brands that deliver global quality and results in profitability?
Caspian debt provides non-dilutive debt capital to start-ups that are in the clean energy and sustainability space. Debt investments help in saving precious equity for long term investments such as research and development of new products, investing in brand building marketing and business development. Debt capital can be used by companies for their working capital needs and it helps in bringing discipline in managing cashflows, tracking collections from the revenues and expenses. This helps them on their road to profitability.
While large scale solar projects are the most commonly recognised and financed aspects, Clean/green technologies are also about a number of other technologies like energy-efficient products, biodegradable chemical replacers for industrial processes, water conservation equipment, waste to energy conversion, energy storage, electric vehicles and pollution controllers, etc. We have funded companies across all these areas, each of whom are innovating either on the product side or on the delivery side and need debt financing for scaling up. Availability of debt enables them to use their equity mostly for R&D purposes or for building teams while the working capital requirement is met by debt. This enables fast-tracking their product or delivery process development and enables them to reach scale and profitability faster.
4. How do you foresee sustainability as an overall movement?
We see a strong consumer switch towards sustainability – in organic food, beverages, packaging, clothes and household products.
Given the international focus on Net Zero targets across corporate supply chains, it is expected that Indian small and medium firms that we work with will either have to transition themselves or will be the suppliers/service providers for products that enable the transition to net-zero.
We also think that sustainability requires a wide variety of solutions and hence our focus on funding a variety of products and services.
5. Your strategies and views as emerging sectors like EVs, HEVs and electric charging infrastructure already dominating the market and bringing new market models?
• We have been evaluating EV business for some time but transaction flow has only recently gone up. Our first deal was Ampere. The only exit in this space.
• For a long time, most of the companies were quite in an early stage and without debt ready business models. That is slowly changing.
• There is customer acceptance for 2W and 3W vehicles – evidenced by OEM sales. However, the financing end is still not fully addressed. However, we have seen many lenders getting interested in financing electric vehicles in recent times. With an improved resale market, financing for EVs will become easier for lenders.
• It is not just the vehicle manufacturers but we have seen rapid growth of even the component manufactures who are helping reduce dependence on imports.
• There is strong interest among equity investors for this segment.
• Other eco-system players such as Incubators – especially those in the IITs – are creating a strong pipeline of companies
• Over the past few years, we have been seeing a lot of companies using EV to develop a logistics business like last mile deliveries or last mile connectivity. However, we think that the business viability is still unclear. It will take more time to be sure that these models work.
• The charging infrastructure has attracted recent interest amongst investors and even large corporates. While significant investments are required to create charging infra and network, it also requires some level of regulatory nudge like mandating or incentivising housing societies, commercial buildings or petrol pumps to have charging points and it also requires coordination between market players like agreeing on a battery swapping code or interoperability that serves all players.
6. Caspian Debt recently announced the opening of its regional office in Delhi/NCR. What will be the key focus and how vital has the national capital become for the company?
According to a report published by TiE Delhi Chapter and Zinnov in 2019, Delhi/NCR has the largest number of active start-ups in India. The number of startups founded from 2009 to 2019 in Delhi NCR is 7,039, while Bangalore is 5,234 and Mumbai is 3,829. Delhi has become very prominent in the start-up ecosystem in terms of the number of start-ups being registered and the funding received in recent years. Caspian Debt would like to play an important role in the start-up ecosystem of not only NCR but also in the North of India. There has been significant growth in the number of clients from the Delhi/NCR region from FY19 to FY21 and we see a huge potential in this region’s start-up ecosystem. Currently, we have 32 clients in the Northern region that will be handled by our Delhi office. To serve our existing clients better and further expand our presence in the Delhi-NCR region we have also partnered with startup ecosystem players like IAN and TiE Delhi NCR.
7. In the coming year, where would Caspian debt vitally look into lending money and expanding its strategic focus (sectors) and why?
Caspian Debt believes that SMEs are a growth engine for our economy and is encouraged by the resilience shown by them during the Pandemic.
We expect to double down on our focus on climate and sustainability. We expect to raise targeted funding that enables SMEs across sectors (beginning with agriculture) to transition into a more sustainable/green supply chain. Given that our portfolio already has companies that are helping other supply chains transition, we see the possibility of encouraging our other portfolio companies to work together to help each other. Caspian Debt will continue to lend to SMEs in impact-focused sectors like Education, Healthcare, Clean Energy, Food and Agriculture, WASH, and women-led enterprises.
8. Lastly how do you see the impact of digitalization in the lending biz?
Digitalization which was gaining ground slowly has been hastened during the COVID period. Rapid digitalization in both loan disbursements and collections are a welcome step forward. Digitalisation in lending has also been made possible as SMEs are undertaking their own digitalization journey at the back of rapidly developing mobile payment solutions and increasing the influence of social media and communication apps such as Facebook and WhatsApp. Having a digital financial footprint will help businesses access debt capital and bring in ease of evaluation for lending companies. This will also give rise to the use of related analytical tools such as bank statements and GST analysis in deepening the assessment of the repayment capacity of SMEs. The account aggregators are expected to dramatically improve the availability of debt for MSMEs because the cost of evaluation for lenders is expected to go down. However digital lenders will need to find ways of engaging with the borrower and will need more support from the judicial eco-system to help in recoveries for stresses cases or willful defaults.