Jan212019
Posted by:Aishwarya Pramod Sai Pramodh
Credit Risk Management for Venture Finance
We cater to a particular segment of enterprises that are under-served by the traditional banking and financial system due to their newer and asset-light/asset-moderate business models, growth-driven strategy, and their promoters being first-generation entrepreneurs who are unable to offer much collateral or personal guarantee. In fact, the vast majority of loans we made at Caspian (98% to be precise) are not backed by mortgage collateral, and 45% of our clients were loss making at the time of their first loan.
All these above-mentioned characteristics are unlike the borrower segment of the traditional banking system.[1] Thus, managing credit risk for these types of businesses also requires a approach that is unlike the one used by the traditional banking system. At Caspian, we have developed a specialized risk management framework to build and manage a portfolio of this niche but fast-growing market segment. Our core principle is that high quality professionally managed operations and a viable core business model are better predictors of credit quality than collateral value.
It could take less than a month for the fortunes of any company, especially an early stage company, to dip or to rise. Therefore, we have put in place a strong post-disbursal risk monitoring system that provides us with early warnings for stress cases as well as for highlighting star performers where we could provide more funding. The early warning system is characterized by proactive monitoring, focus on all borrower segments (irrespective of ticket size of the loan), and periodic / near real-time assessment of borrowers, etc.
An early warning system of the type adopted by us requires the processes to be high touch and technology enabled. We identify and monitor key risk triggers for each client based on vintage, industry, customer segment and other factors. We use multiple parameters to assign periodic risk ratings to our clients. In fact, a customer that is currently on-time with repayments may still be classified as a “Watch” customer if the combination of other Early Warning Parameters, indicate so.
Our risk team is guided by the desire to provide good customer service and be an outsider-insider supporting the growth of the borrower and pointing out concern areas early on. We understand that the kind of enterprises we work with are resource strapped. A high touch approach must be combined with trying not to overburden the client with reporting requirements. To this end, we try to align our data requirements as closely as possible, with the customers’ existing systems and reporting. A one-size-fits-all approach cannot work and we implement it in letter and spirit. We build strong relationships with clients, which gives them a channel to air their relationship concerns, and at the same time ensures that we receive regular business updates. Our standard message to clients is that they should share good news as soon as possible and bad news even sooner.
Our prompt, information driven system helps us reduce turnaround time for tranche disbursements as well as repeat loans to high performing clients. There are several clients running on their 7th or 8th loan from us. Our system also helps us differentiate between companies that are experiencing temporary turbulence and companies that are floundering. In the latter case, we must explore options to prevent portfolio losses through discussions with the company in case it is a genuine issue beyond control. However, in cases where the issues are due to mismanagement, strong action is taken (including legal) to avoid portfolio losses.
We constantly strive to hone our credit risk management framework at Caspian. Our task is clear. We have to scale up our systems and processes to allow us to apply the same risk management framework for a much faster growing and larger portfolio. Our colleague has talked about our overall, risk management approach in an earlier blog piece.
[1] SMEs tend to have low capitalization, lower assets to cover for the loan and high mortality rates. Their larger clients may delay payments, and the long receivables period is a major cause of SME death. Please refer to the following for understanding these typical characteristics of SMEs we at Caspian work with.
https://www.worldwidejournals.com/paripex/recent_issues_pdf/2015/May/May_2015_1432974263__92.pdf
https://www.thehindubusinessline.com/opinion/bullying-of-smes-by-large-players-must-stop/article23751288.ece
https://msme.gov.in/sites/default/files/2015_02_MSME_Committee_report_Feb_2015.pdf
