Deal focus: LeapFrog adds to financial inclusion portfolio

LeapFrog Investments has gone to great lengths to bank India’s unbanked. The firm’s portfolio currently includes two non-banking finance companies (NBFC), an insurance business, and a microfinance platform. Each operates primarily in rural or semi-urban areas, which is where most of the country’s 50 million micro, small and medium-sized enterprises are based. It is estimated that 40 million of these businesses are self-financed, restricting growth and job creation.

NeoGrowth Credit represents another piece in this financial services puzzle: a company that issues loans to small retailers based on their card and online sales. It analyzes and underwrites digital payments data generated from daily sales, focusing on current and future cash flows rather than historic financial statements. Loans are secured against these future sales with repayments made at a similar pace and in a similar way: flexible, small, and automated. 

“This approach revolutionizes small business lending, making it possible for merchants who are unable to secure loans from traditional banks to access a loan,” says Michael Fernandes, a partner at LeapFrog. 

The social impact investor has led a $47 million round of funding for NeoGrowth, with participation from existing backers Aspada Investment and Quona Capital. The company previously received capital in 2016 from IIFL Asset Management and Quona, taking the total raised since inception to $35 million. Omidyar Network, Aspada Investments, and Khosla Impact all re-upped in that round, having provided $7 million in funding a year earlier.

Fernandes notes that the 2016 investment accelerated NeoGrowth’s expansion as well as advancing the company’s capacity to access debt capital. It now has a presence in 21 cities and will use the latest funding to enlarge its geographical footprint. Demonetization is also working in NeoGrowth’s favor because it has boosted adoption of digital payment methods. Point-of-sale transactions rose 85% year-on-year to INR740 billion ($11.6 billion) in the 12 months to September 2017.

“The SME market in India is large enough to withstand healthy competition and, as a result, many lenders – both traditional and tech-enabled – are beginning to explore the segment,” Fernandes adds. While the likes of Bajaj Finserv and Capital Float also provide unsecured loans to SMEs, he believes that no other company in the segment has a technology platform as strong as NeoGrowth’s, which should make scaling the business easier. 

As more NBFCs adopt cashless financial services, the company is expected to find ways to collaborate with them. There are already plans to cooperate with more traditional players to access growth capital and enter into co-lending arrangements. In addition, LeapFrog is keen to see how NeoGrowth could work with Fincare, its microfinance platform turned small finance bank, which mainly serves rural businesses.   

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• Topics
• South Asia
• Technology
• Financials
• Expansion
• India
• LeapFrog Investments
• TMT
• Financial Services