How Kinara’s Hardika Shah builds social capital

Hardika Shah inherited an understanding of overcoming barriers to access to entrepreneurial capital. Growing up in Mumbai in the 1980s, the CEO and founder of non-banking financial company (NBFC) Kinara Capital watched his mother run a grocery store on the ground floor of a building where his parents owned an apartment. In pre-liberalisation India, clients often ran short of cash at the end of the month, meaning her mother would give them credit, when she herself was short of cash to extend. “Every one of (his clients) was running paycheck to paycheck, so he always had a working capital gap,” Shah recalls. But every few weeks, “this random guy comes in with a paper bag with cash.

It’s probably no coincidence that after a successful career in consulting, Shah eventually founded Kinara Capital in 2011, focused on providing unsecured loans to small business owners who lacked working capital. In 1988, Shah moved to the US to pursue a graduate degree and subsequently joined Accenture, where he worked for twenty years. Shah’s crazy travel schedule meant that more than a decade passed before he returned to India in 2003. That year, when he traveled to India to set up an office in Hyderabad for client Microsoft, he realized he had missed an opportunity to witness the liberalization of India. The economy was entrusted to the then finance minister Manmohan Singh and his successors. Shah looks like Rip Van Winkle. “You end up in a time warp,” says Shah, 53. But as is often the case in India, he notes a growing gap between “qualified engineers” and everyone else: “You realize that a lot of people are being left behind.”

Inspired by his experience of witnessing India’s rapid growth phase, but also aware that it was not benefiting everyone—he was particularly concerned about unequal access to credit—Shah returned to the Gulf. The following year, he began mentoring social entrepreneurs studying at Santa Clara University and Stanford University in California. In 2007, while working at Accenture, he began an Executive MBA shuttling between the Columbia University campus in New York and the Haas School of Business at the University of California, Berkeley.

Shah worked academically and worked in Mumbai, interning as a market researcher in high school and later as a typeface designer, saving his earnings for the high cost of higher education in the United States. After Shah completed his education in Mumbai, before taking on massive student loans in India, he quickly learned the lesson of not getting credit. His parents sold their apartment in Mumbai so that he could study computer science and liberal arts at Knox College in Illinois, USA. While attending college, the rupee depreciated significantly in 1989 and his parents said they could no longer finance his education. Shah received permission to work off campus, working weekends as a receptionist at a nursing home and finding work during the summer.

In 2009, after completing his MBA, Shah took a few months off and went back to India. In Mumbai and Chennai, he met people who were willing to give up his time to talk about finance for MSMEs (Micro, Small and Medium Enterprises). He finds credit in India for being characterized by a peculiar dichotomy. Banks lend to people who own land or other collateral, while others rely on connections or micro-funds to raise cash. “I looked at it and thought, ‘Most people in our country don’t have land, capital or property.’” I saw the lost middle outside of microfinance. ” After returning to the US, he raised $180,000 in seed funding, primarily from classmates and Accenture colleagues from his MBA program, and Kinara Capital was born.

Since founding Shah Kinara Capital and shifting to Bangalore in 2011, the company has disbursed a total of 100,000 loans to MSMEs. $65 billion rupees. Although the NBFC industry has gone through many upheavals since Kinara was established, assets under management of NBFCs grew by 150% between FY22 and the quarter ending December 2023. As of February 2024, assets under management were $3,113 crores. The company helps small businesses run everything from grocery stores to medical shops and auto parts to cloud kitchens.

Women-owned MSMEs account for about 12% of the customer mix. Kinara’s Herbicas Women Entrepreneurship Program has been running for five years and has been launched $7 billion in commercial loans. HerVikas’ approach is to provide a long grace period to women entrepreneurs before the EMI becomes effective. It offers them a 60-day repayment holiday, a 1% discount on the interest rate charged by the company and lower loan processing fees.

A lower proportion of its customers are women than one might expect, but Shah is realistic about the fact that the prejudice women face when working outside the home is deeply entrenched in India, which has one of the lowest female labor force participation rates. World “If you don’t support your daughter working outside the home or don’t like her work, I can’t change that,” he says matter-of-factly. Bias against women extends to venture capital industry: Only 7% of venture capital funds in India went to startups with female founders in 2023, new data from Tracxn shows.

Kinara is an excellent example of a female-led organization, with women holding most of the company’s senior positions and substantial LGBTQ+ representation within its ranks. At the elegant Bangalore headquarters in Indira Nagar, there’s a feminine touch everywhere, from quirky mugs to Shah’s brightly decorated office.

The day we meet, Shah wears colorful costume jewelry that reminds me of a young Indra Nooyi, whom I interviewed decades ago when she was a senior at ABB in Connecticut. During my visit, Shah and his colleagues ordered a cringe-worthy pastry from a coffee shop, and he cut himself a small Danish pastry out of cannabis, which I thought was in keeping with his Bay Area roots.

Shah laughs easily, perhaps at a time when Kinara Capital, the small businesses it seeks to serve and the NBFC industry are going through a decade or more of turmoil. A slowdown in credit growth in the wake of the global financial crisis, cyclical concerns over lending by non-bank financial institutions after the IL&FS collapse in 2018 and RBI concerns over unsecured loans and rapid growth all contributed to the end. Retail loans. Shah insisted that the RBI review did not directly affect Kinara, which has been profitable for nearly a decade. Even before RBI’s recent move, funding for fintech companies and even startups in general had dropped significantly. Data from Tracxn shows fintech funding in India will reach US$2 billion in 2023, less than a quarter of US$8.4 billion in 2021.

Reflecting investors’ confidence, Kinara celebrated Women’s Day on March 8 and pledged to increase allocations to the HerVikas programme: $500 crore, the target $1,200 crore for women entrepreneurs by FY25. But the RBI’s concerns about fintech are unlikely to go away. Kinara’s unsecured lending model has technology as its solid foundation: the UPI backbone makes it relatively easy to check whether a business has the claimed income. Once all the physical and digital checks are done, the technology-enabled workflow means it takes just a day and a half from loan disbursal to disbursal. He emphasized that this hybrid model is very important in India. “Cut, copy, paste (the model used by many Indian startups in the West) may not work in India,” he said.

He believes that the “speed bumps” put in place by the Reserve Bank of India to slow the runaway retail credit growth are not unreasonable, but worries that his MSME client base is being hit by government policy changes. Demonetisation in 2016, which disproportionately affected small businesses heavily dependent on cash transactions, was followed by the introduction of the Goods and Services Tax in July 2017. Subsequently, the collapse of IL&FS brought non-banking financial institutions under scrutiny. Despite challenges such as fluctuating prices of imported inputs to the risk of chronic power outages, small businesses remain resilient. “Small business owners say ‘I’m just trying to survive one step at a time’. They are being pressured from all sides. There is no pressure valve,” he said.

Kinara, which has 133 branches in six states and has 2,000 employees, could be “modest” in its collections, he said. If a customer misses two payments, a recovery process is initiated. However, its UPI-enabled model allows it to see how small businesses are paying during the month, thereby determining when Kinara can apply for leniency. Having enough staff to follow-up means Kinara can tell most of its sole proprietors if they encounter an emergency. Although Edge’s unsecured loan model targets the smallest businesses, the delinquency rate is 3% and net non-performing loans are around 2%. On a pro-rata basis, its average final interest rate is around 13%.

While Shah is confident of Kinara Capital’s growth potential, he worries that the uneven playing field that brought him back to India to start his company in 2011 remains a constant for his business here. “The entrepreneurial energy we had as a country was stifled. India should spread its wings,” he said. Small business owners don’t know “what’s coming.” Shah’s argument that government agencies are showing generous incentives to small businesses, important job creators, makes sense. India needs a new sympathetic capitalist compact – the government’s dealings with our smallest capitalists, the men and women who run our micro-enterprises.

Rahul Jacob covered India’s economic reforms for Fortune and Time magazines in the 1990s and was a Mint columnist.