HOW WE CAN BOUNCE BACK FROM CORONA STRONGER AND WISER

In barely a decade, Northern Arc has used its pioneering structuring and risk management approach to help transform the lives of millions. Through her work at Northern Arc and in her personal capacity, Kshama has been tireless in her efforts to broaden financial inclusion across the sub-continent, and to empower women and the girls in particular.

Corona has, for now at least, changed everything. But it is in such times of crisis that ‘actors’ like Kshama and Northern Arc stand out. So we were keen to focus in this interview on Kshama’s take on, and response to, the Corona crisis. Asked how the Corona crisis is affecting Northern Arc, Kshama’s first words are not about her own company. “The situation facing those at the bottom of the pyramid is very concerning. Our economy has come to a grinding halt.” Northern Arc has been in conversations with their clients – embattled Non Bank Finance Companies (NBFCs) small corporates and SMEs, who are severely affected because they serve the most vulnerable borrowers and clients in India. “With no income, these clients are obviously under enormous pressure. So since the crisis broke out, we have been providing moratoriums on instalments due to us, and thinking of how else might we help.”

In the first weeks of the crisis alone, Northern Arc systematically evaluated hundreds of NBFC clients across the country, plus other retail borrowers on their platform, to assess how many of them needed moratoriums. The answer? “Almost all of them! No well-run NBFC carries cash reserves to cover more than 2-3 months of operations. With complete shutdown, many have problems not just servicing loans but meeting operating expenses.” Kshama stresses that the evaluations have to be done very judiciously. “Northern Arc after all is also an NBFC that borrows from the market. We must ensure that our own liquidity and financial position remains strong so we can repay our lenders in a timely manner.”

Safe pair of hands

As fortune would have it, Northern Arc completed a large equity raise in December 2019. As a result, they are currently leveraged to about two times net worth, in contrast with their usual level of 3.5 to four times. This obviously puts them in a stronger position to help others, and themselves, ride the crisis. “It means we can put client payments on hold and even lend in limited ways to NBFCs that we believe are otherwise financially sound and just need an uplift of liquidity.”

Northern Arc was the first to introduce structured finance to the Indian market, and is widely seen by Development Financial Institutions as a safe pair of hands and an efficient way to enable the transmission of credit where it is required the most. “Operating in India over the last decade,” she laughs, “we have also become fairly expert at dealing with crises!”

Kshama and her colleagues have therefore been busy talking to DFIs, investors, foundations, charities and other institutions around the world who are keen to help people in these difficult times. “One challenge is that most organizations want to do their own thing by intervening directly. This may not be the most effective way to help, especially in times of crisis. Reinventing the wheel is expensive, time-consuming, and highly inefficient in terms of human resources and capital for every dollar deployed. So we have been working towards aligning efforts by bringing investors to the same table, and by developing financing structures that will enable us to build economies of scale and efficiencies in a timely manner.”