When large industrial activity is not continuous, smaller companies are less enthusiastic to invest in catering to larger industries. So SMEs start depending more on the regional market for growth. Lack of fresh investments has been the primary reason for moderation in credit growth in the MSME segment. With respect to Shriram City, Balance sheet growth was not so visible in the past largely because macroeconomic conditions were not too comfortable for us to keep the money outstanding for long since we were unsure about the direction the wind would blow in. In a situation of the economy tightening further, we did not want to keep too much money outstanding in the system. We took a cautionary view and started lending for a shorter duration. We reduced the loan tenors to 1 to 2 year from 4 years earlier. However, we have now moved back to 3 years duration.
“20% growth is sustainable with the pace with which we are moving; it may accelerate to 25%+ as we roll out an increase in ticket size to a larger customer base”.
While the economy remains very tight and we do not see a great level of enthusiasm in our customers at this point in time, there are a few pockets which are doing better. I do not see things deteriorating further from the current levels as there are no negative or detrimental factors with respect to government policies, macro economic conditions or local issues. While today 20% growth is sustainable given the pace at which we are moving, the growth may accelerate further to 25%+ as we roll out higher ticket loans to a larger number of customers who are part of our own existing customer database and also by adding this product line in several of our matured branches. The pilot has already started in Southern India where the average ticket size has increased to Rs1.5mn from Rs1mn earlier. Moreover, loan tenors are also seeing extensions to 5 years from 3 years currently, specifically for higher ticket loans of around Rs.5mn.
The MSME sector contributes around 45% to India’s GDP. However, a large part of the sector is unorganised and receives funding from unorganized sources. Hence, organised market size looks smaller than it actually is because many businesses that are conducted from households never get reported at all. They are not even part of the GDP calculation. I see some of this unorganized business shifting to the organised-financing market, creating lot of opportunity for MSME financiers.
On every parameter – whether it was balance-sheet growth or asset quality – new SME business in the northern and western regions is doing better than in the south. But there is a reason – on a small base the growth is fast and you take least risk when the portfolio is small. Asset quality in non-south regions is fabulous but that does not mean asset quality in the south is bad. That means we were successful in doing what we attempted to do. We will see a lot of activity in the non-south market and in the south market we will see streamlining and consolidation of the processes. In the south market, the pilot has already started – where ticket size and tenure has been increased.
While we finance around 5% of the total two-wheeler sales in India, in terms of financed two-wheelers, our share is 25-30%. In some part of the south, we have 50% of the financed market. Two-wheeler financing on a standalone basis is a profitable business for us, besides being one of the most promising segments. Until 2008, 70-80% of the two-wheelers sold in India were financed, which fell to as low as 15-20% (between 2008-10), and has now moved back to 30%. The growth engine in two wheelers is not about manufacturers selling more – it is about converting cash sales to credit. Two thirds of the total sales are in cash, so we can still double our business without the OEMs manufacturing more. While we have good distribution reach, it’s a question of educating customers and making them more comfortable about taking finance. There is a need for streamlined and customer friendly-processes to increase productivity.
The risk is largely to the over-ambitious financiers, especially in LAP financing, where end-use is not monitored or there are cash-flow mismatches. In a collateral-backed loan, further supported by the borrower’s cash flows, you can finance even 110% of collateral, but where there is no cash flow and only collateral, even 10% (LTV) financing is bad. In India, real-estate disposal is a big challenge – you cannot dispose a property in less than three years due to legal hassles. Hence, in a scenario where property prices remain under pressure or remain stable for a prolonged period, even at lower LTVs, financiers would lose, because of accounting for overdue interest.
We do not see any threat from small-finance banks, as their area of operations is very small compared with ours – we are present across the country. In any case, these companies were already doing business as microfinance entities. So nothing changes for us.
The transition to tighter NPL norms will be exactly on the same timelines as prescribed by the RBI. We will move to 150dpd in Q4FY16, 120dpd in Q4FY17, and 90dpd in Q4FY18. The transition will result in a 200bps increase in GNPA at every transition phase. It is likely to increase to ~5% by FY16 and to 7% by FY17 and to 9% by FY18. Provision cover will also come down to 70% on 150dpd and further to 50% on 90dpd from the current 80% levels. We are not actively educating customers on tighter NPL norms unlike other NBFCs who we believe propose to do so, and hence we do not expect change in customer behavior to be dramatic.
Impact on account of additional income reversal is about 50 bps. As it stands now, we are not proposing to reduce our lending rates in our existing segments. However, as we progress further in our effort to cross sell and offer longer term loans to our existing relationship customers, we may look at reducing the yields in those specific segments However, this will be more than compensated by reduced opex and better employee productivity. On a standalone mode, there can be marginal compression in yields. This too, we expect to be more than compensated with some reduction in borrowed funds. Overall, our objective is to protect current NIMs.
Opex ratio would have come down to 37% on 180dpd basis in a one-and-half year time frame. However, as we move to tighter NPL norms, our income will start shrinking while cost will largely remain the same, so cost as ratio to income will look higher. On 120dpd, opex ratio will continue to be at 40%.
There is a bit of uncertainty surrounding MCLR – what rate will the banks charge us under new regime? Even banks themselves are not clear. However, I believe banks would keep it very close to base rates. So we are not expecting any benefit on cost of funds under the new structure – at least not over the next 6-12 months –until banks have a better grip on the new structure.
We are at a very interesting stage in our organization’s lifetime – we have evolved products, a matured business, and much of our groundwork is done. In constructing a building, the foundation is the most difficult part – it takes a lot of time, but the super structure comes up very fast. We are at that stage where the foundation is very strong, all engines are on, we just have to accelerate. Shriram City is well primed for growth. In the next 10 years Shriram City will evolve as an institution to reckon with in the SME financing segment.
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