The Indian NBFC sector needs to think ‘longish’ for its continued growth
The key is to maintain a healthy balance between short term & long-term borrowings
Recent news of how bankers in Europe have stopped lending to property owners who are giving it on rent to WeWork, one of the world’s fanciest unicorns made interesting headlines. Why would banks stop financing a property where one of the world's best-funded start-up unicorns valued at $ 45 billion is ready to rent space? The answer is simple – banks don’t want to lend to a property where it is taken for long lease, but the (WeWork) customers enter into short-term per desk rental agreements. Locking in space for long term leases and then filling it up with short term tenants – this is how the article described the dilemma is filled with uncertainty and risks.
The Indian NBFC sector's crisis is similar, though, the problem is opposite - short-term borrowings to meet long term credit demand. The genesis of the NBFC crisis has been due to the finance companies borrowing short term like commercial papers (CP), mutual funds to finance assets that have a 7-20-year repayment period. This approach needs to be balanced as any break in the chain of the continuous renewing of such short-term borrowings will result in a crisis as we have faced since the past year. NBFC’s needs to have a healthy mix of short- and long-term borrowings as per their business needs.
At Capri Global we have taken a view that our borrowings have to match our lending products strategy – that is long term with a minimum repayment tenure of 5-7 years. As of the FY 19 December quarter, we have no (short term) borrowings of CP or mutual funds and 95% of our borrowings is long term sourced from banks. The NBFC industry has to understand that any mismatch is not good for the business in the long term. Today, while the funding squeeze has eased, NBFC sector as a whole face a challenge of its business model, borrowing practices and governance & risk levers. The Indian NBFC industry needs to work together to remove this misconception by skewing its borrowings pattern to stable long term contracts alongside tactical short-term borrowings. A healthy cash-flow from loan servicing by customers ensure that payments are regularly made to the banks and other lending institutions.
The NBFC sector cannot be ignored or neglected because it is a crucial vehicle for India's goal of financial inclusion and generating economic growth through (MSME) entrepreneurship and self-employment. To meet the affordable housing gap of approximately 20 million homes, affordable finance is again a backbone to this goal. Currently formal credit in India stands at Rs.105 trillion, wherein the MSME sector gets close to 25%. However, this 25% covers only 10% of MSME units operational in the country. Under-penetration is the opportunity. In spite of NBFCs coming in, the MSME credit growth in the past few years is around a meagre 18% annually. Traditional financial institutions like banks can serve this segment partially, leaving NBFC's to gain market share. In terms of on-ground connect, NBFC's with their deeper branch network can partner with banks to disburse large amounts of money allocated for priority sector lending.
For example, at Capri Global for our MSME assets of close to Rs. 18 billion the primary geographic concentration is in the Delhi NCR region (38%), Maharashtra (22%) and Gujarat (20%). The other four states where we have a presence – Madhya Pradesh, Rajasthan, Punjab, and Haryana – make up for only 20%. The above will give you an idea of the growth potential of just not our company but the entire NBFC industry. Today Tier 2 and 3 cities and urban clusters have good demand for both MSME and affordable housing credit, and we plan to grow in these areas on a sustainable basis.
As we enter the new financial year, what is in store for the Indian NBFC sector? According to me, the NBFC sector as an essential piece that cannot be ignored as part of India's emerging market growth story. However, to survive, NBFC's that follow prudent borrowing and lending practices will create market leadership and build strong financial institutions. Risk and oversee is another area that needs to be closely monitored to ensure that credit quality is good. This will result in NPA's that are manageable and as part of average business deviance; any disproportionate increase of NPA's also affects the cash flow and repayment ability of the NBFC's to its lenders.
At Capri Global, our net NPAs stand at 0.23% of the housing finance book and 1.45% of the remainder book (which has construction finance and indirect retail lending, apart from the MSME book). Our gross NPAs in the MSME book lies around 3.50% indicating a healthy level of scrutiny and post-disbursement monitoring. We are also particular about collateral terms and ideally look at 2X the value of loan proposal. Capri Global Capital has an asset-liability ratio consistently higher than 1 with our total AUM currently for FY19 in the Rs. 38-40 billion range.
Moreover, with our strategy of expansion, our AUM should go up to Rs. 250 billion by FY23, wherein housing finance would be Rs.70 billion, and the other segments would combine to deliver Rs.180 billion. For the MSME segment instead of large ticket size, we expect to grow speedily in the number of clients in the next three years, from 15,000 currently to around 2 lakh.
WeWork’s leadership team has responded to the worries mentioned in the beginning by saying they will educate, inform and better engage with the bankers and the business community to remove any fears. Maybe for Indian NBFC players, it is time to talk more the nature of its funds – an optimal approach of short and long term borrowings to match its lending profile – so that the sector’s trust and opportunity play is restored at the shortest possible time.
At Capri Global, our leadership maxim remains as ‘Winners don’t do different things. Winners do things differently.’
To Catch my blogs, visit my website here: Rajesh Sharma Blogs