8/19/2019 NBFCs – a Gold Mine in India

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NBFCs  A gold mine in India

Lets start first with business model of NBFCs. Banks lends money where they see safety i.e. salaried class or with people having sound paperwork/collateral. This practice leaves out entire rural population and those poor households too who live in urban areas. These poor chaps due to lack of proper collaterals and income records [most of them dont bank] are devoid of debt opportunities from bank. This is where NBFC comes in picture.

NBFCs predominantly cater to above described working class. Their business model is least sexy. They employ the people who are remain grounded and knows local peoples financial dynamics well. Credit appraisals/disbursals and recoveries are driven by these simple folks who keep close track of such poor households. This is where they differentiate themselves from Banks.Off late RBI is started listening to woes of such poor working classes. RBI mandates the banks to make sure that approx. 25% lending to this segment for financial inclusion. Now banks find it hard to operate in hinterland hence they lend the money to cooperative Soc. or to NBFCs. So an established payer with suitable credential finds it easier to get access to Banks loans which can be disbursed to SME/MSME segment at higher rates. Needless to say NBFCs loans are typically small tickets and its mainly for working capital requirements or for building houses etc. Govt. looks keen to establish policies to friendly for such lending for example, HFCs who lent predominantly into remote areas gets priority treatment for capital from NHB money. NHB lends the money to such players like GRUH, REPCO, C

AN FIN etc. at lower rates.Now assuming that India lives in villages and we have a sufficient size of labor class who can be safely lent a small ticket loans. Following are key benefits:1) NBFC employs are local folks who are simple graduates but knows local dynamics well. This ensures employee cost is lower.2) Credit appraisals, disbursals and collection is also the responsibility of local team and it their performance is linked to success of all of it.3) Small ticket size and above process ensures NPAs are well under checkOpportunity size in this segment is huge and we have just started. Sound profitability of small ticket lenders like GRUH, REPCO, SCUF, Shriram Transport, Sundaram etc. is a glaring example of this opportunity. Needless to say we have just started this journey and NBFCs have a large role to play in Indian financial system. I envision India getting super rich in next decade due to role played by NBF

Cs and which in turn allows small business owners to get access to capital and one day grow enough to become eligible for Bank loans. In this process, a lot ofemployments are being generated and may lead to systemic wealth creation for India!Disclosure  Invested in GRUH,REPCO & SCUF