Bad times help identify good portfolios says Aseem Dhru of SDFC
MSME-focused SBFC Finance has grown significantly in just three years. Today, the NBFC’s Assets Under Management (AUM) stand at Rs 3,516 crore. Its total income for FY 2020 is Rs 445 crore. Aseem Dhru, Founder and CEO of SBFC (who was formerly with HDFC in a leadership position) in an interview with Free Press Journal’s Jescilia Karayamparmbil and RN Bhaskar talks about the lending business and the way forward.
Edited excerpts are given below:
Tell us about SBFC’s journey
RBI has kept banks restricted in terms of licensing. Therefore, NBFCs have evolved very differently. This evolution was based on the need of the country. Historically, NBFCs are active in sectors of the economy where banks are unable to concentrate.
The sectors where banks are unable to do well is where NBFCs do well. One such sector where NBFCs are doing well is the microfinance segment.
India is a country of shopkeepers and small businesses. We have 65 million small businesses across India. Of that, only 8 per cent of them have access to any form of organised finance. There is a huge opportunity here.
After 20 years with HDFC Bank, I realised that there is a space which can be a good business model. Thus, I stepped out to start SBFC.
SBFC wants to be a nationwide lender. Over three years now, we have a presence in 92 towns and 17 states with 120 branches. We will be launching in Bihar next month which will be the 18th state. Now, SBFC has an AUM of Rs 3,500 crore. Slowly, SBFC is taking grip and getting into the depths of the market segment.
How much has COVID-19 and its subsequent lockdown impacted SBFC?
At the moment, 90-92 per cent of our portfolio is efficient. In the next three months’ time, we will be able to get back to pre-COVID-19 levels (that is 95 per cent efficiency which means around 5 per cent of NPAs).
Where does the industry stand in the case of efficiency?
RBI data (on 31 August 2020) on moratorium was that 40 per cent of all loans in the banking and lending system are impacted. Among MSMEs, it was almost 70 per cent. Over a period of time, things have improved for lenders. Around 8-15 per cent are off their books.
Most players have broken down their business in two parts — one which is COVID-19 affected and another is lockdown affected. The businesses affected by lockdown have bounced back quicker, but COVID-19 affected businesses that have human intervention have been hit. While the manufacturing sector has seen improvement, the service sector (restaurants and travel for instance) has been impacted.
According to NPCI data, the cheque bounce ratio is around 40 per cent and unless that does not come down, things will be very difficult for the industry.
At present, the system is still protected by the Central Bank. The numbers will shoot up when the protection runs out in the second half of next year (September 2022).
Institutions with poor-lending quality will be hurt.
Under the emergency credit line, banks have disbursed Rs 2 trillion already. There is restructuring for individuals which was not there earlier which is more like an extended moratorium.
Not many businesses have shut shop but their cash flows are damaged. So, if their EMIs are reduced, then these businesses can bounce back. Many such schemes have helped the portfolio across the industry.
Has SBFC made any provisions for NPAs?
In March 2020, (during the lockdown) before finalising the accounts, we realised that there will be a problem. So, we had identified the potential accounts then. As things stand today, we do not see the need to make further provisions.
What are the new trends that have emerged due to COVID-19?
The trend that has emerged is that big businesses are gaining market share and smaller businesses are bearing the brunt.
The bigger cities are the worst affected. But for small towns and cities, businesses attained normalcy very quickly.
Will SBFC raise any capital from the market?
While portfolio challenges have to be managed, demand has come back to the economy much faster (than what one has thought).
A lot of supply has come back yet a lot of people are hesitant to lend right now. Good portfolios are made during bad times and mistakes are made during good times. Right now, we are bullish about the loan underwriting that we are doing at the movement.
Last month, we did an all-time high in the case of monthly disbursement at Rs 125 crore. It is business as usual. So, raising equity and raising bank finance will keep happening.
Will you be raising funds through the capital market?
At present, we have no such plan. There is some work to be done before making that decision.
Are you looking at new products outside of MSMEs?
SBFC will remain focused on the MSME segment. In that segment, we will come out with many product variants.
We offer gold loans to these businesses. This has become a Rs 500 crore portfolio for us. Now, we have launched a new technology-driven gold loan in which we offer home delivery of gold loans. Two valuers go to the customers to measure the value of gold through an app and the loan is instantly disbursed. This product was launched two months back and it received a positive response. We launched it as a pilot in eight cities and we will be rolling it out in all other cities and towns too.
Due to such products, has technology cost gone up?
Technology cost has come down due to the cloud and all these costs have moved into a variable basis. Smaller players have the advantage over larger legacy systems in such case.
What are the challenges NBFCs are preparing to face?
Lending is the easiest and most difficult business in the world. The product and demand are unlimited. So, the demand for funds is massive.
The borrowers are not particular about the brand that they buy from. No one can create a brand even if it is in this field for a long time. The borrowers go to the lenders based on their convenience and affordability.
Indian customers are ready to pay a premium if the loans are delivered on time. The challenge of lending is the collection part of it.
Lending is a highly leveraged business. We have to pay back to banks whether or not customers pay us. So, you have to manage your lending.
What puts NBFCs like you in a better position compared to legacy banks?
A bank has only two critical things: judging the customer’s ability to pay and judging the customer’s willingness to pay. It has not changed.
From banks, one learns to judge the willingness to pay and from the technology, we can learn the customer’s ability to pay.
New-age technology has enabled institutions to make calculations faster.
New-age companies are able to judge the customer’s ability to pay but they still have to learn from banks how to judge the customer’s willingness to pay.
Do you use artificial technology?
We look at a lot of alternative data. There is not enough data to rely on. While banks can do that, as they have a lot of data points to do that, NBFCs find it difficult.
What is your customer base?
Over a period of three years, we have served over 1.5 lakh new customers. We add 15,000-20,000 customers every month.
We are still scratching the surface. The reality is that the opportunity in this business is very large. However, finding a good customer in this business is like finding a needle in a haystack. We are a secured lender (lending is secured by property or gold). So, it is difficult to find such customers.
What is the future outlook for the institution?
At present, the focus is to lay the foundation and profitability model right. We do not want to scale up too quickly and make mistakes.
The focus will be on building a high-quality book.
By FY 2023, we will be across all the states in India. We will be present in 300-400 cities and towns from the present 90 cities and towns. So, we will go down that deep.
We do not plan to put lending targets as that usually leads lending companies to go astray.