Explainer: Industry pro tells you about the future of lending

In an interview with moneycontrol.com, Govind Sankaranarayanan, Chief Operating Officer - Consumer Finance & Retail Business, Tata Capital, discusses how the company is embracing the digital revolution and how he thinks it will change the nature of the lending business in the foreseeable future.

Tata Capital, a non-banking finance company, operates in both the wholesale and retail lending market, with home loans comprising roughly half of its retail portion. It also offers products such as loan against properties, used cars, SME loans, personal loans etc.

In the interview, Sankaranarayanan shared his view on various government policies such as its affordable housing initiative and what challenges he sees emerging from upcoming businesses such as payments and small finance banks that have been allowed to start operations by the Reserve Bank of India.

Edited excerpts.

Q: With respect to the home loan segment, how do you evaluate the various steps taken by the government to boost the affordable housing sector in the country, including the interest subvention scheme. And how do you weigh that against the broad slowdown that the real estate has witnessed in general across the country?

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Govind Sankaranarayanan

COO - Consumer Finance and Retail Business|Tata Capital

A: The government has come up with some interesting schemes for affordable loans. The government tends to popularize these schemes through the NHB. These schemes give you long tenor funding and so on provided it meets certain characteristics: such as being below a certain amount. We do avail of such schemes actively. Our business has grown quite well in the last year, year-and-a-half.

In addition, we ourselves need to target potential groups of people who need affordable housing. These could be retired defence personnel, govt employees, people who live on suburbs of large cities etc. We consciously target such people to find out if they need housing.

A lot of the focus has been on peripheries of large cities. So where the ticket sizes tend to become large in the centre or suburbs of cities, once you go 50 or 60 kms away, especially in cities where you have public transport that allows people to travel, there you see some amount of affordable housing. It's there in the extended suburbs of Mumbai where it's possible to take a train and get into the city. There are pockets outside Bangalore. Otherwise, they are in the suburbs of smaller cities, where the central areas may cost Rs 50-60 lakh but the suburbs may cost about Rs 10-15 lakh per unit. I have not seen any geographical distinction between affordable and non-affordable housing.

Q: What steps have you taken in terms of embracing the digital revolution?

A: There are two parts to this. For the customer facing part, we have tried to make it possible for a customer to make an end-to-end transaction on digital in some of our products. For auto and personal loans for instance, it is theoretically possible for a customer to get on to our online scoring system, where he will be given a quotation, and subject to further information, it is possible for us to give him virtually an online approval and disbursal. There are still one or two legs, pertaining to KYC regulations, for which we need physical signatures etc. But otherwise, we can short-circuit the whole process and do it digitally.

For things like home loans or business loans, where there is credit assessment to be done or where there is physical verification, we may need to visit the customer's premises to carry out a technical and legal evaluation.

We have a segment for Tata Capital Car Loans, where in alliance with CarWale, it is possible for a customer to research a car using the latter's platform hosted on our site, and also get a loan at the same time. He can examine various cars that fit within his budget, as well as get help on new-versus-used car decision. We have also tied up with PropEquity where we offer a large number of housing related information on our site.

More importantly, our process itself is being digitized. Our sales people have the capability to meet a customer, scan his KYC documents and upload them on to our systems. Our collection people can collect money on site and issue a digital receipt thereon.

There are other initiatives that we are doing with digital, but that may take six-nine months to get rolled out.

Q: What regulatory changes would you want to see come about for NBFCs?

A: If NBFCs are permitted to do KYC on basis of previously-done KYC such as by banks or tax registry -- if those kind of KYCs would be treated as acceptable KYCs, that would be a step in the right direction.

Q: Do you see any challenge to traditional NBFCs from emerging business models, such as small finance banks? Will there be any pressure on your margins if competition forces rates lower.

A: Small finance banks have to lend a large amount of their loans to the priority sector while the ticket size has to be, I think, less than Rs 25 lakh. They are an additional player in the market but we don't think we are overlapping with them all that much. We do lending that is non-priority sector and above Rs 25 lakh. So that should not be a challenge.

Moreover, the overall impact has to be understood. One of the significant changes these banks will bring about will not be on the assets side but on the liabilities side. So both payments banks and small finance banks can take deposits. So a typical conventional bank will find someone who can and may offer attractive interest rates on deposit. So if a savings account today earns 5 percent, you may find some of these banks offer more and attract deposits. If these banks succeed in attracting deposits, they may force some of the conventional banks to raise their deposit rates slowly. The impact of that on pricing of loans is difficult to make out but I would assume that if a bank raises its deposit rates, if it wants to keep its profit constant, it may have to raise its lending rate. Alternatively, it may stop lending to some customers to whom they used to lend.

Q: Five or 10 years from now, what impact on the society do you think the ongoing advances in technology will have on consumers' lives?

A: More and more business will happen on digital. But it is not easy to imagine the form it will take. Undoubtedly, a fair amount of lending that happens will happen in physical form, some will be done in an automated form. So it may become possible for lenders to evaluate customers on more objective criteria rather than whether the branch manager knows a person. I'm not sure it's only a good thing. In a country like India, a lot of people do get loans because of reputation and relationships. Sometimes, in a poor country, it is good. Moving to an objective platform for evaluating credit history should mean that some people do not excluded from the formal lending sector. So how this will evolve remains to be seen.

Then there will be a lot of short-tenor loans. In the US, they call it "payday" loans where people go to small pawn shops to obtain short-duration loans only to manage till they get their paycheques. In India, this is usually done through moneylenders. So that high risk segment could move into the organized sector where rates of interest may fall from say 50 percent currently to 25 percent. Good digital and analytics will enable something like this to happen.

There is also talk to peer-to-peer lending or marketplaces, where one person can lend to another. I don't know how these will evolve. Once they get big, the Reserve Bank may want to get into the centre of it. Once any lending platform will become large enough, there will be two forces at conflict: technology that will want it to explode and regulation that will have some degree of control.

The other set of concerns revolves around privacy. When people collect data online and use it for multiple purposes, would the regulator permit these in the future?