How Capital First is pushing boundaries with algo lending

Instant loan provider Capital First has been a darling of FIIs. In an interview with CNBC-TV18, V Vaidyanathan, the CMD of the NBFC, explains how the company managed to climb up the ladder.The NBFC primarily handles SMEs and consumers accounts, which accounted for 10 percent of the total loan book in 2010, and now is at 85 percent, he said.Over the next 4-5 years, the financial service provider expects its wholesale business to account for only 5 percent of its current book size. It lends both long-term and short-term. "We give a loan of Rs 1 crore for a tenure of about 15 years with interest of 12-12.5 percent to customers against security, but we also lend to unsecured customers," he said.The NBFC also lends a sum as small as Rs 20,000-50,000, which is not done through cash flow evaluation but via algorithmic lending. This mechanism is what has caught the eyes of international investors. "When algorithmic trading started, it used to give out 5,000 loans a year, and now we do 100,000 loans a month," he maintained.The company aims for asset under management worth Rs 20,000 crore in FY17.Below is the verbatim transcript of V Vaidyanathan's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What did Jonathan Schiessl of Ashburton say very prominently, he likes the way you lend and your systems, what is so unique?A: We think that the space we want to play in is the space which is largely -- I won't say completely -- under the service of banking system. Small and medium sized enterprises (SME) and consumers -- this business for our company was about 10 percent of our loan book in 2010, now 85 percent.How we do it is that for larger loans -- we do loans which are about maybe a crore of rupees for a tenure of maybe 15 years at an interest rate of anywhere between 12 percent and 12.5 percent for the customers who are against security. But we also lend to unsecured and we also do smaller loans, which are as low as Rs 20,000-50,000 which is the system he is talking about.That business is not done through cashflow evaluation at all, that business is done through algorithmic lending and it is so different. When we started the business we were doing about 5,000 loans a year and now we are doing over a 100,000 loans a month.Latha: We had a guy who spoke to us about this algorithmic based lending on Indianomics. He was saying that he lends and his non-performing assets (NPAs) were something like 1.9 percent. What has been your experience if you used algorithmic method and basically what is in the algo, is it the guys phone bills, electricity bills?A: It is far more complex than that but basically what we do is that when we started the business, we initially started with giving out 10,000 loans. On those loans we evaluated how does a customer, who is in the age group of 25 to 30, who is self-employed but married, behave from a person who is 25-30, self-employed but unmarried.Then we find out the incremental value of the customer being married or not being married. So you figure this out. So there are lots of such parameters we put together and then we develop a statistical model around this and then when the next customer applies to you, you do a profile check with the customer and not a cashflow check.Latha: So those who are married return the loans?A: Yes.Sonia: I am more interested to know what kind of growth opportunities do you see for the consumer finance division itself, the AUM growth over the next two-three years and more importantly, now a lot of e-commerce companies are giving companies like yours a ready access to large universe of online vendours, is that helping you at all in terms of increasing your reach?A: Let me talk about the lending business for durable financing business. Now, usually, of the entire market of 30-39 million pieces that are sold in India, this business is only 15 percent. 40 percent in cash, 45 percent is lent by banks in the form of credit cards and debit cards and there have natural advantage because the same bill can apply for durable as well as for rest of purchases for example. So, this market is only 15 percent, which is what we are operating in and maybe one-two more significant players there.But this business, we believe, has a significant growth potential. The ticket sizes are quite small as I said. Tenure is quite short, the operating cost of the business is quite high, as high as 10 percent. If you have operating cost of 10 percent, you have credit loss of anywhere between 4 percent and 5 percent, the breakeven for the business is as high as 25 percent. So that is why these are difficult businesses to do but we love it because it is difficult and therefore if we get this model going and we have already got it going pretty well, we think this market is a unique market.Sonia: What growth you are looking at?A: We think that this business can easily grow for us at a compounded rate of between 35 percent and 40 percent over the next three-four years.Latha: What is your breakup of Rs 100 how much do you lend to SME, how much do you lend to consumer durables? The wholesale you said there is only about 10 percent?A: The SME book for the company is as high as about 90 percent and the consumer is close to about 10 percent.If you take a salaried employee as a consumer, if you take a self-employed person whether buying a small good or whether buying instruments for his factory if you treat them as SME just by classification of what they do, that is about 90:10.Latha: You seem to be behaving more like the Equitas and the Ujjivan, will you aspire for a small bank license?A: We are not applying for a license at this point of time. We think that at this point of time we have foreign ownership, it is much more significant than those companies had. Secondly we also have -- in terms of our life stage, we initially set ourselves a goal that a return on equity (ROE) has to start touching the 17-18 percent for us to start being very profitable and be able to absorb the load of the cash reserve ratio (CRR) or statutory lending ratio (SLR).Sonia: The return on equity (ROE) was pretty depressed for companies like yours. In FY14 it was just about 5 percent but even from those levels, it has improved in FY16 it was about 10 percent. You spoke about 17 percent, by when do you think you could get to that level?A: When we got the first investment from Warburg Pincus in 2012-2013, at that time our ROE was one percent. So every quarter now for 14 quarters at a stretch, it has improved by a percent or 70 bps every quarter. It has now reached about 11 percent. We think this trend will definitely sustain. If you see a CAGR of profits for the last three years, it has grown by over 50 percent. We do think that for the next few years also, our loan book should compound by 25 percent and the profit number after tax should grow by upward of that number.Latha: You were a lender with ICICI Bank as well and you saw through their retail days as well and now you are a huge retail lender for the SME sector, do you think the moment has arrived for SMEs that the system appears to have cracked how to lend to them?A: Too early to say that because I think that when you do your own survey, you will realise that out of every 20 shops on the road who sell equipments and garment and stuff like that, not even one of them have finance from the organised market, which means 19 out of 20 are underfinanced. So that is the level of under-penetration.It is too early to declare victory but certainly we find this space extremely interesting because it is uncontested and we believe that once we get this going then this is a perennially green space for a long time. Even for example if we grew and became even Rs 30,000-40,000-70,000 crore loan book over the next many years, that would still be just less than one percent of the Indian lending system. Can you imagine that opportunity?Latha: So what is the total AUM growth you are looking at FY17-FY18?A: Last year we have got Rs 12,000 crore. This year March ending we were Rs 16,000 crore and next year we do think that we can definitely get to about Rs 20,000 crore.Sonia: 10 percent of your loan book comes from the two-wheeler loans that you give out as well. How are things looking over there and what kind of growth do you foresee there?A: That is again a very good business. Tough to do because of the small ticket size, again short tenure and more competition relatively because banks also do operate there but we have made our own niche, we have started from 0 in 2011, we have already significant loan book, we think that we have some unique advantages there in terms of speed that we give these loans out. It is not a rate driven market, it is a speed driven market.