Three segments that became big in the last 10 years were microfinance, gold loans and personal loans with 12-18 percent interest rates. Two segments that could see explosive growth over the next 10 years is personal loans with 20-30 percent interest rates and micro-LAPs (loans against property) which is a business loan with a ticket size of Rs 3-10 lakh, according to Digant Haria, founder, Green Edge Wealth, who has been tracking the financial services sector for the last 14 years.
He said that Paytm and Navi Finserv were building their presence in the small personal loan segment, while Equitas, Five Star Finance and SBFC Finance were doing a lot of work in the micro LAP segment.
“These companies go to small Kirana shops, small business people, either in big or small cities, having a small house or shop. They tell them: if you mortgage this house or this shop, we can give you Rs 3-4 lakh rupee of loan against that. This is a segment that banks and most NBFCs have not touched,” Haria told Moneycontrol in a long conversation on the NBFC space.
That’s because, for NBFCs, the average LAP ticket size is around Rs 22 lakh, he said.
“Micro LAP is a different segment altogether because once you go to the periphery of the city or slums in big cities, or if you go to tier three tier four towns, the land titles are not clear. So banks don’t want to lend against properties they cannot easily repossess or sell. Some NBFCs are right now developing a model that involves higher risks, but they try and mitigate those risks through better collections, through moral pressure on the customers.
This is a segment that right now has around Rs 50,000 crore of outstanding loans but has tremendous scope for growth. So Aptus Finance has a small book which they lend at 22 percent but it is secured by a property at the other end. You will see one or two big winners emerging in this segment as well,” he said.
Personal loans
Haria said Investors, regulators, and analysts in general are wary of personal loans because there is no security to that loan and no clarity on the end use of that money. But this segment is only expected to get even bigger in the days ahead, he felt.
“But since the establishment of credit bureaus in 2008, lenders now have a lot of credit history available about the borrower. Previously, banks were giving personal loans only to prime customers, the top two crore families with monthly income over Rs 60,000. In 2012, Bajaj Finance decided that it is not only these two crore people that are creditworthy, and started looking at someone with a monthly income of Rs 40,000. They developed a model, experimented with it, and today that segment is a two lakh crore (rupees) market.,” Haria said.
“Today, many fintechs are giving personal loans to people with salaries less than Rs 50,000 a month (adjusted for inflation a similar ticket size or even smaller than what Bajaj Finance had entered in 20212). Navi Finserv, Paytm and EarlySalary have done some good work in this space, and they charge customers 20-30 percent on these loans.
On the face of it, these loans look risky, but they are small ticket-size loans—Rs 50,000-1 lakh with a one-year repayment. That works out to a repayment of Rs 300-350 per day which is a small amount if you were to consider even the unorganised class. I see this segment becoming very big in the next 5-10 years. The companies that will emerge winners are the ones that are well capitalised, have a good collection process and algorithms that are quick to detect frauds,” he said.
Spotting winners in NBFC
Haria said the most valued NBFC companies were those which started off as monoline companies (with single product offerings) and went on to become multi-product companies.
“A Bajaj Finance or a Chola have already become 30 and 40 times bigger in the last 10 years. Chola was just a vehicle finance company in 2010. Bajaj Finance was mostly into capital financing of Bajaj vehicles; that was the origin of Bajaj Finance.
After that, it took a lot of data from there and started doing personal loans, and business loans. Once its borrowing costs came down because of its size, it started doing home loans. So, if you look at the journey of Bajaj Finance, the maximum money was not made when it was monoline, nor was it made in the last two years when it was a proper multiproduct company. Actually, the maximum money was made between 2012 to 2019,” Haria said.
His advice to investors looking to spot potential winners in the NBFC space is to look at managements that are trying to transform from monoline to multiproduct NBFCs.
“Shriram Finance is trying to do that, someone like L&T Finance has a good chance at doing that, Muthoot Finance is really trying hard to diversify outside gold finance. If they are successful, a lot of money will be made not just from earnings growth but also from a re-rating,” he said.
Keep an eye on..
Haria says having identified a company that was looking to grow into a multiproduct NBFC, investors should closely track the strategy for the new products as well as the progress in them.
“Let's consider a scenario where a company with a dominant share in truck finance ventures into personal loans. In such a case, I'd like to understand their approach to personal loans. Will they extend these loans to the same customers they serve with truck loans, or are they looking to establish an entirely new team and target a different customer base?,” he said.
Haria said that in lending, it was easy to build a large loan book, but a company can succeed only if it is able to recover the money it has loaned out.
“Around 80 percent of the loans will come back without too much trouble, is the last 20 percent for which you to design an entire system of how to charge the customer and collect the money back. For example, Bajaj Finance has 20,000 people on the street whose job is to collect the money. That's how intense the collection efforts are,” he said.
Haria said rapid efforts at expansion often backfire. “You can never expand completely outside your domain, you have to slowly go towards the adjacent areas, and build them up. Companies report the performance of each segment so it is easy to know the progress. If the results releases don’t have it, you can check the post-earnings analyst call transcripts, where they are likely to be asked about the performance of the new segments.
Reliance Jio factor
According to Haria, Jio Financial Services, the latest entrant to the NBFC space was unlikely to try and disrupt the sector, because the dynamics are much different from that in an industry like telecom or retail.
“A combination of the digital plus physical model is what really works. Jio has a lot of digital advantages to start with. But they have yet to build a strong physical presence. If you give out loans based on the digital advantage alone, it could lead to a lot of NPAs. The MD of Jio Financial (Hitesh Kumar Sethia) has a lot of experience in consumer lending in the developed markets. I don’t think the idea would be splurge money, but rather to do it slowly and profitably,” Haria said.
According to Haria there is enough room for even new players to reach a good level of profitability given the large profit pool.
“The sector is a profit pool of around three and a half lakh crores (rupees). I don't think a lot of sectors have a market cap which is three lakh crores. Anyone who has the patience to put up good processes set up good teams and has a good borrowing cost advantage will emerge a winner.,” he said.
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