Vault matters: Generalist or a specialist - lenders’ dilemma 

microfinance

Doctors and lawyers go through this dilemma a lot – should they be doing everything or should they opt for something more focused. About twenty years ago, a general physician was not a hot commodity like as thoracic surgeon or a cardiac specialist. A lawyer specialising in civil matters may be more sought after than a generalist. Today that’s gradually changing whether in the field of law or medicine. People want a holistic view on health and legal matters. What about in the world of finance?

Until five years ago, there wasn’t much of clamour of a lender who was spread across segments. Such a lender was often called as a being all over the place. From a business perspective these lenders were seen offering nothing unique, and for investors, being a jack of all trades didn’t justify the investment thesis.

Even post Covid, specialist lenders were more sought after as their ability to wade through asset quality issues were seen better than those who offered every product in the spectrum. But things have changed just recently.

Generalist Lenders on the Rise

Many gold loan lenders want to move on from being purely retail focused to SME-focused. Microfinance lenders want to diversify out of MFI loans to the extent (25% of loan book) possible. Those in affordable housing are increasing the share of loan against property as much as possible (40% of total assets as per National Housing Board’s qualifying assets definition) to mitigate the risks from mortgages.

This trend has been prevalent often at least the last 12-18 months where some pockets such as affordable housing, MFI and even gold loan started revealing initial signs of pressure. With heightened regulatory action on these segments, the thrust to de-focus from the core product offerings has gathered momentum. What’s also noteworthy here is the changing investor preference. Buyers now seem more in favour of picking up assets which are diversified rather than companies focus on monolithic lines.

The Future of Lending 

Clearly, the current trend is in favour of a generalist over a specialist. The question is whether this is a sustainable trend. Inorganic activities in the financial services space is yet to gather momentum. While a few banks and large NBFCs have some pockets which are empty, at the moment, they aren’t filling the white spaces, primarily owing to trouble in each of these pockets. The sense in the financial services space right now is that isolated pockets of affordable housing, microfinance and the gold loan markets are heated, or even overheated depending on the benchmark for evaluation.

Under such scenario focusing on just one line of business may further increase the potential portfolio risks. Also, effort on the part of most lenders, whether a specialist or a generalist seems to be to ring fence the customer and be his/her one point stop for all financial needs especially on the lending side. With the approach to lending taking a different dimension, the demand for generalists may increase at least in the next 2-3 years. Whether from a fund raiser perspective or an operational advantage, specialists may find the near-term business environment difficult to meander. Who said being a jack of all trades isn’t good enough!