NBFCs

A gold mine in India

Let s start first with business model of NBFCs. Banks lends money where they see s
afety i.e. salaried class or with people having sound paperwork/collateral. This
practice leaves out entire rural population and those poor households too who l
ive in urban areas. These poor chaps due to lack of proper collaterals and incom
e records [most of them don t bank] are devoid of debt opportunities from bank. Th
is is where NBFC comes in picture.
NBFCs predominantly cater to above described working class. Their business model
is least sexy. They employ the people who are remain grounded and knows local p
eople s financial dynamics well. Credit appraisals/disbursals and recoveries are d
riven by these simple folks who keep close track of such poor households. This i
s where they differentiate themselves from Banks.
Off late RBI is started listening to woes of such poor working classes. RBI mand
ates the banks to make sure that approx. 25% lending to this segment for financi
al inclusion. Now banks find it hard to operate in hinterland hence they lend th
e money to cooperative Soc. or to NBFCs. So an established payer with suitable c
redential finds it easier to get access to Banks loans which can be disbursed to
SME/MSME segment at higher rates. Needless to say NBFCs loans are typically sma
ll tickets and it s mainly for working capital requirements or for building houses
etc. Govt. looks keen to establish policies to friendly for such lending for ex
ample, HFCs who lent predominantly into remote areas gets priority treatment for
capital from NHB money. NHB lends the money to such players like GRUH, REPCO, C
AN FIN etc. at lower rates.
Now assuming that India lives in villages and we have a sufficient size of labor
class who can be safely lent a small ticket loans. Following are key benefits:
1) NBFC employs are local folks who are simple graduates but knows local dynamic
s well. This ensures employee cost is lower.
2) Credit appraisals, disbursals and collection is also the responsibility of lo
cal team and it their performance is linked to success of all of it.
3) Small ticket size and above process ensures NPAs are well under check
Opportunity size in this segment is huge and we have just started. Sound profita
bility of small ticket lenders like GRUH, REPCO, SCUF, Shriram Transport, Sundar
am etc. is a glaring example of this opportunity. Needless to say we have just s
tarted this journey and NBFCs have a large role to play in Indian financial syst
em. I envision India getting super rich in next decade due to role played by NBF
Cs and which in turn allows small business owners to get access to capital and o
ne day grow enough to become eligible for Bank loans. In this process, a lot of
employments are being generated and may lead to systemic wealth creation for Ind
ia!
Disclosure Invested in GRUH,REPCO & SCUF