NBFCs target micro, small companies to grow business

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Mumbai: Non-banking finance companies (NBFCs) are increasingly lending to micro and small enterprises as greater intent to repay, short-term loan requirements, lower ticket size and a focused approach make lending to them a more lucrative business option than medium enterprises with diversified businesses.

As they sharpen their focus on smaller loans catering to the requirements of these companies, NBFCs also expect their average ticket size to fall.

While NBFCs like Edelweiss Retail Finance Ltd, Dewan Housing Finance Corp. Ltd (DHFL) and India Infoline Finance Ltd (IIFL) have started lending to micro and small enterprises in the last 18-24 months, Reliance Commercial Finance will enter this space this month with smaller loans starting at Rs2 lakh.

Edelweiss and IIFL have started offering loans as low as Rs3 lakh, even as most of them target an average loan ticket size of Rs10-15 lakh for their overall micro small and medium enterprise portfolio (MSME), as against Rs25-50 lakh a couple of years back— indicating the scale is skewed in favour of micro and small enterprises.

Mint spoke to at least 10 NBFCs for the story.

Edelweiss, which entered the segment a year ago, expects to scale up its branches catering to micro and small firms.

“We currently have 25 branches catering to the SMEs and the total number will go up to 150 by the end of the current fiscal year,” said Anil Kothuri, president and head of Edelweiss Retail Finance.

Although many of the micro and small businesses may not have audited balance sheets or adequate collateral to offer, the razor-sharp focus of their businesses is making them attractive.

“The delinquencies are less and creditworthiness is impressive. Given their single focus, they deploy all the profits into the same business as it is their only source of earning. Our 70-80% loans are under Rs15 lakh,” said G.L. Kumar, head for MSME, healthcare finance and personal loans at India Infoline Finance.

Kumar and Kothuri of IIFL and Edelweiss respectively, said that as NBFCs start expanding in the underserved micro and small enterprises sector, the ticket size is bound to come down.

Mahindra and Mahindra Financial Services Ltd, another NBFC, is planning to tap micro and small enterprises in food and agri-processing.

“The size of the sector (food and agri-processing) alone can provide us with a healthy book size. Our loan tenures are typically in the range of 3-5 years.” said Ramesh Iyer, vice-chairman and managing director (MD), Mahindra Finance.

Even though such enterprises are more vulnerable to cyclical changes, lower ticket sizes and shorter tenures make lending to them attractive.

“NBFCs charge a premium for these loans to mitigate risks and even in a scenario where a couple of accounts go bad, the impact on profitability will be minimal due to low ticket size. Clearly, the yields are higher and if good quality loans are underwritten in this segment, profitability of these NBFCs will increase,” said Krishnan Sitaraman, senior director (financial sector and structured finance ratings) at Crisil Ratings.

According to him, it is a logical step for most NBFCs as they have gained experience with bigger SMEs and are now testing waters in the smaller segment as well.

While large NBFCs with a strong presence across India may find it easy to scale up their micro and small enterprise portfolio, they believe operational efficiency will be the key challenge.

“Many of these firms do not have an impeccable balance sheet and financial ratios may not be very healthy. Even secured lending is not the traditional secured lending that we see. The opex (operating expenses) is also high. Hence, efficiency becomes crucial. The goods and services tax (GST) will be helping in understanding this segment better,” said Devang Mody, executive director and chief executive (CEO) at Reliance Money.

As more micro and small firms become formalized with the implementation of GST and digitization, it gets easier to understand their credit behaviour. Sitaraman of Crisil said that credit demand for SMEs in India is estimated at around Rs30 trillion, of which only half is met by banks and NBFCs.

“The micro and small SME segment has opened up vast business opportunities as these businesses are small and their growth potential is big,” said Harshil Mehta, joint MD and CEO of DHFL, adding that his company expects its micro and small enterprises loan book to grow at 50%.

Some NBFCs, however, are taking a cautious approach as a large number of such loans are unsecured. For instance, Bajaj Finance is not actively looking at niche businesses as the risks are high.

Rajeev Jain, MD of Bajaj Finance, however said that with the stabilizing of GST and the economy picking up, the firm is “well prepared for growth opportunities”.