Low operating expense, high yields to help NBFCs' grow their rural books

Some of the top rural-focused non-banking financial companies (NBFCs) have each grown their branch and sales network significantly over the past two years. Having specifically built innovative and low-cost business models that are driven by a technology platform and low operating expenses, analysts say the room for growth is wide-open. 

Table-I illustrates how NBFCs have grown to reach out to consumers Tier-III (plus) towns and villages over the past three years. For example, based on financial reports and presentations, Shriram Transport Finance Company (STFC) has increased the number of rural centres by 8.9 per cent to 930 at the end of December 2017.

Similarly, Bajaj Finance Limited (BFL) increased their urban outlet network by 40.3 per cent to 529 stores, at the end of December 2017 and added around 191 stores in rural locations between March 2016 and December 2017.

Karthik Srinivasan, senior vice president of ratings agency Icra says “NBFCs are expanding beyond the Tier-I cities and the spreads that they get in those regions are higher, as they are using a combination of both: physical presence in terms of setting up branches and technology to reach out to borrowers.”

Krishnan Sitaraman, senior director at CRISIL, the credit rating agency, says that the operational architecture to actually build such a business depends on the kind of the business.

NBFCS “are not opening up high-cost branches, even in metros they are opening smaller branches. Underwriting is getting more and more template-based; they are using a hub and spoke model for regional credit officers. So to that extent, the incremental cost for new branches is definitely lower than what it was a couple of years back,” said Srinivasan.

NBFCs essentially first identify a ‘hub’, a regional branch well-connected to nearby villages, which is a relatively large office with the requisite staff that is responsible for seeking customers, selling products and maintaining the firm’s collection efficiencies.

Alternatively, NBFCs set up small kiosks, or a small office in a specific geography, which are connected to the main branch, or they contract Direct Selling Agents (DSAs), who are licensed sell the NBFCs product to customers in a specific region.

Srinivasan says that NBFCs need to see a decent amount of volumes being transacted at a particular location/region or a mini-branch, and only then do they scale-up. “Till that time these companies use the hub and spoke model or have a plan set up with minimal infrastructure and people to keep the operating expenditure (Op-ex) down,” he said.

Post the initial investment stage, in order for NBFCs to scale-up their physical presence, the business needs to be profitable.

“One needs to look at the yields in this business,” says Sitaraman, “If you subtract the borrowing cost of the NBFC, as well as the operating expense ratio and the credit cost, in case of non-performing assets and provisioning, from the yields, it needs to be positive.”

In the past, most lenders (NBFCs or otherwise) had a physical, face to face model, but now the ‘hub and spoke’ model gives better control to the NBFCs over their credit risk control and operational risk control, say, analysts.

Additionally, other than ‘hub and spoke’ and DSA model, NBFCs are also heavily focused on pushing their sales and services through a mobile-application based model, which is low-cost, high-yields with enhanced abilities for lenders to monitor and analyse borrowers’ behaviour.

“Public sector banks have branches across the country but most of the focus of branch managers would be on looking at deposit-mobilisation in rural areas, as the credit-focused branches are mainly in urban areas. What we see is that some PSBs and private banks are engaging with NBFCs, so the NBFC originates the loan while the bank(s) purchases the portfolio,” says Sitaraman.

NBFCs are taking the advantage of the liabilities side of banks, while banks take advantage of the asset side of NBFCs’ balance sheet, Sitaraman told Business Standard.

For NBFCs, there is a lot of potentials given the underpenetrated market, and since they are able to better satisfy the borrower whether it is because they have local knowledge, domain expertise, can provide tailor-made services and or that they are more flexible, there is huge scope for future business prospects, say analysts.

The information for SFTC and BFL in Table-II notes their respective rural-Assets under Management due to the paucity of comparable information, while total rural disbursement data has been produced for the five other NBFCs.

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