Non-banking finance companies (NBFC) continue to witness an uptrend in growth, especially on the back of higher retail credit offtake and regulatory changes. This year will be pivotal for NBFCs as they navigate the aftermath of demonetisation and impact of GST on businesses and customers, says Thomas George Muthoot , managing director, Muthoot Capital Services Ltd. (MCSL). Edited excerpts of an interview:
What is driving NBFCs’ growth?
The two-wheeler industry has grown phenomenally over the past few years and recent surveys clearly show that every third home in India has a two-wheeler.
Last year, India was the leading two-wheeler economy globally with 17.7 million vehicles sold at an average of 48,000 units daily. The scooter segment has seen strong pick-up with both the rural markets as well as the export front booming. Till about February, 2018 of this year, growth was at more than 20% for the economy segment. Society of Indian Automobile Manufacturers (SIAM) data shows that the domestic two-wheeler industry grew 13.6% till February again. In two-wheeler segment, scooters remain the segment to watch out for as a large base of customers are expected to migrate to premium models over time. Such strong growth in the primary segment of our presence has helped drive these results and will continue to do so.
How do you see credit demand shaping up?
According to CRISIL, the share of non-banks in the credit pie is expected to increase by 300 basis points in three years.
Credit penetration in India is low as compared to other economies. On similar benchmarks, the non-bank finance penetration in India is even lower. With economic growth gathering pace, it is safe to assume that NBFCs will grow even faster. From a credit demand perspective, we expect an uptick in demand driven by improvement in macro-indicators and prediction of normal monsoons this year. The improvement in physical infrastructure along the rural belt (construction of roads etc.), and much higher Union Budget allocations, will definitely improve cash flows. Rising rural consumer confidence and moderate inflation are catalysts for credit demand growth.
From an on-going perspective, the NBFC segment in India continues to see an up-trend in growth and performance, especially on the back of retail credit off-take and recent regulatory changes that culminated around recognition of NPAs. This year will be a pivotal year for this industry as it navigates the aftermath of demonetization and the impact of GST on businesses and customers. With underlying business growth expected in key segments like auto, housing finance etc, the industry is likely to be on a growth trajectory. While NBFCs would continue to do well in their traditional stronghold of retail finance, according to industry analysts, they are seen growing fastest in the wholesale finance segment as well, which would provide a trigger to their overall credit growth. Like I said, Vehicle finance has seen an up-trend on the back of robust auto sales, especially around rebound in the 2 wheeler segment that has seen steady demand emerge from buoyant rural demand, on the back of strong monsoon and increased investments in rural infrastructure, roads and improved industrial activity. This year too, Monsoon is projected to be normal-to-good.
Overall economic indicators as well as sentiments are on a robust up-tick and we see steady positive demand over the next few quarters that will see credit demand across most categories.
You seem to have cracked rural penetration...
India is a smorgasbord of multiple markets, each with its cultural and social milieu. However, the opportunities for unification are around the Indian mindset of seeking value. For us our bottom-of-pyramid focus is a larger mission of delivering affordable financial services to support the common man through his life cycle needs. Our products are therefore targeted to help address her or his evolving needs through the years.
Especially from a rural or the marginalised section, there are specific requirements around products that help drive immediate liquidity, that provide customers the means to achieve immediate goals. So whether it is about an emergency situation or a planned vehicle financing, the group offers a full suite of products to help him fulfil his needs.
From an MCSL standpoint, we have created products that service specific needs, we are now looking at leveraging technology to deliver a better experience, including the best TAT, data driven insights on consumer profiles, looking at new emerging needs like vehicle upgrade opportunities. It is important to understand the existential circumstances of the consumers to be able to deliver a better overall experience. In addition, Muthoot Fincorp Ltd, is having presence across the country with 3,600 branches with an average walk-in of 75,000 to one lakh customers per day and a “One Muthoot Experience”, are added advantages.
Importantly, the organised market of two-wheeler segment in India is estimated to be ₹6,000-7,000 crore. So, a huge space for the two wheeler finance companies. Previously there was a limited awareness about availability of two wheeler loans in the rural areas but now the demand for those areas are picking up.
Are rural consumption trends showing an uptick?
The rural economy has seen steady growth over the last year or so due to good monsoon, consequent crop yield and the huge government focus and impetus to drive rural demand, through steady investments in rural infrastructure and connectivity.
Another key factor driving increased rural consumption is penetration of technology and increased awareness around emerging livelihood opportunities. Further key segment trends like scooterisation, driven primarily by mobility uptake amongst women, increased urbanization and convenience and easy ownership of a scooter are some key factors driving rural economic up-tick. Further the government’s focus on catalyzing rural growth and demand through greater emphasis on subsidies, welfare schemes and boosting farmers’ income are all steps in the positive direction for the rural economy to strengthen and further grow rural consumer demand. Upliftment in rural economy has direct positive impact on two-wheeler industry helping, in turn, NBFCs focussed on that market.
What has been your product strategy for the rural segment specifically? How are you planning to build on that?
At MCSL, we have had a long-standing presence in this category, focused on catering to the requirements of borrowers in rural and semi-urban areas majorly, with an aim to democratise two-wheeler financing for the bottom-of-pyramid customers. The company has so far disbursed more than 12 lakh loans since starting the two-wheeler financing activity in 2008 in a focused manner.
We now realise that the next upgrade will be the 4 wheeler passenger vehicle segment, and thus we have just announced the launch of our used car financing program targeted towards this audience segment.
We believe India is a microcosm of many regional markets, and our ground-to-the-ear-strategy, has helped us create products that directly satisfy and suit the evolving needs of the audience segment.
How do you tackle cyclical fluctuations?
The two-wheeler industry has seen a turnaround in the last few years after muted growth in the past. Strong economic fundamentals and rising consumer demands will continue to see buoyant credit offtake. For a multi-brand and multi-business portfolio, the ability to hedge risks, having expanded market presence, helps the business weather cyclical peaks and troughs.
The cyclical fluctuations largely revolved around vagaries of nature. We don’t see any specific cyclical fluctuation related risks this time around.
Given your exposure to the two-wheeler segment, what are some of the strong trends that you are witnessing?
The automobile industry in India is world’s fourth largest, with the country currently being the world's seventh largest commercial vehicle manufacturer. 25 million automobiles produced in FY17 and this will grow in the coming years, total production volume grew at a CAGR of 5.56% between FY12-17. Scooters now account for 33.7% of the entire market with motorbikes at 62.1%.
We are seeing increased consumption and credit consciousness emerging within our consumer class. We are seeing strong growth projections for the two-wheeler industry, the steady y-o-y growth, increased affluence and affordability are all driving greater mobility within the nation. Especially from a two-wheeler sector standpoint, the high end premium bikes are seeing good traction and demand, which is reflected in the launches and entry of global brands in these segments. At the same time, the scooter segment has had faster growth run on the back of multi-usage, urbanisation, greater mobility aspirations and overall driving ease and mileage capabilities. Technology innovation within these categories have also led to greater adoption and usage. Further strong rural demand on the back of an uptrend in rural economic activities have fuelled two-wheeler sales. We remain optimistic about the sector outlook.
Two wheeler – predominantly- is not a lifestyle product. For the working class and more so, for the low-end trading/business class, its an essential, integral and critical product. Only some metros / top-cities have credible public transport. Geographies are large and public transport almost non-existent. In rural areas particularly, distances to cover, for anything and everything, are large with almost zilch public transport. We have huge population and even after being such a necessity, penetration is low. The glass is much more than half empty and so opportunity is massive.
At the same time, finance penetration from the organised retail finance, in two-wheeler purchase is also far less than a third of total purchase of two-wheelers. There’s massive opportunity to grow for organised retail finance to grow, as well. Consumers are also getting more aware. Given various governmental, NGOs-led and other initiatives, consumers are now beginning to shun the tendency to look at getting out of the shackles of neighbourhood money-lenders and looking at safe and secure and – now – easy and convenient organised retail finance options.
All factors together, it indeed a growth market; indeed, a rapid growth market.
Which parts of India are driving your growth?
South continues to be our strong bastion. Our efforts to diversify business across geographies are showing results. North and east have contributed well in terms of overall growth. We have an ambitious plan charted this year for west. Moreover, having made tremendous efforts in technology, physical boundaries are gradually becoming less relevant.
