You do have a high presence in rural segment and the sector itself. Are you seeing the cash flows among rural customers shaping up well?
Most definitely. First of all, there is good news from the monsoon gods. The sowing patterns have been good. The kharif crop has been good. Rabi is also quite good. No doubt, the mandi prices are a little below the support prices but the various state governments have taken quick corrective actions including timely loan waivers and improvement in rural infra, higher spending in MGNREGA and maintaining rural roads.
It is all leading to not only cash flows but very good positive sentiments in the rural market which is seen in growth in various products like tractors, two wheelers etc. Most importantly, proof of the pudding is in eating. Till December, our portfolio has been showing improvement in sales as well as NPA and even early bucket collections. It indicates that cash flows in rural areas are improving and the sentiments are very good.
When you say the rural business is improving, can you quantify for us what was the status exactly a year ago and what is the status this year? The recovery has been visible for the last couple of years now, but can you quantify it for us and give me some example as to where in rural you are witnessing recovery?
Two years back, tractor industry was showing single digit growth. This year, the very conservatively tractor industry has grown by about 18%. FY19 is expected to be another good year for the industry. The two-wheeler industry, especially motor cycles which are used in the rural areas where it has grown by 15% and which was very close to zero two years back.
On collection trends, I cannot give precise numbers, given that our results are due but till December, our rural NPAs continuously trended down. We expect the same trend to continue not only in March but in the future also. That is not only NPAs but early bucket collections are also improving.
It is not the only factor for improving conditions in the rural market. It is also a factor of the lending done in the rural market. The way good lending can be done in the rural market is changing. The data availability in rural India is changing and from very rough and ready models, factors like monsoon is good and you lend more. If monsoon is bad, then you lend less. But now it is changing to very data-based, algorithm-based lending which overall will improve growth as well as portfolio trends in the rural India.
How is the MFI book looking? Two-wheeler and tractor finance did increase in Q3. Are the growth drivers intact in these segments given the strong correlation to the rural economy?
Most certainly. Growth drivers in rural India are quite simple if the farmer is in good health. If the farmer is reasonably out of his debt cycle or debt trap, if the crop is good and realisation of the crop is good, rural India will be good. These are simple folks who do not understand finance. They are always willing to repay debt, but for them it becomes a question of ability. So, very clearly, the growth factors are completely intact.
We expect both tractor and two-wheeler industry to continue to do well. As far as micro loans are concerned, it is not so much a question of demand. The demand is always there but unfortunately even today, financial inclusion is limited.
It is a matter of how lenders change from lending more and more to the same customer to going deeper, spreading more, finding new customers who have not over borrowed and lend there. If you lend there, your credit quality will always remain good hence the importance of data analytics importance of digital cannot be ignored.
We have to move away from the traditional methods of just forming the group and lending to them. Today the India stack data is available, based on which, good KYC can be done, good borrower identification can be done. There are a lot of credit bureau data compulsorily available now, based on a very good regulation brought out by the Reserve Bank. Using this, any lender can see what is the borrowing level of a customer and find newer and newer customers, achieve proper and real financial inclusion and keep your portfolio safe.
Your portfolio will be as good as you are and the care that you take in expansion. But the scope of expansion is surely there.
Analysts have been highlighting higher borrowing cost for NBFCs and we are seeking banks hiking interest rates. Do you see higher cost of funds as a cause of concern for margins?
First let me talk about the positives in the economy. The central government borrowings have come out lesser than what was expected. There are benign prints on inflation. We definitely believe that this has led to certain softening of interest rates. They are definitely below what they were in October-November.
Having said that, if you look at FY19 as a whole, interest rates are expected to be definitely higher than FY18. There is no question about that. Now what will be the effect on NBFCs? I believe this will separate the men from the boys. Good quality NBFCs, the AAA ones, the AA plus ones are the NBFCs which manage their ALMs well and most importantly NBFCs with good positions in their lending markets. Hence, they have higher ability to pass on the interest hikes.
Last but not the least, NBFCs with good fee percentage which is not dependent on the interest rate cycles will do better than the others. In good time, everybody does well. When the interest rates go up, it separates the men from the boys and we are quite okay with that.
What is the share of retail business? I understand it has grown from 26% to 30% now. What is the management strategy here in terms of retail growth and which segments are you targeting given the high level of competition as well in the same space?
Though we are increasing share of retail, it is not going away from wholesale or anything like that. Two years back, when we started our turnaround plan, wholesale was 62% of the balance sheet and that was excessive for any business and naturally that had to be reduced and the share of rural and housing both had to be increased.
The wholesale share today is 56%, down from 62% a year back. We expect this trend to continue. The concentration will be on rural and on retail housing as we grow our this retail portfolio. Not only that, the trends in these sectors are favouring this but more importantly our investment in digital and data analytics, in branch network, in our relationships with manufacturers and most importantly in improving customer service and turnaround time is helping us continuously gain market share in each of these segments.
It has called the retailisation of our balance sheet and may be, it is that. More importantly, we are getting the balance sheet to reflect all the three segments — wholesale, housing and rural.