Banking on non-banks
A non-banking finance company may be almost like a bank, but can it be remodelled into one?
Print Edition: Dec 26, 2010
Ramesh Iyer knows a thing or two about rural financing. The MD of Mahindra & Mahindra Financial Services, a non-banking finance company or NBFC that is focused on rural and semiurban India, offers some interesting insights into consumer behaviour in the hinterlands.
For instance, he reveals that more tractors are sold upcountry for non-farming purposes such as material handling, excavation and loading than for farming. That, in turn, turns the entire model of tractor financing on its head. A conventional tractor loan in small towns has a tenure of up to nine years with an option to pay instalments on an annual or half-yearly basis. But, as Iyer points out: "Construction and infrastructure activity in rural areas has changed the market dynamics."
Here is how: a person who buys a tractor for contracting purposes earns on a regular (monthly) basis. Also, this tractor will typically be replaced after three to four years. The short point: this buyer does not need a nineyear loan, and has the capability to pay on a quarterly, if not monthly, basis.
Reaching out
The shorter point: there are some financial whiz kids out there who are structuring financial products to match the changing behaviour of consumers. Those head honchos are not calling the shots from plush air-conditioned offices at the headquarters but make frequent trips to the hinterlands - Iyer, for instance, spends 8-10 days in a month out of Mumbai in small towns like Morvi and Disa in Gujarat, which he recently visited. What is more, the likes of Iyer are not bankers - not yet at least. They are senior executives at NBFCs who have helped in creating efficient business models to reach rural and semiurban consumers.
NBFCs from big business houses like Anil Ambani's Reliance Group, the Aditya Birla Group, the Bajajs and the Tatas offer a wide range of products, have huge financial muscle, a strong brand name and top quality management. In other words, they are almost banks - except that they cannot start savings accounts for customers. Now, a number of these NBFCs are hoping for regulatory approval to morph into banks.
Bankers point out that some 60 per cent of people in the top 100 cities have a savings account. That percentage is guesstimated at 33 per cent in rural areas. "There is definitely scope for more banks," reckons the CEO of a corporate-promoted NBFC on the condition of anonymity. Adds Iyer: "If at all there is room to accommodate more players in the banking space, it is definitely much beyond the big cities."
Rashesh Shah, Chairman & CEO of Edelweiss Capital, is one of the many in the long line for a banking licence. Shah's view is that competition is necessary to bring about efficiencies in the banking system and would go some way in reducing the cost of financial intermediation. He gives the example of sectors like telecom and aviation where the consumer has benefited as more players entered.
The counter, however, is that many of the newer banks have not been able to make much headway, leading to consolidation - Centurion Bank was merged into HDFC Bank and Global Trust Bank was bailed out by the government by merging it into Oriental Bank of Commerce. So, rather than new licences, one view is that what is needed is consolidation, with the smaller banks that are unable to scale up getting gobbled down by the bigger players.
More banks needed
But even if more banks are needed, the question many are asking is: Should NBFCs be allowed to convert into banks? Confused? Meet Shachindra Nath, Group CEO of Religare Enterprises , a financial services group with a presence from insurance to wealth management to asset management. Nath is pretty keen to get into banking. But? "We will not convert our existing NBFC into a bank. That is because the NBFC model is not transportable to a bank," explains Nath.
His argument is that NBFCs are more suited for businesses like infrastructure financing, lever aged buyouts and mezzanine financing. They can lend to customers but largely to the self-employed rather than the salaried. That is because the cost of their funds is high - after all, NBFCs borrow from banks as they cannot avail of low-cost deposits the way banks do. Bottom line: Nath will set up a separate entity for a bank if his firm gets a banking licence.
Clearly, the arguments for and against doling out more banking licences are plenty. Banking is all about handing the small saver's money, which some NBFCs are not strangers to. The counter to big corporates being allowed to get into banking is that their economic clout will only increase, which could be dangerous. Over to the Reserve Bank of India.
For instance, he reveals that more tractors are sold upcountry for non-farming purposes such as material handling, excavation and loading than for farming. That, in turn, turns the entire model of tractor financing on its head. A conventional tractor loan in small towns has a tenure of up to nine years with an option to pay instalments on an annual or half-yearly basis. But, as Iyer points out: "Construction and infrastructure activity in rural areas has changed the market dynamics."
Here is how: a person who buys a tractor for contracting purposes earns on a regular (monthly) basis. Also, this tractor will typically be replaced after three to four years. The short point: this buyer does not need a nineyear loan, and has the capability to pay on a quarterly, if not monthly, basis.
Reaching out
The shorter point: there are some financial whiz kids out there who are structuring financial products to match the changing behaviour of consumers. Those head honchos are not calling the shots from plush air-conditioned offices at the headquarters but make frequent trips to the hinterlands - Iyer, for instance, spends 8-10 days in a month out of Mumbai in small towns like Morvi and Disa in Gujarat, which he recently visited. What is more, the likes of Iyer are not bankers - not yet at least. They are senior executives at NBFCs who have helped in creating efficient business models to reach rural and semiurban consumers.
Bankers point out that some 60 per cent of people in the top 100 cities have a savings account. That percentage is guesstimated at 33 per cent in rural areas. "There is definitely scope for more banks," reckons the CEO of a corporate-promoted NBFC on the condition of anonymity. Adds Iyer: "If at all there is room to accommodate more players in the banking space, it is definitely much beyond the big cities."
Rashesh Shah, Chairman & CEO of Edelweiss Capital, is one of the many in the long line for a banking licence. Shah's view is that competition is necessary to bring about efficiencies in the banking system and would go some way in reducing the cost of financial intermediation. He gives the example of sectors like telecom and aviation where the consumer has benefited as more players entered.
The counter, however, is that many of the newer banks have not been able to make much headway, leading to consolidation - Centurion Bank was merged into HDFC Bank and Global Trust Bank was bailed out by the government by merging it into Oriental Bank of Commerce. So, rather than new licences, one view is that what is needed is consolidation, with the smaller banks that are unable to scale up getting gobbled down by the bigger players.
More banks needed
But even if more banks are needed, the question many are asking is: Should NBFCs be allowed to convert into banks? Confused? Meet Shachindra Nath, Group CEO of Religare Enterprises , a financial services group with a presence from insurance to wealth management to asset management. Nath is pretty keen to get into banking. But? "We will not convert our existing NBFC into a bank. That is because the NBFC model is not transportable to a bank," explains Nath.
His argument is that NBFCs are more suited for businesses like infrastructure financing, lever aged buyouts and mezzanine financing. They can lend to customers but largely to the self-employed rather than the salaried. That is because the cost of their funds is high - after all, NBFCs borrow from banks as they cannot avail of low-cost deposits the way banks do. Bottom line: Nath will set up a separate entity for a bank if his firm gets a banking licence.
Clearly, the arguments for and against doling out more banking licences are plenty. Banking is all about handing the small saver's money, which some NBFCs are not strangers to. The counter to big corporates being allowed to get into banking is that their economic clout will only increase, which could be dangerous. Over to the Reserve Bank of India.
