Magma FinCorp Ltd is entering two new areas – housing finance and gold loans. This move to diversify comes as stress is building up in the commercial vehicles segment due to downturn in the economy. The non-banking finance company, which has a predominant presence (83 per cent) in rural and semi-urban areas, believes that these are the areas where future growth will come from.

Chief Financial Officer V. Lakshmi Narasimhan gives Business Line a heads up on the challenges facing the sector and the reasons for diversification into two new business lines.

Non-Performing Assets have become a concern in the financial sector. How is Magma coping with it?

The regulator does not require an NBFC to write-off any asset. Instead, they have guidelines for provisioning norms like the provision coverage ratio. In the 180-365 days bracket, you are required to make 10 per cent provisioning and in the 365 to 730 days bracket you require 15 per cent provisioning.

At Magma, we write off an asset, as soon as it becomes a NPA, i.e when a loan is not serviced for 180 days.

There are two reasons why we have adopted this strategy.

NBFCs do not get tax breaks on loans, they get a break only on write-offs.

The entire system wakes up to delinquencies much earlier if the triggers are identified early.

So, what strategy have you adopted for recovery?

About half of our total workforce is geared towards collection. About 3,000 agents are responsible for collecting money from our customers – 3 lakh at last count. These agents operate through call centres spread across 21 States in the country.

These call centre employees make calls to the customer five days before the due date and keep reminding the customer about their commitments. When the customer defaults, a specialised team starts talking to the customer in his/her language to understand if the default is genuine or intentional.

How do you understand if a customer default is genuine or intentional?

When we give loans, let us say, to a truck driver we know what route he is operating on. Typically, a customer makes about 2 to 3 trips in a month. So, on that basis we know what returns each trip can give. So we have a fair idea about the repayment capacity of the customer even before lending.

So, if the customer defaults then the questions are: what has changed that the customer is defaulting? Has he changed the routes? Why? If he (the customer) keeps changing routes frequently then there is a problem in the way he understands the business. In this business you do not keep changing the routes frequently.

So, in this case the default could be intentional or it could be genuine. The evidence is circumstantial. Our executives are trained to ask the customer a set of questions like these to determine the issues. Then we talk to other customers who are plying on that route to determine if there was a load problem. If there was no problem with load for other customers, then what went wrong with this customer? So, it is not one question or one conversation that determines the intention of the customer.

What are the other areas you are diversifying into?

We started giving gold loans in June. We plan to launch a home loan subsidiary in a few months.

Sachin Khandelwal, formerly head of ICICI Home Finance, has taken charge of our home loans operations. We are particularly trying to get into the affordable home loans segment where the average loan size is Rs 10-12 lakh. This will be 70 per cent of the total cost of the home.

The initial capital required for the home loan business will be Rs 50-80 crore. All of it will come from internal accruals.

Given the regulatory challenges faced by NBFCs and the different treatment given to banks for lending against gold, does gold loan business make sense?

It is a viable, profitable business in the long run. Today, the gold loan business is at about Rs 150,000 crore. Twenty-five per cent of this lending comes from the organised sector and 75 per cent comes from the unorganised sector like pawn brokers. So, there is a big opportunity in that segment.

How much will home and gold loan business contribute to your overall portfolio?

Gold loans and home loans will only contribute 3-4 per cent of the total loan book over the next three years. This is because it will be a new business for us. So, we think we should take baby steps in any new category that we are launching to understand the nuances of the business better.

Other segments will drop a tad in the next two years. Commercial Vehicles business will drop to about 26 per cent (from 32 per cent). Auto business will drop to 18 per cent. (from 28 per cent)

Where is growth for Magma coming from?

Our lending business is robust in tractors, used commercial vehicles, and construction equipments.

Notwithstanding the slowdown in auto sales in the urban centres, our auto loan growth is coming from the rural and semi-urban centres. And this is true for most of the NBFCs.

satyanarayan.iyer@thehindu.co.in

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