In November 2014, the Reserve Bank of India streamlined regulations for non-banking finance companies (NBFCs). Rules were harmonised across non-banking entities, in an effort to level the playing field between NBFCs with large asset sizes and all deposit-accepting NBFCs, and, to some extent, with banks. The revised framework, according to Amit Saxena, CEO & Wholetime Director, Karvy Financial Services, shows that the central bank sees NBFCs as important players in the financial system. In an interview to Business Line , Saxena feels that while the RBI has tried to create a level playing field between NBFCs and banks, the former should be allowed refinance facility (on the lines of what the National Housing Bank provides housing finance companies and banks) as well as cover from the Credit Guarantee Fund Trust for Micro and Small Enterprisesfor the micro and small loans they provide. Excerpts:

Will the 90-days-past-due norm prescribed for recognising non-performing assets seriously impact the NBFC sector?

First, we have three years to change over (the transition to a 90-day NPA recognition norm from 180 days). So, it is not a factor that will immediately impact NBFCs. If you see the longer-term scenario, the RBI is trying to get everyone on an even platform. Credit risk measurement has to be equal for everybody. It is like the Indian Penal Code. The law has to be the same for everybody.

I don’t really buy the argument that NBFCs deal with a set of customers who are more comfortable with a 180-day NPA recognition norm, though I would have been a beneficiary of that.

Sooner or later, it (regulation and business) has to be done on an even platform. Then let the market decide.

If I am in a segment which has, say, customers with cash flow mismatches and the 90-day norm is going to go high (prove to be tight), so be it. Then the yields will go high, the premiums will go high. My risk measurement and management will have to be different.

It is like saying that Apple produces iPhones and Micromax produces another kind of phone but the cost of plastic should be different. Why should it?

If one player is serving one segment and somebody else is serving another segment, they both have their different factors to contend with but the base level has to be the same, which is risk.

What is your reading of the revised regulatory framework for NBFCs?

At least NBFCs are now being seen by the RBI as very important players in the overall financial system.

Two years back, there was a perception that NBFCs are some sort of second-class citizens and some people said it is shadow banking. However, there is no truth to this.

The RBI is trying to get the regulatory scene structured in an appropriate manner. This will benefit the good NBFCs a lot.

The ones that don’t really have a business model (those who are just trying to basically build a balance sheet or have a regulatory arbitrage), those NBFCs will see some negatives.

Do NBFCs have an edge over banks when it comes to making loans to micro and small enterprises?

Every industry has to be structured on customer segments. The one-size-fits-all approach will not help. Our public sector and private sector banks are universal banks. You can’t have a bank branch focusing on giving ₹1,000 crore corporate loans and also hoping to do a ₹5-lakh loan. This is where the NBFC sector comes in. These firms have been lending to truck operators, small businesses, corporates and so on.

We lend to micro and small enterprises only against property/ gold/ commercial vehicles. About 90 per cent of our loan book comprises such loans. And of the 90 per cent, about 75 per cent are business loans against property. Our teams just go out into the field to get in touch with the owners of retail and medical shops, small manufacturing units, wholesalers and distributors, who may be looking for funds to overcome working capital mismatches. In the micro business loan category, our average loan ticket size is ₹15 lakh; and the average ticket size for small business loans is ₹1 crore. We don’t go beyond ₹2-3 crore.

Our branches interact with each customer. Sometimes, we offer credit education, impressing upon the borrowers that if they don’t pay their instalments on time, they are going to have problems with the credit information bureaus. With this kind of on-ground presence and relationship, we have done fairly well in terms of profitability and return on investment.

What is the average ticket size of your loans?

The average ticket size of our gold loans is about ₹1 lakh; small CV loan (average ticket size: ₹5 lakh); micro business loans against property (₹15 lakh); and small business loans (₹1 crore). As at September-end, our loan portfolio was at ₹2,100 crore. Last year (2013-14), we grew our loan book by only ₹166 crore because markets were bad and we faced currency volatility. All kind of crises were happening. This year, so far (up to September-end), we have grown from ₹1,666 crore to ₹2,100 crore. That is already 30 per cent growth. So, hopefully, by the end of the current financial year, we may be able to meet the ₹2,400-crore loan book target.

Are you planning to tap new lines of business?

We don’t want to complicate our life with multiple products. And in the last 4-5 years, we have seen that the markets have not been exactly great. So, we want to keep our business model simple and straight. Now, once we are there (achieve the ₹2,400-crore loan book target), we may look at low-cost housing finance and segments like that.

We may look at providing car and consumer goods loans after some time. We are contemplating a low-cost housing finance product within the NBFC fold. But we do not see ourselves becoming a multi-spectrum kind of a company. We would like to keep our business model simple, focused and differentiated.

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