Posted in Finance Articles, Total Reads: 1972
, Published on 01 January 2015
India is an agrarian country, with majority of the population living in semi-urban or rural areas, the population figure stands at 68.8%(census of India 2011), that is 83.3 million. People in this region, are mostly farmers, tractor holders, suppliers, etc. Their major source of income comes from farming, agriculture, supplying water tankers, sand, among others.
As banks increased their credits towards borrowers from 2008 to 2012, prices of commodities increased. While there was slower economy growth during the same period due to crisis in the world economics, India was able to survive the impact. But this high inflation and slow growth, led to less disposable income for the common people especially in the rural and semi-urban regions. People in the semi-urban and rural India due to lower disposable incomes could not afford to operate at these levels. They needed loans to increase their profitability and funding, on tractors, equipments, SUVs, agricultural products such as pesticides, fertilizers, et cetera.
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NPA(Non-performing assets) for banks are currently up from 3.6% in 2012 to 5% in 2014 while it was just 2.3% in 2009. This created a “big” worry for the banks at the current scenario. Also, if we look at the international banks’ scenario in NPA, India stands at 3.5%, while Japan at 2.4% and South East Asia at 2.2%. Only US is at 4% which is the highest. The major causes are bad lending practises, overburdened court system and political pressure to lend, majorly in infrastructure projects, many of them get stuck in issues such as environmental clearances, court clearances etc. Public and private sector banks contribute about 95+% in these assets.
Now, banks have put major emphasis on the KYC documentation. This requires Identity and Address proofs with proper due diligence. For example, HDFC Bank does not let go of the recovery amount, when in one incident, for recovering Rs.200 from a village personal, the officers went to recover it, even though it cost them Rs.100. Other Foreign Banks have shown very little interest in recovering the money from borrowers and thus, shy away from lending to Indian borrowers as they consider the fraud rate to be higher here.
People with vision, planning but with low income and low assets, now found it difficult to procure loans from national and state banks as they impose conditions on borrowers such as high income levels, security such as land assets, etc. Also granting loans by banks have seen frustrating experience for the borrowers. Rural and semi-urban residents desperately need tractors for farming. During FY’12 to FY’14 commercial vehicles sales have seen a decline while tractor sales during the same period saw very marginal decline in sales.
NBFC on the other hand, are not banks, therefore cannot accept deposits, but still are covered under Regulations. They offer services like credit facilities, supporting investments in property, trading money market instruments, private education funding, savings, money transfers, underwrite stocks and shares, mutual fund, wealth management, retirement planning, advise companies in mergers and acquisitions, deposits through Debt Investments, discounting services, etc. Total bank loan to agriculture and equipments have seen rise from 9.3% to 21.3%, while in the food industry have seen a decline from 28% to 10.4% with total loan being Rs. 60,505 crore.
Mahindra Finance, one of the big players, has invested around Rs.24000 crore in FY’14, a rise of around 20% from previous investment of Rs.19000 crore. Other players are SREI BNP Paribas which will invest Rs. 500 crore in the future, Shriram Transport which looking forward towards Utility Vehicles, Tractors, etc. investing Rs.5000 crore. “Kisan Bandhu” scheme by Larsen&Toubro is looking forward in road construction field in compliance with Pradhan Mantri Gram Sadak Yojana(PMGSY). Magma FinCorp,which has presence in 70% of the semi-urban and rural regions is also looking forward to Tractor, SMEs, and used commercial vehicle space. “Bandhan” by Micro-finance Institute will lend in Rs.50000 slots towards borrowers.
The major drive for NBFC has come from high margins of 15-25% in agricultural equipments, and farming. This also is in line with competition from local money lenders (suthkhoors) who offer exorbitant interest rates, around 40%. Fewer competition and unorganized rural market existed in the market, resulting in higher interest rates imposed by the lenders in this sector.
With Modi’s vision, as conveyed in his Independence Speech at Red Fort, strong farmers on the inside and Soldiers at the front, shows future vision for India with major concentration on infrastructure, especially Road and Electricity. Modal for new smart semi-urban and rural towns will lead to higher profits for already established NBFCs. He also have pointed, farmers are not getting enough loans from nationalized banks. Land condition, water irrigation, scientific processes and equipments used for farming needs to be improved for increasing the efficiency. Average farmer in the current market need huge loan amount to compete with others.
The 12th Five Year Plan, have included provisions for Urban Amenities in Rural Areas(PURA), Rural Housing, National Rural Livelihood Mission(NRLM), will provide services in areas such as water supply, sewage, village roads, solid waste management, skill development, economic activities in various rural parts of India, with add-on integrated rural hubs, village linked tourism, educational and training institutes, thus building, schools, hospitals, health centres, marine processing, telecom, electricity among others. Rashtriya Krishi Vikas Yojna, Bharat Nirman, Integrated Water shed management, Swarnjayanti Gram Swarozgar Yojna, are some of the pilot projects that will be implemented in the future. This will help in empowering the rural and semi-urban regions, but will require a time frame of more than two-three years with a decade to be fully implemented.
NBFCs have developed small business in rural India through local presence and strong customer relationships. Usually the loan officers in such NBFC’s know the end customer or have a strong ‘informal’ understanding of the credibility of the borrower and are able to structure their loans appropriately. Local borrowers, many a times don’t have the proper documentation of assets and income details, and thus, get rejected for loans by national and state banks. NBFCs hold trust on the borrower’s prospects of vision, plan of achieving higher profitability with the loan amount. With NBFCs, rural borrowers can fulfil their dreams, of procuring tractors for cultivation, farming equipments, agriculture and land needs, etc. NBFCs also build loyalty with customer by providing them emergency loans, in cases such as medical emergencies, marriages, child birth, natural calamities, etc.
Overall, at the current market scenario, farmers need more borrowing to increase the productivity of their output and buy equipments. Residents at rural and semi-urban regions in India, are witnessing relief by borrowing through NBFCs and not through local money lenders. With huge margin, NBFCs, on the other hand, are enjoying the market share and profits in this sector. They provide a profitable alternative, thus making a win-win situation.
This article has been authored by Anshul Agrawal from International Management Institute