As the market sentiment improves and the shock waves settle in, with more liquidity coming into the system, NBFCs see some relaxation in the system. However, 2020 is a make or break year for the NBFCs in general and “Cautiously Optimistic” suggesting how it shall be in 2020 and beyond, says Nirav Choksi, Co-Founder and Chief Executive Officer, CredAble, in conversation with Rashi Aditi Ghosh of Elets News Network (ENN).
1. Being a FinTech NBFC, CredAble is re-imagining supply chain finance. How are you ensuring this?
Through the diverse program offerings, CredAble looks to cover the entire supply chain for large enterprises. On the payable side, CredAble’s Early Payment Program (EPP) for suppliers enables vendors of large enterprise clients to access capital, eliminating the need to be creditworthy. On the receivables side, CredAble’s Distributor Financing program enables dealers/distributors of large Enterprise clients to get credit extension for Enterprise receivables. Through its Just-In-Time (JIT) financing program, CredAble has enabled pre-invoice funding to suppliers based on the occurrence of ‘billable’ events.
In its attempt to modernize supply chain financing, CredAble’s product offerings enable on-tap financing at bankable rates through a vibrant ecosystem of banks, financial institutions, capital markets and other NBFCs. Vendors, dealers/distributors get access to capital irrespective of their creditworthiness at no additional security or collateral. Furthermore, these programs are off-balance-sheet for all parties involved with no or limited recourse depending on the program. These programs are entirely digital including all documentation, verification and its e-signing process.
2. CredAble is in the process of reaching $2 billion of deal-flow across their platforms in the next 12 months. Tell us about the development of this project.
Since its first client onboarding in early 2019, CredAble now works with a dozen-odd anchors whose annual payables opportunity exceeds $5billion. Client industries include consumer goods to media to e-commerce. On the Supplier Early Payment Program, these payables are expected to flow through the platform enabling early payments. Moreover, CredAble is also working with Corporates to enable liquidity programs linked to their sales (receivables) through distributors with estimated deal volume opportunity of $1billion. CredAble has based its projections on an estimated share of the total payable and receivables opportunity which will be transacted through the platform.
3. What are your views on the ongoing liquidity crisis pertaining to the NBFC sector? What is the way forward?
2018-19 was a year of bloodshed for the NBFCs, as they were hit by a contracting supply of funds due to the IL&FS crisis, troubles began in September 2018 when major shadow bank IL&FS Group unexpectedly and shockingly defaulted, prompting a wider shock that made it hard for many companies to refinance and rollover their debt. As if that wasn’t enough and adding insult to injury, were the mutual funds choosing to not refinance loans is what was famously coined as the ‘Contagion effect in the NBFCs’. “What is noteworthy and salient is the deployment of funds by mutual funds which has turned negative and stood at -12 percent in April 2019, a survey said.
The underlying issues with liquidity for NBFCs have been systemic and endemic of sought in India’s economic landscape. Shadow banks have been an integral part of the India financial landscape in which the majority of the NBFC portfolio loans comprise of loans to the real estate sector, as well as structured or equity-backed loans to promoters of large companies, essentially industry agnostic. India’s Shadow banks lend to small merchants and property tycoons with relative ease, have to now find their way painfully back through the same alleys’, borrowers from the shadow banks have had relatively easy access to credit in the past few years as finance companies have aggressively pushed for high-yield loans to them” Moody’s said. Among the 19 largest NBFCs by assets, excluding government-owned companies, 10 have such exposures. Merely infusing NBFCs with bank funds is really skirting the core issues at hand.
One of the clear ways out would be to expand the scope of the one-time partial credit guarantee by the government. The government credit guarantee on NBFC assets or loans will be limited to 10 percent of the asset’s value and valid for two years from the purchase of the asset by the bank. The budget may have set aside 1 lakh crore to refinance high-quality assets of financially sound NBFCs, funds transfer on this count won’t be substantial in my view. This is because assets are likely to take some time to become subpar. Another precondition is NBFC’s must be AA-rated, with no asset-liability mismatches (ALM) in any of the lending categories — a difficult ask, given that even high-rated NBFCs, such as those backed by public sector banks, have some ALM mismatches in certain buckets, and hence I said earlier that certain problems are structural and chronic in nature. A lot leaves to be desired in the way some of these loans had been underwritten keeping in mind a frothy business environment, jubilation and unfounded optimism is thrown in good measure. NBFCs need to course-correct immediately and to not take moon shots of any kind to avoid getting burnt.
In the frantic pace to expand the loan book, it cannot happen at the cost of disproportionate and unsustainable NPA’s. There would be a bottom and one needs to see it, one cannot borrow short term and lend long-term for e.g., one is certain to have higher ALM’s if this continues, better sense should prevail and NBFCs need to be on Terra- Firma and for good. One can draw parallels from India’s largest private sector bank HDFC and the largest NBFCs which are reeling under NPA stress can look for inspiration on prudent underwriting from them.
The move does not address the existing skew of just a handful of NBFCs getting all the bank funds (30 out of 9,659 of them registered with the RBI account for 80 per cent of the total exposure, according to the Financial Stability Report of June 2019). This trend has worsened after the IL&FS — and now, DHFL — defaults. Banks have turned more risk-averse, along with mutual funds, insurance and commercial papers exiting the scene, NBFCs seem to have now returned to the bank window (no longer more expensive as in the pre-IL&FS debacle period), which, however, is open to just a few. 2020 will separate the Men from the Boys in the NBFC space.
While a correction will set things in order for many NBFCs and triggers of an impending consolidation in this space is looming, it would also solidify business models with more prudent underwriting and robust client acquisition taking place at the same time. As the market sentiment improves and the shock waves settle in, with more liquidity coming into the system (read a better market outlook from Q3 of next year) you will witness some easing of pain in the system. However, 2020 is a make or break year for the NBFCs in general and “Cautiously Optimistic” is how I shall be in 2020 and beyond
4. Which technologies have you deployed recently to streamline your services?
CredAble’s platforms all operate on state-of-the-art technology that is developed in-house to offer a seamless experience to its users. In addition to its client-facing platforms, CredAble has invested in several technologies on the backend that forms the backbone of the technology infrastructure and client experience. CredAble has developed a software that enables us to monitor and track trips in real-time, enabling us to fund suppliers based on deliveries of goods and service, even prior to an invoice being raised. This, combined with our proprietary Credit Assessment Model, which analyses and crunches several data points in order to assist our vendor engagement teams in setting discounting rates with suppliers, gives CredAble an edge over its competition. CredAble has also built its own LMS (Loan Management System) and is curating a LOS (Loan Origination System) and digital KYC and e-signing tools to streamline the onboarding process for our marketplace and lending businesses. Another feature that CredAble is in the process of implementing is the use of smart contracts, which hasten the entire lending process across the value chain.
5. The year 2019 has come to an end. What learning, challenges and opportunities did it bring for you?
The 2019 liquidity crisis created a massive demand for banks and capital markets to finance good credit. This boosted supply chain financing in the country which made us a direct beneficiary. Given a unique business model of being a supply chain investment bank and a risk participant in our SCF programs, we were not affected by the liquidity crisis. One of the biggest learning for us was that there is a significant insatiable appetite for financing SME/MSME credit as long as it can be de-risked on the basis of their anchor receivables. The challenges do remain on the onboarding time of large customers and scaling these programs. However, using technology effectively, we are able to scale a lot faster than traditional financing companies. With tighter regulations and increased cost of compliance, the cost of borrowing has increased and NBFCs are making their hay by focusing on niche markets and developing bespoke financial offerings.
It is imperative for NBFCs to be digitally agile and sharpen their offerings in the natively digital age. As digital transactions and capabilities proliferate it will allow NBFCs to lower their cost of operations, on customer acquisition, serving its customers or de-risking their portfolio while trying to overcome the increasing formal credit penetration in a growing economy. The new-age CFO (Most probably a millennial or a gen X’r), expects a lot of innovation. NBFCs need to revisit their traditional lending models, develop “technologically exponential” business models which will help them meet new demands in enabling credit on demand. Innovation is no single person’s prerogative.
6. What new innovations would the NBFC sector be likely to see in 2020? What are your plans?
Among the innovations expected, video KYC being approved by RBI is a good step to reduce onboarding timelines. Wide acceptance of digital signatures will help standardize our products across the market. Digitization is improving customer experience journeys. Data protection and security is a vital part of our business. Our plan is to focus on all the above aspects, leveraging technology. CredAble plans to build on our existing technology infrastructure, making it a seamless and secure experience for all our stakeholders.