In 2020, I definitely see more of tech-automation being adopted by Non-Banking Financial Companies (NBFCs). Processes across functions will get more technology-oriented or digitised leading for consistency & being much more cost-efficient going forward, says Sachin Pillai, CEO, Hinduja Leyland Finance, in conversation with Elets News Network (ENN).
You have been a part of Hinduja Leyland Finance for around eight years. What major innovations did you come across on these years?
One major aspect has been the data explosion and availability of a huge amount of data with increasing internet access and explosion in mobile phone usage. From a lenders perspective a normal underwriting program will involve analysis of customer data with regard to KYC, demographic, socioeconomic status, financial background etc. Given the enhanced credit penetration witnessed in our country, almost all lending institutions are having a data mine of customers added to that the ability to analyse credit behaviour over the tenor of the loans. With advanced application of AI and ML the approach to foresee customer requirements, provide customize solutions and improve overall customer experience has gone through a huge transformation.
In the recent past, we have seen the emergence of various platforms (loosely categorised as fin-techs) having capabilities to extract information from various central databases viz Aadhar, Registrar of Companies, IT department taxpayers, Credit Bureau customers, EPF active subscribers, LPG connections, E-commerce registered users, etc. Well equipped with cutting edge technology-aided backend algorithms these entities have been able to rewrite the way lending business has been happening in this country in terms of philosophy, strategy and execution. The beauty is most of it happens with minimal human interaction for customer data.
What challenges, pertaining to the NBFC sector, did you witness in 2019?
The primary challenge the NBFC segment faced in the aftermath of IL&FS meltdown has been on the liquidity side. NBFCs having a presence in asset categories which were not to the liking of banks from a refinance perspective had a tough time. Hitherto these assets were refinanced largely by capital market debt instruments, wherein short term commercial papers dominated. Post the IL&FS crisis, avenues to refinance through capital market debt instruments vanished overnight.
On the backdrop of these events, we did see the entire NBFC model being looked as flawed and therefore lending from banks and other institutions came at a cost. In the past few quarters while the regulator has eased rates, for the NBFC segment we have seen the cost of funds going up or at best remaining flat.
The emergence of other names joining in the bandwagon after IL&FS has not helped the cause at all. We feel the perception of NBFCs as “shadow banking” entities, will remain for sometime till the time we see a resolution of this challenged NBFCs. The effects are felt both in domestic as well overseas investor appetite to consider the exposure in NBFC papers.
Our focus remains in the vehicle finance space, wherein almost our entire book gets categorised under Priority Sector Lending/Direct Agri classification – we did see enhanced interest by banks to buy our portfolios. We are focussing at leading to our ability and managing liquidity better than many others in the industry. We have witnessed a growth of 20 percent in topline and bottom-line during this period. Our NPAs have remained flat at 2.80 percent reflecting fairly stable asset quality. However, it will be incorrect to say we remain unaffected, as we did witness a marginal increase in the cost of funds during the same period.
The other point which I don’t reckon as a challenge has been the transition to IND-AS accounting during the course of the year. It is worth a mention as NBFCs are now required to have their accounts drawn out as per prudential norms as well as IND-AS. In the absence of any directive, few standards are open to interpretations and which leads to a lack of consistency in terms of adoption of the new accounting standards at an industry level.
What measures have you taken to deal with the liquidity crisis surrounding the NBFC sector?
From a liability perspective, certain measures we have been following since inception helped us to navigate through this period better.
Given our business model wherein all our customer repayments happen monthly and our liability servicing is either quarterly/ half-yearly/annum basis, we always have been positive across all-time buckets in our ALM profile.
Average tenor of our assets is in the range of 3-4 years and it matches off with the tenor of our liabilities as well. Commercial papers were only 5 -6 percent of our total outstanding liabilities. Further, we always ensure our commercial paper outstanding are marked against the drawing power of our working capital lines which ensures enough liquidity and strengthens our cash position.
As mentioned above, since all our assets get classified as PSL/Direct Agri – banks appetite to buy our portfolio remains stable. This ensures a consistent flow of liquidity augmenting our ability to grow as per plan.
In this period, our reliance on bank loans has gone up as compared to capital market debt instruments. In our bank borrowings, securitisation/assignment has taken a lead over term loans.
What tech-trends do you project for the sector in 2020?
We do see more of tech automation being adopted by NBFCs in this year. Processes across functions will get more tech-oriented or digitised leading for consistency and being much more cost-efficient going forward.
We do see the rapid adoption of mobile/ digital-based applications by both the lending institutions and customers. With the increase in transaction processing, the digital route will result in enhanced cost efficiency for lending institutions and superior customer experience along with consistency in delivery.
Traditional touch base business models will get transformed into more of tech and digital-based execution models. The pace of change may wary across customer segments in line with the speed of technology adoption, however, sooner than later we may witness a total transformation from touch base to tech base execution across all retail asset categories, customer segment and geographies.
Would you like to tell us about your vision 2020?
Our vision is to have the largest wallet share of customers in the vehicle financing space and emerge as the most cost-efficient asset manager in the country.
In line with the vision, we are currently mapping the entire vehicle finance customer ecosystem to identify all the needs of our customers. The idea is to map the customer needs to our capabilities and the gaps identified to either build or acquire capabilities to ensure we have maximum wallet share penetration of our customers for their financing needs.
Financing here is not restricted to extending loans, it covers providing savings, investment and protection solutions. We are also working on initiatives to facilitate vehicle finance customers transform their business in this digital age, help them become more efficient and in the process gain from the advantage of aggregation – as there is a huge opportunity out there on account of the arbitrage available at present.
We have been good on the cost side as far as the costs of operations are concerned. While we have a presence in 1550 locations across the country, we have also been able to manage our costs at reasonable levels which get reflected in our cost to income ratios being the lowest in the industry now. Going forward as we digitize our processes further, we do expect further efficiencies and with the growth further economies of scale will help us staying lean on this front as well.