The banking and finance sector is in the midst of a storm. And the storm is not limited to the funding crisis or its access to Non-Banking Finance Companies (NBFCs), the storm is much more and beyond. It is encompassing a lot of activities that NBFCs traditionally went through, says P Sridharan, Executive Director, Sriram Transport Finance Company Limited during 7th NBFC100 Tech Summit in Chennai.
The market funds starved and it’s not just the NBFCs, businessmen today are fund staved. The requirements are manifold, the market is tight; normally the market responds by providing credit within the system. If funding from organised institutions is not very aggressive the market finds its way to operate on credit mechanisms and that also has its limitations. Once that gets saturated, the market really finds it difficult to turn its wheels. When businesses are fund starved, it might look that there is a fantastic opportunity for the financiers. Businesses are lacking in working capital finance, which means a fantastic opportunity for financiers.
However, the situation is such that people are delaying payments to their vendors. People are satisfying customers at the cost of their own vendors. Bill Payments which used to get cleared earlier in 15 to 40 days, are now taking as long as 60 to 120 days or more. Vendors are bearing the working capital shortage. The principals, the load originators, people who give the goods for transportation or staff transporters, are delaying payments for their own vendors, thereby passing on their working capital requirements to their vendors.
There is an opportunity for funding but NBFCs too are going through a funding crisis. NBFCs also don’t have the luxury of looking at an aggressive growth, funding this working capital requirement. But is this an opportunity let gone or a blessing in disguise?
Looking at the capital expenditure part, everyone is talking about the Bharat Stage 6 (BS6) rollout in coming April. There is a lot of talk about new technology vehicles, and we hope that the Supreme Court (SC) will not allow any extensions in its implementation. At the outset, we all understand that the cost of vehicles or any asset complying with these pollution norms will go up. It could be in the range of 10-15 percent. Now, what does this translate to higher cost, assets? It will translate to higher lending requirements by NBFCs, more funds required. Now, the viability of these vehicles may not really shoot-up, the freight rates may not really increase, which means either the tenures of these loans should be longer and longer; higher funding and longer tenures are going to be a reality very soon.
Micro, Small, and Medium Enterprises (MSMEs), now what’s the situation there? We wanted to foray into SME lending and when we were doing our market researches, we identified that in small trade, there was a huge volume of business which was happening off books. There was an on-book business and an off-book business. Banks generally fund the on-the-book requirements. Off-the-book trade was funded by unorganised funding or funding through other sources, maybe relatives, private finance, NBFCs, that was an opportunity.
Now, where is this opportunity going? FinTechs are moving in, the entire GST data is throwing open what small and medium businesses are doing. Books are getting built, data is getting recorded, FinTechs have a play, dashboards giving beautiful reports, making things simplified, telling us all the + and – of business is coming about.
With Goods and Services Tax (GST), combined with demonetisation, people doing business off records were slowly turning into on-the-books. People cannot convert the whole thing into on record overnight, they’ll have to do it gradually, which means there was a good opportunity for NBFCs to step in, recognise the off-book lending and aid them in converting they’re off-book to on-the-books by giving financial support. How is this situation evolving? GST data getting more and more digitised, throwing open transparency, e-KYC making things simplified, IT records getting digitised, the credit scores are already in place.
FinTech’s, is getting all this data through customer authorisation, are able to bring out beautiful dashboards, make things very simple to analyse the business and cash flows; and at present the opportunities to fund, whether it is capital expenditure in that business or whether it is working capital expenditure, financing that is required, is becoming very easy.
Banks who are much more equipped, much lesser cost funding will be able to take over. Anything that is easy, process-oriented, the bigger boys would take over. Things would become all the more difficult in the medium term, long term for NBFCs and others. Low-cost funding will be the only differentiator. When things are so easy to assess and fund.
Now, are FinTechs becoming an alternative for business processes, or do we look at it as a support for traditional business processes? Mechanism of collections is always easy. You have many options and FinTechs make it very-very easy with mobile phones in your hands.
Support from financiers is key for businesses to survive difficult periods. Traditional banking provided solutions to businesses beyond finance. They made partnerships, they made mergers, they found customers, suppliers and better deals for businesses supported businesses wholesomely but today finance is restricted to very very narrow concepts and surprisingly I don’t know whether the FinTechs will like it really but FinTechs are aiding in making things easier, simpler and more plain. Don’t look at partnerships, just look at financials and funds. Things are becoming easy which means things are going to be difficult, bigger players will take over.
Trust-based lending, trust in all these factors. When somebody goes through difficulties, rather than just looking at credit scores, looking at track records, looking at GST data and funding may end up in a situation where somebody will able to raise funds continuously, systematically, will continue to have good credentials. Jet Airways was able to borrow continuously and repay continuously and kept borrowing until one day. Now that sort of a plain vanilla funding would have its own consequences.