U GRO Capital | An Overview
The Indian SME Lending Market A large yet untapped market opportunity 2
Despite Near-Term Headwinds, the Indian Economy is Anchored by Political Stability and Long-Term Structural Reforms Investors Still Bullish On Long Term Growth Consumer Confidence Improving Signaling Sustained Growth Despite Near-Term Prospects Spending Growth Revival Challenges Real GDP Growth Rate Consumer Confidence Perception FDI Net Inflows ($ B) 75 Current 1-Year 64.4 8.2% 50 8.0% 7.4% 7.2% 25 6.8% 0 61.0 5.9% 5.0% -25 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 ▪ Real Private Final Consumption Expenditure ( PFCE ) will FY18 FY19 FY15 FY16 FY17 FY18 FY19 FY20F FY21F increase from 5.5% in 2019-20 to 7.0% in 2020-21 Unprecedented Structural And Political Stability The NBFC Liquidity Crunch is Transitional in Facilitating Long Term Reforms Nature ▪ First government with an outright majority since 1984 ▪ Corporate Insolvency Resolution Process yielded ▪ Current liquidity crunch an outcome of idiosyncratic resolution of 94 cases with total claims settlement of governance issues in certain NBFCs ▪ Geopolitical stability has been maintained despite $24.2B as of March 2019 ▪ Subsequent slowdown in the auto, SME segments re- sporadic flare-ups | India has moved to 4th on the Asia- ▪ India’s new 15% tax rate (down from 35%) on new Pacific Power Index emphasizes the critical role played by NBFCs manufacturers is the lowest amongst its peers, and ▪ Inflation (3.3% YoY rising to 4.0% by Sep ‘ 20) and the ▪ Intervention from the Central Gov/RBI very likely – will drive growth for manufacturing-based SMEs fiscal deficit are well under control Increasing bank exposure limits, classification of credit ▪ PSU Banks have been consolidated for operational ▪ India jumped from 77 th to 63 rd in the World Bank’s ease- for on-lending to SMEs up to $28.5K as PSL efficiencies, coupled with a $7.8B capital infusion to ▪ The RBI has instituted a Partial Guarantee Scheme for of-doing-business index, the third year in a row that India reinvigorate the financial sector has been among the top 10 improvers in rank NBFCs, with $5.6B sanctioned and $1.4B already disbursed The broader economy and the NBFC sector expected are expected to normalize in 2020 3
India Represents a Large, Significantly Underpenetrated Credit Market However, the credit to GDP ratio is still Significant government impetus for the One of the largest and fastest growing much lower than other markets growth of credit economies in the world Total credit to non-financial GDP PPP – $ T, Real GDP Growth ▪ corporations as a % of GDP Grant of universal banking, payment banking and 25.1 small finance banking licenses 160.0% 20.2 ▪ Focus on financial inclusion – Jan Dhan Yojana 1 , 99.9% 10.3 73.6% Pradhan Mantri Awas Yojana 2 54.3% 49.1% 44.8% 5.5 4.2 4.0 ▪ India Stack – Cashless, Paperless, Presence-less ▪ Credit guarantee scheme for MSMEs China US India Japan Germany Russia China US India Japan Germany Russia 6.1% 2.1% 5.0% 1.9% 0.6% 1.7% Leading to high credit growth in the country led by the NBFC sector Total credit to the private non-financial sector ($ B) Credit Growth Rate (%) 21.2 18.8 17.9 The overall lending market in India 16.6 385.7 15.6 14.6 338.6 297.1 is expected to grow at 10-11% with 254.3 212.9 178.6 14.1 13.9 NBFCs growing at 15-17% over the 154.3 10.9 10.0 9.0 8.2 next 5 years FY14 FY15 FY16 FY17 FY18 FY19E FY20P FY13 FY14 FY15 FY16 FY17 FY18 Bank NBFC ~$1T lending opportunity over the next 5-6 years | Significant head-room for many more banks and NBFCs to emerge ! Source: IMF, BIS 1 Jan Dhan Yojna: A govt initiative to ensure that every individual has a bank account; 2 A govt initiative to ensure housing for all by incentivizing low cost housing and providing access to credit; 3 set of APIs that allows businesses, startups to utilize an unique digital Infrastructure to solve India’s hard problems towards presence -less, paperless, and cashless service delivery (Aadhar, eKYC, Unified Payments Interface) 4
NBFCs Have Certain Structural Advantages and Disadvantages Vis-à- vis Banks… ▪ 100 % foreign ownership permitted ▪ Ability to be nimble – lesser restrictions on branches, allowed businesses ▪ No obligation to lend to “priority” sectors or open branches in rural areas ▪ No requirement to maintain Cash Reserves/Statutory Liquidity Still very regulated – NBFC-ND SI 1 as regulated as a bank ▪ ▪ Cannot offer liability products ▪ Higher capital adequacy ratios ▪ Higher cost of funding NBFCs have over the years proved themselves to be nimbler and more specialized than traditional banks 1 NBFC-NDSI are non- deposit taking NBFCs having total assets of greater than ₹ 500 Cr; which are classified as systemically import ant by the Reserve Bank of India 5
...Resulting in Significantly Higher Value Creation by NBFCs 5-year Annual Share Price Growth Rate ROE (FY19) 5-year AUM Growth (FY14-19) 21% 19% 18% 17% 9% 16% 18% 15% 33% NBFCs 1% 22% 17% 3% 16% 15% Mean: 23% Mean: 19% Mean: 13% 20% 18% 5% 25% 27% 3% 38% 22% 47% 19% 14% 11% 6% -23% -13% -6% -51% -14% 3% 2% -7% 34% 7% -2% Banks 13% 28% 14% 8% 17% 9% Mean: 15% Mean: -1% Mean: 3% 3% 12% 7% 14% 0% 4% 23% 12% 18% 21% 17% 16% -60% -40% -20% 0% 20% 40% -20% 0% 20% 40% 60% 6
The NBFC Lending Market Can Be Broadly Divided Into Three Segments - • Constrained credit growth - • Structural issues Corporate, - • Higher NPA Infra, - • Low rating and leverage Real Estate - • Long term sustainable ROE is challenged - • Muted equity value creation. Scalable business with attractive returns Low gestation period + • Healthy credit growth - • Current players are limited by credit availability, SME lower assessment ability & distribution reach. • Pricing advantage & structural support available . + • Favorable demographics + • Increasing income + + • Increasing debt appetite Consumer - • Faced with heavy price competition - • Needs strong capital base and a long gestation period Public Sector Banks Private Banks NBFCs ▪ ¾ of total credit ▪ Increasing NPA ▪ Diversified geographical ▪ Limited by high NPA ▪ Limited Geo. reach presence ▪ Low CAAR (Basel-III) ▪ Limited assessment ▪ Higher assessment Current Scenario Future Projection ▪ High levels of ability as compared to a ability ▪ Limited by cost of funds bureaucracy/ NBFC interference and capital investment 7
Small Business Lending Isn’t a Small Business 50 M MSMEs in India US$300 B | SME Credit Gap Potential Addressable Credit Gap: 560 B Gross Value Add (US$) ₹ 21.3 T growing at 7%+ per annum ₹ T 0.7 2.9 29% 45.0 Contribution to India’s GDP 23.7 20.1 10% MSMEs with access to credit Banks NBFCs Other Total Formal Total institutions Supply Addressable Demand Bridging the $300B gap will need $60- 70B in incremental equity capital | Growth isn’t a challenge for small business financiers! 8
Traditional Lenders remain unfocused on SMEs due to Business Model Diversity Challenges in lending to the SME segment… ? Difficult to understand Fragmented set of High cost of customer High dependence on Lack of businesses/cash flows customers acquisition the ecosystem data Traditional Lenders continue to find mid market and large corporate more rewarding – not necessarily true!! …leading to a Frustrating Borrowing Experience for Small Businesses Time consuming Non-tailored credit Rigid collateral Product mismatch offline process assessment requirements 9
Specialized SME Lenders are Better Positioned to Bridge the SME Credit Gap… Specialized SME Lenders Traditional NBFCs Banks Customized products based on the nature of business, non-financial Loans against property, supply Loans against property, supply Product parameters, end use, payment chain financing, unsecured loans chain financing capacity/ frequency of underlying customer Omnichannel Distribution Branch/DSA led Branch/DSA led Ecosystem based lending Sector specific approach, One size fits all One size fits all Credit Appraisal Cash Flow Based Collateral/Bureau score Collateral/Bureau score Automated Review Turn-Around Time 4-5 days 15-20 days 30-45 days Combining traditional and non- traditional sources. Use of Financial Statements, P&L Project Reports. Projected Documentation information available in public and Account, Balance Sheets, Bank financials, Bank Statements. private domains. Digital document Statements submission 10
…a Trend Previously Witnessed in Consumer Finance Specialists vs. Generalists | A comparison of value creation by select NBFCs over a 5-year period Stock returns scaled to 100 511 351 333 139 68 10 08/14 08/15 08/16 08/17 08/18 08/19 Reliance Cap L&T Finance Magma Fincorp Cholamandalam Muthoot Manappuram Specialized AUM Growth 3% 20% 9% 18% 12% 13% NBFCS 22% NA 18% 13% 21% 19% ROE On an average, specialized NBFCs have created long-term value for shareholders | These companies have leveraged their deep knowledge of their segments to generate faster AUM growth/better ROEs as compared to generalist NBFCs AUM CAGR between FY14-19; ROE for FY19 11
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