I am trying to answer few macro questions raised…
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Moat: IMHO, no company starts a business with a large Moat … They can have an aim, a direction towards what types of Moat they are looking for and if strategy and operation are correct, Moat gets developed over the year and gets deeper and wider with scale, attracting quality talent, operational finetuning and huge negotiation power. Not every Moat is same. For a NBFC, a Moat can be one or many among the following… i) deep knowledge of a specific geography and / or specific domains of MSME operation like textile, handicrafts, crop market, light machining and many other similar things; ii) access to wide variety of customer origination points and a very entrenched relationship with banks, mutual funds, consumer durable, two wheeler makers iii) extremely efficient and fast credit appraisal and “red flag” mechanism; etc…
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Banks can have cheaper access to capital but not cheaper access to customer. In US, consumer credit is mostly NBFC based. And banks credit appraisal mechanism is very asset heavy compared to NBFC which is more cash flow heavy. In Indian context, biggest part of population / Micro enterprise is not creditworthy for a bank for lack of formal income documents and its assured predictability … An NBFC can profitably help this segment to come out from the clutches of “money sharks”.
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The historical default rate of small customers are substantially better than that of large borrowers. Wilful default is rare and concentrated in some geographic locations as per my interaction with NBFC, Cooperative Banks and general bankers. I am told, 180 days of loan classification gives enough headroom to NBFC to recover forced defaulters. And since ticket size and tenure is small, liquidation event in MSME is low but comparatively higher in LCV / CV segment.
Coming to Capital First … I am just at preliminary stage of review. Their application to disbursal ratio is 30%; LTV ranges between 60% - 65% and spread is 6%. None of these shows a very aggressive level of exposure.
Its correct that GPA / NPA develops over time and with size of the loan book… so reading too much in low NPA would be premature.
Real test of good NBFC starts when it scales up… Magma Fincorp faltered while scaling up. In India we have many stories of how companies went belly up while trying to scale mindlessly.
And yes, as I mentioned in my earlier post too that a very aggressive management is negative for NBFC in my opinion.
Lastly, I don’t allocate more than 10% of portfolio in NBFC as a sector. If one is running a small portfolio or just beginning to invest on his own, I would advise to shun the sector altogether. There are many simple, understandable, scalable and compounding type businesses available elsewhere.
Disc. I am not invested in Capital First but have exposure in Magma, SCUF and Bajaj Fin.