ValuePickr Forum

Shriram City Union - Bet on MSME Financing

its foolish to talk about scalability of a financial company…:slight_smile:

cash is like blood…ever in shortage and needed by whomsoever…it has same color for all…i get cash on loan and give the cash again on loan…u give me 10000 cr …i can give 10000 cr loan in a year with my single office…so its not about scalability…stand on the street with cash…u will get the queue…so demand is always there…loanbook can be increased to any size…so scalability is irrelevant…it is always scalable…by RULE. NO matter who runs the business…loan book can be multiplied like anything…

what restricts financial cos to grow?..it is not the market…it is the principal of trust…how much u can grow with safety…growth is a risk-adjusted concept in money lending business…

the best of companies would be those who grow at maximum rate with minimum risk…u have to draw ur maximin matrix for companies…

hence the question of scalability do not arise…be it a housing finance company/nbfc/banks etc

income. Group

)‚ÄĒ Ya Anil they do have advantages and are hungry compared to banks‚Ķ And the speed at which they dispose loans for the needy puts them on par with other institutions‚Ķ

Group is good and knows its business well but this is inherently a risky business i.e. lending money to those who lacks access to proper Fin institute. I am really surprised how they are showing consistency in low NPA for so long! Its simply amazing.

I have a part of my portfolio in the finance space and would like to hone my skills in analyzing them,there are lot of grey areas,maybe all of us could help each other in understanding them.If we were to look at the asset side to see how risky it is/whether it is risky.

The asset book is granular in nature in other words large numbers of small ticket sizes.I have seen some branches of banks getting hit because the book had a few large customers.If we look at the individual asset classes-

MSME(49%)-from the site PAN card seems to be compulsory,therfore they must be doing a CIBIL search for defaulters,referal from an existing customer(chit fund) is required,business existence for 2 years,business registration docs.This means that some amount of verification/creditworthiness of customer is done without getting into stuff like IT returns/cash flow etc which banks get into The loan has to be backed by a collateral and knowing shriram group to be conservative,iam sure they keep sufficient margins.I dont see too much a risk on this part of the loan book.I assume interest rates are around18%

Gold loan(24%)-collateral is good unless prices crash,LTV is 60%,sufficient safety.one can look at the muthoot site for interest rates,i dont see too much of divergence.interest rates go upto 24%.not much of risk.

2 wheeler loans(15%)-this could be a risky one,if the vehicle is not recoverable/damaged and residual value cannot cover the principal+interest .interest rates are high here,expect around 20%-this has risks.LTV is again i think around 60%.

3.cars-they are also into used cars,lesser risk than above.

4.Personal loans(4%)- banks also offer this often to people having lot of money,but dont require it.banks are smart,they con the guys having money in borrowing at 18-20%.Iam not sure if shriram is smart at that,however this is the riskiest,as there is no collateral and guys in dire straits must be be borrowing.interest rates could be as high as 24%.

Maybe we can conclude around 80% of the book is not risky.There is also sufficient time and expenses involved in recovering pledged assets,i believe.Maybe some other way to compare the loan books of these NBFC’s.

Good analysis above, its really comforting…:-). Assuming risk is manageable, lets focus on how it can grow:

  1. Harnessing more customers from chit fund

  2. Opening more branches all over India

#1 is plus while #2 is bit hard and it takes time to know local guys in such business hence breakeven might be longer. Plus competition is also there by local small lenders. So one should continue the journey cautiously.

SCUF has rewarded amazingly in last decade lets hope the same in next decade too.

Few questions for Anil & others,

Context:

SCUF was incorporated in 1986 as a deposit accepting NBFC. Prior to 2002, it was exclusively engaged in transport finance with special emphasis on financing pre-owned commercial vehicles to small road transport operators. In 2002 when they formed SCUF as a JV with City Union Bank the past business was mostly passed on to SHTF.

Thus all of the current segments are hardly a decade old. The earlier loan book till 2007-08 was retail heavy formed with Consumer durable and Personal loans. Post which they made a hay during gold loan boom and now shifting focus to MSME loans.In all they hardly had a stable asset mix over 10-15 years to base on.

Qs 1) Is it ok to assume prudent risk management when the management hadn’t been tested on a stable asset mix for a considerable period of time and across cycles ?

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Context:

In FY13, Securitisation/Assignment accounted for 13% of interest income, including interest on the margin money of 503 Cr.Taking proportionate figures the total AUM is ~18400 Crof which 15800 Cr is on own books and**rest on securitisation and assignment.**Company did further 600 Cr last quarter with average yield of 8.4%.

Qs 2) If the gross yields are far lower than their own,what is the incentive for company to do so ?

Context:

ALM

From the latest concall,

The average tenor of assets is now moving with a larger proportion of business loan which is a three√Ęyear to four√Ęyear monthly amortized loan and also the gold loan is also inching towards more to five to six months.So weighted average tenor is about 20 months now.

So from ALM point of view, it is what used to be about 15 months to 23, 30 months, between asset and liability it is now closer √Ę√Ę it‚Äôs √Ę√Ę the gap is rigid.

The asset is about 20 months and liability is about 23 months.

Qs 3) Coupled with higher provisioning, ALM may lead to higher borrowing cost on longer tenures specially on the bank borrowing part. Also they will soon hit debt markets again to replace soon to be maturing private part of NCD subscription.

Can the tenure adjustment for ALM be done there of, or will it lead to higher cost of borrowing in the future ?

Rudra

  1. Short tenure of business: Yes, that’s one of my concern which I highlighted in my first post. Its a concern and risk. I have not yet formed any opinion on this aspect

  2. Incentive for secularization is simple. Banks who needs to fulfill PSL norms will give better yield. NBFC can save 1% interest via this route vis-a vis bank loans.

  3. as far as I am concerned I will be happy is NBFC is conservative and maintains liability tenure higher than assets. Remember 2008-09, no one was ready to give any CASH. Shriram transport had to curtailed business because of absence of liquidity…

Please download below document to understand securtisation in detail.The document contain extract from conference call of STFC [Shriram Transport]

https://drive.google.com/file/d/0B8Mr8IuAEwz7dkU2ODBJbHVkZlU/edit?usp=sharing

Q3 results are out today. Its near flattish but by all means good in current extremely challenging environment. Need to see about loan growth and NPA data in their quarterly presentation.

SCUF Management Q&A, Jan 2014 for your perusal. We completed this in 2 separate rounds at Hyderabad and Chennai recently.

This and the SCUF Stock Story should help bring everyone on the same page. Please go through these in detail and help dissect the business closely.

What are the strengths, and where are the weaknesses? What are the vulnerabilities in its business model? Lets focus on key issues.

Aim is to equip us to do another round of finer-grained questioning.

Cheers.

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Anyone good at the technicalities of the Funding Business?

Refer this SCUF concall trasnscript of June 2012 Results. I cant seem to get a good grip on the real implications of much what analysts were asking and the answers from CFO:). I sure need help here.

Without a grip on these, I might be leaving room for blind areas!

Few points worth thinking deeper:

1). On re-reading this discussion and also going through my notes, I get a feeling management is relying more on the credit history of the customers and collateral available to it. Company does not have capability to review viability of customer business model. By insisting its a collection company and saying we are industry neutral, is company completely ignoring the risk which can arise through non-viable businesses… NOT SURE ON THIS, BUT WORTH EXPLORING AND THINKING MORE…

2). One point which is raised repeatedly in conference calls and CFO never gave quite clear answer is what is the % of their chit clients which are viable clients from total population of 4m customers. And then from this viable population how much is mined. How many branches are viable for SME [many rural branches might not get SME but only gold and 2W loans]. VERY LOW RISK, that we might overestimate the opportunity size if we go wrong on this…Lets remember, a large portion of chit clients are from bottom of the pyramid, which mostly will be service class and will need personal loans rather than SME loans.

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Some more concerns√Ę.

1). In today√Ęs conference call one question was on early foreclosures. My GUESS IS one of the reason MIGHT BE because 1/3rd of SME loans are against collateral of immovable property and with interest yield of more than 17-18%. Many of its competitors are offering loan against property at much lower interest rates 13-15%]. SCUF has no clear policy on prepayment penalty. Second point is with all segments of asset financing down except for housing and SME, there is a POSSIBLITY THAT lot of money is chasing SMEs√Ę We need to explore more on this.

2). Asset side of Balance sheet is very illiquid for loans above 10 lakhs. Here collateral is immovable property. In case of default recovery might take COUPLE OF YEARS. Ofcourse this will be a valid concern ONLY IN WORST CASE SCENERIO. To me protection in WORST CASE SCENARIO is very important, so need to think deeper on this.

3). SCUF grants loan against lien on Chit. Financially its more beneficial for customers to either withdraw chits or NOT to go for chits and use own funds to finance its business. Is company getting benefited because customers do not understand this simple maths or is there something more?

4). WHAT WILL IT DO IN NON-CHIT STATES? No collateral of chits or credit history of clients is available.

Weight-age of concerns in the same order in which they appear…[including earlier comment]

So BULLS can take over from here. I am a over pessimist guy, would be great to hear what others have to say…

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Thanks Anil. You are making us all think more:)

Re: Relying on Credit History vs Validating Customer Business Model

Absolutely. I came to similar conclusions while reviewing the process part. But wasn’t good enough on my feet while interviewing, to question this critically!

However I have different reactions:)

a) 10 lakh loans don’t require industry/business diligence. So on the CHIT model they are generally fine

b) this is an issue for growing Non-Chit model with loans upto 2cr (currently some ~10% of the MSME business)

This also needs to be seen in the context of Mr Duruvasan building/leading the CHIT model team

The externally recruited HSBC/City honchos will not have that as a handicap and the kind of teams that they are building are very different from chit model.

  1. Here the customer is a complete unknown (unlike the Chit history/reference. Just like anyone else the capability here is to process CIBIL scores, and since ticket sizes are much bigger here (25-50 lakhs is the average, 2 Cr is the max) I would guess some amount of business/working capital/cashflow diligence will be there

But again - good food for thought. This opens up another line of finer-grained product segment based questioning. Thanks.

1).

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I am not too concerned on this point.

a) From multiple data points it is pretty clear that the opportunity size is huge. The emphasis would have been entirely different had the opportunity size been questionable

b) We must realise every company has all the rights to reveal only as much as it wants about its business/models/plans/vulnerabilities. They have all the rights to consider some info as confidential/trade-secret/proprietary information which they will not detail it out to the last ‚Äút‚ÄĚ for you

Having said that I believe we have to become better as analysts - to be able to extract the most out of our interactions with Management…as much as we can…there are always ways to throw questions in a way that can get more specific responses - if considered crucial.

At the moment I don’t find this a key swinger of odds in any way.

2).

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Business model of SCUF is very different. They lend the money to MSME but who are MSME?

  1. Kiranawala near your house from where you buy some less or more fixed household grocery every month

  2. Carpenter who takes contract for your Apt from time to time

  3. Laundrywala who picks up your clothes for washing and ironing every week

and so on…

None of above has as predictable income as of salaried man but they earn pretty stable income though not every month but every year for sure. So lending lending them small ticket loan is anything but unsafe.

But here lies a catch, SCUF needs a smart and local filed-force who can do two things very successfully:

  1. smelling a good business prospect by personal visits to shops

  2. Able to recover the money

Banks don’t want to spend their energy on above so that opens up vistas for SCUF.

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I just get a feeling it is something similar to what you have pointed out and not to some sme supplying spares to ford/hyundai etc.In a sense the model could be similar to muthoot except for the collateral.There were many of these in kerala at one time,they used to take in deposits at 18-20% and lend at 24-36%,i think ,to the category mentioned above.The lender used to take regular morning walks,used to be a walk to collect the interest on a daily basis from the vendors/small time businessmen before they left for work.However many of these collapsed eventhough in most occasions there used to be a collateral in the form of gold.The interest rates were simply not sustainable.You could say scuf,muthoot maybe better versions of these but the rates still are usurious.To build an opportunity outside TN/APis a huge task and would take time to build a potential creditworthy database,but Muthoot/Mannapuram seem to have done it

To database,but

Isnt it in itself a strong moat :-), new players cant establish so easily?

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Opportunity Size: Ok let me put it differently. Lets assume that from current Chit based customers they can grow 2-3 x more from current levels. I guess by that they would have exhausted majority of the chit based customers.

So after that they need to expand in chit based states, where they will not have BENEFIT of collateral of chit funds or access to credit history of customers. Let’s fast forward 5 yrs ahead. Without having access to credit history , chit collateral and CAPABILITY to assess the customers business, how one is going to lend.

Yes opportunity size is huge, but one also needs to think what would be the credit cost [provisions + write-offs] in such a scenario. Need to question management on this more.

Agree fully they can grow from Chit states, but after that WHAT?

Read this excellent article on Gruh Finance, to understand how much its important to thoroughly evaluate the customer source and ability to generate income and not relying merely on collateral. Even when the collateral is immovable property and that too customer first home.

Some extracts:

√ĘLet√Ęs take the case of Vaishnav. His stall sells bhajjiyas and puushak. Both sell for Rs 10 and, on an average, he sells 150 puushak and 50 bhajjiyas, earning him Rs 2,000 a day. He has two workers who are paid Rs 80 a day each and he spends Rs 300 a day on ingredients, leaving him with a profit of Rs 1,540. The stall does business five days a week, generating a monthly income of about Rs 30,000 for the father-son duo.

Information like this is gathered individually for each borrower by a loan officer. Next come interviews with his neighbours, a copy of his bank statement, educational records and so on. Each file contains over a 100 pages of documentation, complete with photographs. Once this is complete, the company determines the loan.√Ę

√ĘWhat helps GRUH is its decade worth of experience in dealing with such buyers. It knows how much a taxi driver would make. So, if a taxi driver says he owns the taxi, GRUH can check prior loans to see if what he makes sounds accurate. If he doesn√Ęt own but rents the taxi, his salary is different. Different weightages are given in each case. The value of the taxi permit is also counted.√Ę √Ę I would say, Gruh is checking base rate of probability.

Standard procedure: Officers put in details of whether the person files IT returns, if he has a guarantor, if he smokes, if he has a history of family illnesses, if he has insurance and so on. Once this is recorded, the computer puts out an interest rate at which he can be lent money and no one in the company is allowed to change that rate. It was with this step that Choksey eliminated any scope to tamper with the system

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