In an exclusive interview with SME Times, Harshvardhan Chamria, Chief Strategy Officer of Magma Fincorp, a Mumbai-based non-banking financial company, said that with bad loans rising for corporates, the private sector banks focus shifted to financing small and medium and enterprises.

Excerpts of the interview …

Please tell us about Magma Fincorp and its entrepreneurial journey.

Harshvardhan Chamria: Magma Fincorp (Magma), a Mumbai-based non-banking financial company started our journey extending unsecured loans to SMEs in Kolkata in 1988. We built out consumer durable loans business in East and North India and then added car loans. Grew inorganically by acquiring Consortium Finance in 2001 which helped us grow our presence in North and West India. We were able to kick off the CV loans biz through this acquisition. We acquired Shrachi Finance in 2006, kicked off our used vehicle finance biz. We then embarked into the tractor space and launched thetTractor finance biz in 2008. Formally launched our SME business by the end of 2008. Started General Insurance business, a JV with HDI Gerling of Europe in 2010. Finally acquired a home finance license through the acquisition of GE Capital's Home Loan Company.

What types of assistance do you provide to SMEs?

Harshvardhan Chamria: We provide unsecured term loans to larger SME’s, and secured term loans to smaller MSME’s. We focus on providing loans upto INR 2 cr in the unsecured SME loan segment, although 96% of our portfolio is sub-INR 50 lacs. The Average Loan Size is between INR 19-20 lacs. Since we focus on MSME’s in the secured loan segment, 80% of our portfolio is sub-INR 25 lacs. The Average Loan Size is INR 12-14 lacs.

What according to you is the ongoing credit scenario in the industry, particularly SMEs?

Harshvardhan Chamria: Traditionally SME's have been funded by PSU banks, which controls over 70% of the market share. However with bad loans rising for corporates, the private sector banks focus shifted to financing SME’s. This was further supported through several government schemes/sops: CGTMSE, MUDRA, NSIC schemes, etc. Additionally, there was a huge spurt in emerging FinTech companies focusing on MSME funding.

In the last 6-12 months however there have been 3 trends which have squeezed credit to this sector.

a) Several PSU banks have come under the PCA (Prompt Corrective Action), b) Rising bad debts in several large private sector banks, c) Liquidity squeeze causing the entire NBFC sector to clamp down on incremental funding. Thus resulting in a credit squeeze to the sector, and existing limits are also not being enhanced. Moreover, the temporary Overdraft facilities have reduced.On the other hand, credit demand from the SME sector has been inching up under the GST regime due to the slow but sure formalization of the economy. With reported turnover rising, the reported working capital gap is growing, and thus there is a need to introduce capital formally into the balance sheets.

We would like to know you view on the current conflict over RBI and Centre over MSME loan availability.

Harshvardhan Chamria: The RBI and central government are conflicted over several issues, including RBI Reserves utilization, setting up independent payment regulator, RBI board composition etc. The conflict included two issues that impacted MSME loan availability – the liquidity window and relaxation of PCA norms.

My views on these two conflicts are: 1) Liquidity: the crisis began withIL&FS defultand was further exacerbated by a mutual fund taking loss on the CP (commercial paper) sale of a large housing finance company. All NBFC’s large and small, old and new, are being subjected to the same treatment due to the panic that has set in. I expect the government and RBI to come to an agreement on a pragmatic solution which provides a breather to the NBFC sector, which has traditionally been one of the safest sectors for the banks to lend to. 2) Relaxation of PCA norms: Stopping business altogether isnt the best solution to solving a bad debt problem, as it leads to major operational and confidence issues. Possibly, the RBI could agree on a path forward with the bank’s management, and if the stricter operating input metrics are being adhered to then by allowing the banks to start lending will also speed up their recovery.

Is credit availability the only reason behind lack of credit, or it has something to with a faulty delivery mechanism?

Harshvardhan Chamria: Credit availability is certainly not the only reason contributing to the huge funding gap in the MSME sector. Retail credit delivery has always been saddled with a problem of high operational expenses. The high opex makes it difficult for finance companies to cater to MSME’s profitably. The delivery mechanism to MSME’s has certain issues. Lets start with customer acquisition, due to lack of formal data and customer history or earning track record, screening a customer takes a higher degree of sophistication. For data collection- most SMEs are farmers, store owners, dairy business of rearing animals, thus the absence of paper work or applicable proofs and the lender needs to rely on surrogate proofs like mandi receipts etc which proves to be a hurdle. For Underwriting – the process which is based on hard data relies on unstructured data and thus is unable to use digital modes of processing, field investigation plays a larger role. As far as the agreement and disbursals go, digital agreements in most instances are ruled out given that local courts have lower awareness and physical documents are time consuming and costly. Lastly for collections, the hurdle being the lack of an active bank account and a large portion of transactions in the segment that take place in cash.

What is the gap and how NBFCs can fill this gap?

Harshvardhan Chamria: International Finance Corporation (IFC) estimatesa finance gap of US$ 230 billion, since the potential demand for India's MSME finance is about US$ 370 billion as against the current credit supply of US$ 139 billion, resulting in gap equivalent to 11 per cent of GDP in comparison to a finance gap of US$ 5.2 trillion (19 per cent of GDP) for the group of developing countries (IFC, 2017a; 2017b). NBFCs help address this gap since 97% of MSMEs operate in the informal sector. Challenges faced by MSMEs in accessing finance are due to lack of comprehensive formal documentation relating to accounts, income and business transactions. As a result, loans are provided to the MSMEs by NBFCs mainly through appraisal of their collaterals and assessing their true business potentials.

Please tell us about future plans of Magma Fincorp.

Harshvardhan Chamria: Magma has three lines of finance businesses. Asset Finance, SME Loans, and Housing finance, each has their own growth plans; here we will focus on the prospects of the SME business. During FY19 we target to grow disbursals by 25-30% over FY18 at a Magma group level, and over 35% for the SME business. In SME unsecured loans, we disbursed over INR 1300cr in FY18 and in FY19 we will propel growth in this business by over 30%. In the MSME secured loans biz, we disbursed aroundINR 400 cr in FY18, and in FY19 we will maintain our growth track record.Currently the large cities contribute over 50% of the disbursal, and every year we are increasing contribution of the upcountry businesses, to focus on semi-urban and rural customers. We have betting on our newly setup innovation cell to take Magma to the next level of growth. The innovation cell will be focused on 3 main areas namely, new product development, data analytics, and process reengineering. a) The backbone of new product development will be digital and technology. We will drive lending across the gamut of businesses with a focus on SME by going digital. The informal segment is getting finalized post the introduction of GST and digital data availability is rising all this will aid digital payments and processing in an immense way going forward. Magma will partner with Fintechs who are importing data APIs, namely data fromMCA, ROC, GST returns etc. b) Data analytics from the 30+ years of being in business will help us capture and utilize information of past and present customer thus helping us build a credit score card which will help in straight through processing (STP). c) Finally on the process reengineering front we are working with India Stack which is a set of APIs which uses a unique digital infrastructure and help us move towards a presence-less, paperless, and cashless service delivery.