SME Times News Bureau | 04 Jan, 2019
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.
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.
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
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
Please tell us about future plans of
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.
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.