Jugal Kataria, Group Controller at Satin Creditcare Network Lmited talks about lending to small and medium businesses, their underwriting strategy, collection efficiencies and the road ahead. Edited Excerpts:
Q. How is Satin Creditcare lending to small and micro businesses, how do you underwrite these loans?
Satin Creditcare is offering MSME loans to its existing microfinance borrowers and also to new borrowers through its wholly owned subsidiary named Satin Finserv Limited (SFL). SFL was incorporated in August 2018 and got license from RBI to start the business in January 2019.
SFL provides secured loans to such MSME and has a robust mechanism of client sourcing, credit appraisal, operations process, technology, internal audit and professional and experienced team in place to serve these clients. Most of the business is sourced through in-house teams. The Company has a well-established process of evaluating these proposals including assessing the repayment ability of the borrower based on which the final credit decision is taken. SFL is using non-financial data to create a scorecard which helps in appraising customers from the informal segment. We also see increasing use of technology in our processes right from the sourcing point to the on boarding and approval process.
SFL has 1,429 clients with AUM of Rs. 127 crores as at 31.12.2020. The Company has an independent credit rating of CARE BBB-(Stable). The average ticket size is ~ Rs. 4 Lacs.
Q. How has the business been so far since the onset of Covid-19 pandemic?
The abrupt halt of economic activities in March 2020 due to the Nationwide Lockdown has had a major impact on businesses across sectors. Barring few essential services, all commercial activities stood at complete halt until the end of Q1FY21 when things started to improve slowly with staggered lifting of lockdown restrictions.
The overall business has improved significantly during Q2FY21 and Q3FY21 with disbursement reaching close to pre-covid levels. The collection is also improving month on month across all geographies. The NPA numbers are improving. With all the steps taken by the Government and Reserve Bank of India and support provided through moratorium on loan repayment, restricting facility, liquidity through various schemes, ex-gratia payments, interest subvention etc. has helped all businesses (especially MSME). With the economy coming back on track and expectation of ~ 11% growth next year, we hope that the MSMEs will bounce back quickly.
Q. To what extent the collection efficiencies have improved?
We have seen a good momentum in collection efficiency, from 3% in April during the peak lockdown to 98% in December in JLG loans. Cumulative collection efficiency for 9MFY21 is 92% and 98% of our clients have paid their full instalments in the month of January 2021.
For SFL, the cumulative collection efficiency stood at around 97% while collection efficiency for December 2020 was 99%. This is a strong indicator that business is back on track, as a testimony to our investment in systems, processes and technology.
Q. What are the challenges w.r.t. to disbursing to SMEs?
We serve the lower end of the SME segment with average ticket size of Rs. 4 Lacs. Most of these clients are from unorganized sectors and hence do not have proper documentary evidence of their business, cash flow, income & expenses etc. A very large portion of the business is not routed through banking channels and hence credit assessment is a big challenge. Their businesses (especially during initial years) are subject to many uncertainties and hence the chances of failure are quite high in the absence of any back up plan.
The quality of collateral is another challenge. The legal title of the property is not perfect and hence they have to pay a higher rate of interest.
The cost of delivering such small ticket lending for a short tenure of 3-4 years is quite high. Such high cost makes the business even more vulnerable resulting in higher NPA.
However, advancement in technology, development of regulatory framework and credit bureau have significantly helped the industry to mitigate risk of defaults.
Q. How do you plan to enhance and spread your lending biz across SME space?
Small and Medium Enterprises (SME) are an important part of our economy. There is a lot of unmet demand. With so much focus of the Government and Reserve Bank of India to provide credit to the SME sector at an affordable price, we feel that proper funds will be available to NBFCs for on-lending. SFL is well capitalized, has established processes, strong credit and risk policies, professional and experience team and time tested technology to grow the lending to SMEs. SFL will focus on providing credit to borrowers with established repayment track records of microfinance borrowers, who need larger loans to expand their businesses. The Company will also source new clients to grow the business. The Company will expand its footprint in the existing geographies as well as increase coverage into new geographies. Apart from its own in-house team the Company has also tie-ups with other NBFCs for a co-sourcing model which helps in expanding into geographies where we are not present.