process broker used to take fixed brokerage which can even range from 10 percent – 25 percent of the total loan amount and this led to over leverage. This whole system lead to huge defaults, say a person takes a loan of 50k for a period of three years @ 36% flat with processing fees of 4 – 5 percent. He gets in hand around 47k and out of which he pays about 5k to the broker. The net he got was 42 k and he has to return around 150 k back. None of the business generates that much profit. By 2005 the reserving of the NBFCs was at all time high. They payments buckets were moving from 30+dpd to 60+dpd to 90+ dpd very quickly. Front level employees started changing the companies at a very short interval and no ownership of the lending portfolio was there at the bottom level. The model which was initially designed to be relationship based turned the customer into a commodity and Loan a run of the mill product. At the same time there was a new MNC which entered
the lending space, Fullerton India credit company limited (FICCL), a fully owned subsidiary of Tamasek holdings, Singapore, and redefined the distribution system of consumer finance. They took the sales force on rolls to promote ownership, defined the distribution are of a branch to encourage relationship with customers and hired employees with totally different skill set for business loan lending and personal loan lending for salaried class to have better underwriting mechanism. Started from about 20 branches in 2006 they reached to the epitome of 1000 branches by mid 2008 and became the largest NBFCs in terms of distribution, only to come down to almost half the number by next year. All these companies suffered from the same syndrome, very high orientation towards quantity lending rather than quality lending. On the other hand companies like HDB financial services (NBFC of HDBC bank), HDFC ltd, Muthoot finance have worked in the same environment and grown to the unprecedented levels. The only reason for their success is patience and readiness to change their credit underwriting policies and more importance to understanding customer business cycle and not income statements. To sight an example Muthoot finance hires Branch Managers who are retired bank employees and this gives them a cutting edge in terms of vast lending experience and relationship management skills. In my view and lending company can have a profitable portfolio in Indian market if at all they have some patience, ready to unlearn and learn from the new experiences and can adapt to the different and ever changing culture of Indian terrain.
February 2013
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