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BankInvest investing in Indian finance companies

03.04.2020

Where does the average Indian person borrow to invest in education, tractors, 2-wheelers etc. when banks are not geared for this? And how does finance companies, the so-called non-bank financial companies (NBFCs) ensure they can collect interest and repayments?

Prathamesh S Sahasrabudhe, head of DCM South Asia in Standard Chartered Bank, had kindly arranged meetings for BankInvest with management from 7 NBFCs over 3 days in Mumbai, India.

BankInvest has invested in some of the India  NBFCs and we are looking forward to participate in international bond issues from new issuers. This was the reason behind my visit. However, given the uncertainty around corona virus and the potential impact on the economy, it is not likely to happen in the short term.

Following big loan losses on infrastructure projects, most public sector banks are undercapitalised and cannot increase loan growth to support the economy. NBFCs face increasing demand for their loans, but depend partly on funding from banks. Thus, several NBFCs are turning to the offshore bond market to diversify their funding base. Some NBFCs have a strong parent company, which lowers the risk significantly. Others, have a strong market position in a niche segment.

Mumbai Sb2020
Contrasts in Mumbai. Dhobi Ghat, an open air laundromat constructed in 1890,
and construction of new high-rise buildings in the background. Photo: Søren Bertelsen.


Gold jewellery as collateral

Gold financing is a good example: loans are extended with gold jewellery as collateral. The industry is well regulated to protect borrowers against high interest rates and the gold value continues to belong to the borrower. Borrowers are often small shop owners needing to buy inventory. Gold loans are typically repaid within 2 months, so assets are very liquid - reducing the risk for offshore bondholders.

Another interesting business model is lending to micro- and small businesses, which are too small to have a banking relationship. The NBFC has an extensive network of credit officers who visit borrowers and spend time to understand the financial situation of the whole family and the cash flow of the small business. They also visit if any payments are delayed. Banks are not able to lend this way, so the NBFC provide loans to people who cannot go to the bank for funds to support their business. However, it takes long time to develop skills to evaluate this segment as there is little data available.

While loans from NBFCs are small relative to total loans from banks, they are often the only credit available to certain segments of the economy. Credit ratings for NBFCs range from low investment grade (mainly those with strong parents) to low double B at the time of writing. Not all had made their rating public yet, as they are waiting for the right market conditions to issue.

SB 2
By Søren Bertelsen, Chief Portfolio Manager, BankInvest. Photo: Ricky Molloy.

 

Read more:
» Chief Portfolio Manager at BankInvest named Europe’s best investor in Asian bonds

 

Last updated: 03.04.2020