SMEs remain high on potential, have good absorption capacity: Senthil Kumar

Overall, our NPAs are at 2.6 per cent in the vehicle finance book, which is relatively low. We are not observing any pressure, says executive vice-president of Manappuram Finance

Senthil Kumar, executive vice-president of Manappuram Finance, tells Advait Rao Palepu that despite a rise in borrowing costs, the company has not faced the asset-liability management (ALM) issues that other non-bank financiers have faced in recent months. However, he says, if financiers face higher borrowing costs in the coming months, it will be detrimental for retail lending and consumption. Edited excerpts:

Has the present liquidity and ALM situation affected Mannapuram Finance?
 

I understand our cost of funds has gone up a bit over the last one year. However, we do not face any pressure on the ALM side. A large part of our consolidated (assets under management) AUM — in fact nearly 75 per cent — is parked in short-term gold loans, where the average loan gets repaid in about 60 days.
 

Another 15 per cent is accounted for by microfinance (MFI) loans, which are also quite short-term. The small and medium enterprises (SME) book was under pressure on account of the twin disruptions of demonetisation and GST. These pressures are now easing but the overall cash flows are still somewhat strained, although heading to normalcy. Therefore, we do not face ALM issues that other NBFCs may be facing.

Are you seeing any pressure on the SME and vehicle finance books?

The signs are positive. One needs to carefully understand the cash flows and cycles of these businesses, and then monitor them appropriately. The segment continues to be high on potential and has good credit absorption capacity. We expect it to grow in line with the economy.
 

Similarly, in vehicle finance, disruptions due to demonetisation and GST have eased, though the routine cycle is yet to return, given the backdrop of the steep increase in fuel prices. Overall, our NPAs are at 2.6 per cent in the vehicle finance book, which is relatively low. We are not observing any pressure.
 

Having said this, our constant endeavour is to bring down delinquency levels by filtering the right customers through our efficient credit mechanisms, which makes use of our indigenous data analytics platforms. Currently, in vehicle finance, we have an AUM of Rs 9.2 billion focused on commercial vehicles and two-wheeler financing.
 

We are venturing into used cars and tractor financing by tapping our vast customer base. I see the vehicle finance business growing to Rs 40 billion in AUM terms over the next three years.

Are SMEs facing lending or repayment issues, given the overall credit crunch in the economy?
 

There’s no doubt that SMEs are up against an overall credit crunch, which has made it more difficult for them to access loans from banks and NBFCs. Moreover, banks have always had relatively rigid policies, which rendered them unable to fully meet the dynamic credit demands of this segment.
 

The non-banking entities have been addressing credit needs of the lower rungs of the SME segment, by using innovative methods to assess their creditworthiness. The system worked fine, but the recent default by IL&FS has soured the mood. I understand that credit availability for most NBFCs has shrunk, leading to curtailed lending to SME enterprises. Manappuram Finance has not faced any credit crunch, as all our limits are getting renewed on time.

Do you think retail lending will be the next segment to face higher borrowing costs? Will this affect consumption? 
 

Our target customers are in the affordable segment, and 25-35 per cent of them are first-time borrowers. Therefore, we have created our own credit rating models, and robust IT platforms for risk management and fraud detection.
 

If borrowing costs continue to rise, it will no doubt be detrimental to retail lending and consumption. However, recent inflation data shows a cooling contrary to earlier fears, and hence there is reason to believe the RBI may not hike interest rates any time soon.