High margins, growing demand add to the attraction.
Financial inclusion is turning into a profitable venture for non-banking finance companies (NBFCs), as they are scurrying to fill the gap left by banks in rural markets that offer better margins.
Srei BNP Paribas is entering the agriculture equipment finance market by April and hopes to disburse around Rs 500 crore in one year under the vertical.
Similarly, Shriram Transport, which has been for long focusing on used truck finance, has also created a separate vertical for farm equipment finance, and hopes to disburse as much as Rs 5,000 crore in the next two years.
L&T Finance, which has been more focused on infrastructure finance, is expanding its rural network through products such as Kisan Bandhu, a product specially launched with a view on the Prime Minister Gram Sadak Yojana (PMGSY), a rural road construction scheme. The product is targeted at entrepreneurs who need funding for the acquisition of small-sized transport vehicles.
Magma Fincorp, which has around 70 per cent of its branches in semi-urban and rural areas, is looking at expanding its high-yield portfolio comprising tractors and loans to small and medium enterprises and used commercial vehicle finance.
Even micro-finance institutions (MFIs), most of which are registered as NBFCs, are now looking at agriculture equipment finance. Bandhan, an MFI based in West Bengal, has started a pilot project aimed at lending for investments of over Rs 50,000.
The rush for rural finance is showing in the overall numbers. While credit flow to most sectors slowed down last year, fund flows to the farm sector remained largely unaffected.
According to the latest data from the Reserve Bank of India, during the year up to November 20, 2009, 23.7 per cent of non-food credit (y-o-y) was absorbed by the agricultural sector, compared with 9.3 per cent a year ago. Similarly, within non-food credit, bank loan to agriculture and allied activities increased by Rs 60,505 crore in the year up to November 20, 2009, against Rs 49,994 crore in the corresponding period last year. The growth rate remained around 21.5 per cent, while non-food credit growth slowed down to 10.4 per cent from 28 per cent in the year up to November 20, 2008.
A part of the reason for the rural push is in the margins. In urban areas, the net interest margin (NIM) for NBFCs was 3-4 per cent, and in rural markets, it was close to 8 per cent, said the head of a Kolkata-headquartered NBFC. With local money lenders, who lend at exorbitant rates, being the only competition in most villages, NBFCs charge anywhere between 15 per cent and 25 per cent on loans offered by them. The high rates even prompted RBI Governor D Subbarao to express concern recently.
The finance companies also admit that a part of the reason for the rural focus is high margins.
“Gradually, the agriculture equipment finance market is moving towards maturity and is becoming competitive. The margins in the market are high because of low competition, high interest rates and dealers support,” said Srei BNP Paribas Chief Executive Officer DK Vyas.
“Rural markets are generally unorganised and there is no competition. The growth in these markets has been very good, and we want to create it as a very strong vertical,” said Umesh Revankar, executive director-operations at Shriram Transport.
Apart from margins, strong rural demand has prodded banks and finance companies to focus on this market. While the sale of commercial vehicles declined by 21 per cent during 2008-09, for the tractor industry, the decline was marginal. Tractor sales declined marginally from 346,000 units in 2007-08 to 343,000 last year.
Also, the focus of government schemes is partly responsible for the demand. For instance, the construction of feeder roads in rural areas under PMGSY has provided a thrust to the demand for small-sized transport vehicles.
“PMGSY has opened up huge opportunities in the small transport vehicle segment,” said Vyas.
