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MANAPPURAM'S MSME AND OTHER VERTICALS’ LOANS
A business of Rs.800 crore built from scratch in 3 years
By V.P. Nandakumar
On 14 February 2022, Manappuram Finance Limited published its results for the 3rd quarter ending December 2021. The key takeaway was that despite the impact of the omicron variant (which was particularly severe in December), we achieved good growth in our business volumes. Our consolidated AUM stood at Rs.30,400 crore, registering a sequential (or quarter-on-quarter) growth of 7 per cent. In our core business of gold loans, the loan book crossed the Rs.20,000 crore landmark while our microfinance subsidiary’s portfolio surged past the Rs.7,000 crore mark. There was good growth in vehicle and equipment finance division which contributed over Rs.1,500 crore while our home loans subsidiary accounted for about Rs.800 crore in business.
These figures were extensively reported in the media and it is not my intention to talk more about it now. Indeed, for the purpose of this article, I would like to focus on another number that did not get the attention it deserved. That number, also Rs.800 crore, is the business achieved by what we refer to internally as our ‘other verticals’ which mainly includes MSME loans besides micro-home finance and personal loans. Within this Rs.800 crore, the largest chunk of about Rs.350 crore is contributed by MSME loans followed by micro home finance at about Rs.250 crore. At first sight, there is nothing remarkable about any line of business reaching a level of Rs.800 crore in a company where the total loan book is north of Rs.30,000 crore. But then, keep in mind that as late as three years ago, this business did not exist in our books. Yes, it was only in January 2019 that we kicked off this business with the first MSME loans disbursed to a small shop owner specializing in hardware at Angamaly, a small town close to where the Kochi airport is located.
The start
Having started MSME lending from a zero base in January 2019, we could easily see there was good demand for such loans. Accordingly, within a short period, we went ahead and scaled up the business to new geographies like Tamil Nadu, Karnataka, Andhra Pradesh etc. Our initial focus remained on the southern states where we targeted the local ‘Kirana’ shops and small industrial establishments. We were careful to exercise due care when vetting the loan applications and in this we were helped by our pool of existing gold loan customers who gave us good leads about quality borrowers.
Interestingly, we started this new line of business without recruiting anyone from the market with prior experience in MSME lending. Instead, the employees were selected from our home-grown gold loan employees based on their connect with the relevant micro-markets, and after assessing their aptitude to handle this new line of business. We also chose to explore a different path by recruiting fresh youngsters as field sales representatives for the purpose of interfacing with quality MSME borrowers.
We were confident that MSME lending would be one of the major growth areas for us given that entrepreneurship at the grassroots is taking off in a big way. To serve a broader range of customers, we started to offer a wider range of loan products across different categories – health care industry loans, small scale industrial finance, food industry loans, restaurant finance etc. We disburse fully secured loans and only for business purpose. The maximum loan amount was limited to Rs. 15 lakhs for shops and establishments.
The pandemic setback
The onset of the Covid-19 pandemic from March 2020 onwards was a disaster for almost all sectors of the economy and the MSME sector was particularly hard hit. With rising uncertainty, the financial services sector went into a freeze and fresh lending slowed down to a trickle. The squeeze on working capital coupled with the disruption to their regular activities from the lockdowns played havoc with their cash flows and resulted in non-payment of loan EMIs. Many of the MSMEs were on the verge of downing their shutters. The pandemic disrupted our disbursements and its negative impact on asset quality affected sentiments and morale. For a brief period, we had to stop fresh disbursements as we focused on collections instead. However, by June 2020 things began to look up, and we became active in the market once again to resume disbursement of loans. By this time, the Reserve Bank of India (RBI) had come out with its guidelines on the moratorium to be extended to borrowers affected by the pandemic. Accordingly, we too extended a moratorium to our eligible borrowers facing genuine challenges.
Against the backdrop of a sharp fall in business, most MSMEs were faced with an acute cash crunch at this point, and they needed immediate liquidity to tide over the situation. The disruptions gave us an excellent opportunity to serve these MSMEs by speedily catering to their urgent requirement of working capital. We seized the opportunity and expanded the business to the rest of India, adding states like Odisha, West Bengal, Uttar Pradesh, Chhattisgarh, Madhya Pradesh, Maharashtra, Gujarat, Rajasthan, Haryana etc.
Keeping NPAs in check
Perhaps the most important factor in any lending business is its asset quality, and how successful you are in holding down non-performing assets (NPAs). An important factor that enabled us to maintain good asset quality is our use of novel methods for loan appraisal. Before sanctioning any loan, we thoroughly analyse the repayment behaviour of the applicant. It helps us to assess the credibility and financial status of the borrower and that is taken to their credit score.
After the loan is disbursed, we provide our customer with user friendly online payment options like Google Pay, Paytm, PhonePe etc. so that loan repayments can be made easily, thus improving our collections. Further, we have established collection and customer relations team to exclusively cater to MSME borrowers and they have played a crucial role in holding down our cheque bounce rate to below 4 per cent, and the NPA level to well below 5 per cent despite the severe challenges of the pandemic. It may also be mentioned that the NPA level for the total portfolio (i.e., MSME and other verticals put together) is less than 3 per cent.
As things stand today
Today, Manappuram’s MSME and other verticals boast of customers from many states across India. Tamil Nadu contributes around one-fourth of the total business. We have more than 10,000 satisfied MSME customers and this portfolio generates a yield of about 21 per cent. The collection efficiency stands at more than 100 per cent including advance collections.
We take special pride in having built a hardcore MSME portfolio of over Rs. 350 crore from scratch in three years, even as the last two years saw major disruptions from the pandemic. We did not hire any senior managers from the market as the entire business is managed by employees from our gold loans side. When we set out to do this, many questions were raised about whether employees from gold loans would be competent enough to run the show given that they lacked experience in credit appraisal, cash-flow analysis, or the valuation of non-gold security. Today, we have been able to demonstrate that business can be done differently without having to adhere to the conventional path. We have proved that the market can be wrong in many of its preconceived risk perceptions, such as the belief that when starting a new line of business you require people with industry experience, or that each business would require a separate HR, a distinct business culture etc.
We now expect that business from the MSME and other verticals will approach the Rs. 1,000 crore milestone by the end of this fiscal year, and thereafter cross Rs.5,000 crore within five years. In the post Covid environment, we have seen for ourselves the grim situation that small enterprises across India find themselves in due to the sudden fall in business. Unlike large and medium enterprises that have access to institutional finance, small enterprises depend on regular cash flows for their sheer survival. They face an acute cash crunch and need immediate liquidity to help them survive in these challenging circumstance. It highlights the need for policy action to ensure the survival of small enterprises. The government should continue with its measures in support and see to it that small enterprises have uninterrupted access to liquidity to keep their businesses running and generate jobs for our workforce. Manappuram’s MSME business has made a strong start and we look forward to becoming a part of this process of keeping our small enterprises humming.
Published in Unique Times Magazine, March 2022
(V.P. Nandakumar is MD & CEO of Manappuram Finance Ltd. Views are personal.)