The base rate system which kicked off earlier this month has changed the way lending was done. Loans below the benchmark prime lending rate (BPLR) have disappeared for the corporate. Banks are trying to adjust under the base rate regime and so are companies such as Magma Fincorp, which is eying growth in disbursements of over 25% and is in the process of increasing its branch network. Sanjay Chamria, vice chairman and managing director, Magma Fincorp shares his company plans with DNA. Excerpts:
What is the USP of Magma Fincorp?
We are in this business since the last 21 years. The USP that you look at is in terms of reach. There would be very few companies which would have a national reach. We are present across seven products. You would not have any other company that has a presence across seven products. We do cars, trucks, construction equipment and tractors.
We also finance strategic construction equipment. We do commercial vehicles. We give loans to small and medium enterprises. When you talk about giving loans to first time borrowers, clearly banks are outside the purview. That is because the people, whom we cater to, do not have a credit history. 50% of the vehicle sale happens to the first time buyers. Our ability, to understand their needs and also appraise their ability to repay the loan, is our uniqueness. There are two-three others players in each of the product groups with similar expertise. For a vast country like ours, there is a need for two or three players like us.
At what rate do you expect the asset financing market to grow in the next few years? How are you preparing to cater to this growth?
The growth in the asset financing market is aligned with the growth in the primary sale of products that we are financing. If you look at the primary products, namely cars, trucks and tractors, these three products are expected to be growing at about 20% on a year-on-year basis for the next two to three years. In case of construction equipment, the scenario is a bit different. There has been recovery from the depression scenario. But it has not reached the level where it was in 2007. We are looking at growing in excess of 25% in disbursements, which is more than the market growth.
The additional growth, we are hoping to achieve, will come by opening new branches. The three products that we launched in the last few years which is used for commercial vehicles, tractor financing and SME, there we are having a low base effect. Therefore, the growth rates are much higher.
How many more branches are you planning to open this year? How much investment goes in opening one branch and how much time it takes to break-even?
We have 160 branches currently. We started the year (January 2010) with 153 branches. We have opened 7 branches in the last few months. This year we are looking at opening another 15-20 branches (by December 2010). We are looking at significant branch expansion in the current year. We are an eastern India bound company. We have a very strong market share there. We acquired a company in north India due to which we have a strong market share and distribution network over there.
So large part of our branches are going to come up in the south and west where we have less than optimal presence. We have various types of branch set-ups. It could be a very small office with 500 sq ft with about 7-8 people or a large office also with 1,500 sq ft with about 45 people. So typically the cost can be between Rs 3 - 4 lakh for a small office to Rs 15-20 lakh for 1,500 sq ft office. The total capex for the branches opening this year is Rs 5-6 crore. The expenditure is not significantly high, because my IT capex is higher than Rs 6 crore. But the break-even is more critical.
Any new branch we open, there is a revenue expense which is kicking in every month. For a branch to become profitable, it takes about 18-24 months cumulatively. On an incremental basis it can become profitable in 9-12 months.
How have you managed to keep your asset books clean? What steps do you take to make your collections efficient?
We are a process-driven organisation. In retail, if someone loses money, it is not because of the credit risk, it is because of the process failures. Since we are dealing with first time borrowers, who do not have credit history, your collection strength has to be significantly superior. We have invested a lot in collection strength. Even after all this we have bad books.
So, in order to maintain a clean book, we follow very aggressive write-off policy. We don’t make provisions when an account becomes non-standard. Therefore, we don’t have any non-performing assets in our books.
What are your fund raising plans for this year?
If we are going to grow our disbursals by more than 25% we would need to borrow an equivalent amount. Last year we did close to Rs 4,000 crore. In excess of 25% growth will be more than Rs 5,000 crore. Out of this, in Quarter I, we have borrowed Rs 1,100 crore. Larger part of the lending comes in the second half of the fiscal and more particularly in the last quarter. We will borrow when we will need it. So that time we will borrow more.
How has the base rate of the banking system affected you, in terms of raising funds?
Before the base rate system kicked off, banks used to lend below BPLR for short-term loans and like other corporates we also got loans at those rates which were lower than the base rate set by banks. The base rate has come from this month and there also banks have sought some time to completely migrate to base rate. It is very apprehensive that banks may loose good corporate customers if they try to implement the base rate effect in one go right now.
For us also the various short-term loans that we had issued, they have not yet matured. Once they mature, we will borrow again. By that time we shall know the real impact of the base rate. Banks are trying to deal with the new dynamics of base rate and so are we as a corporate.
Any other area of business you are planning to diversify?
That is one of our uniqueness that we do not get into unrelated areas of diversification. We have stuck to our core business and that is one of the reasons that we survived quite well even during the downturns. We will diversify in areas which will always compliment our core business philosophy which is to remain stuck with the rural and semi-urban markets.
One of the related areas is general insurance. There is a need to improve the penetration of insurance. 50% of the people are first time buyers, so they are buying insurance also for the first time. We have signed a joint venture agreement to set up a general insurance subsidiary. We have signed up with a German company called HDI Gerling. Once we receive approvals that will be one diversification for us.
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