Smaller towns are the future for home finance business

Small business owners need to learn how to scale their business up, says KV Srinivasan, chief executive officer, Reliance Commercial Finance. In an interview with Vishwanath Nair, he talks about the company’s growth plan in a difficult market environment and how it is a good idea to bet on smaller businesses in the lending business. Edited excerpts:

This year has not been very good for lenders, how are you planning to grow your company?
I think the market segment we have chosen is something that is fairly untapped. While I do agree that the growth rate has not been very good, the inherent potential is intact. From that perspective, we have been doing very well. If we look at the first quarter disbursals, we are pretty much at the same level as last year. We had taken a call in the second quarter last year. Because the economy is likely to hit a bit of a downtrend, we began beefing up our internal mechanisms to ensure that the quality of the portfolio is maintained at a high level. The growth in topline may be important, but the quality of the portfolio is far more important for us. At the end of the first quarter, our gross non-performing assets were around 1.6-1.7%. We have tried and maintained our book at around the same size as the last three to four quarters. But in the process, we are recycling the money which is coming in, back into the market at a higher rate so that we can also manage the net interest margin.

Which are the sectors you are expecting some growth from?
The biggest sector that we have is mortgages which constitute about 45-46% of the total portfolio, that is about Rs15,000 crore on assets under management (AUM) basis. Of this, loan against property would be about 24% and home loan about 20-21%. One thing we have started is heading for smaller cities for our home finance business. The property market seems a little stressed as far as the bigger cities are concerned, but there is considerable potential and developments in smaller towns. These are towns which are growing rapidly and the local economy is strong enough. They are fairly insulated from the larger macroeconomic situations. We are also pushing more and more on the small and medium enterprises side. These would not be micro SMEs where the mortality rate is higher, but this is more of the larger variety. We already had good presence in the education and healthcare sector, we are renewing our focus on that, plus we are also adding a few more avenues such as agriculture related businesses such as seeds and food processors. As far as commercial vehicles are concerned, clearly there is a reduction in demand in the new vehicle acquisition for the medium and heavy segment whereas the light commercial and smaller truck segment is growing. Earlier, our exposure to smaller vehicles wasn’t more than 10-12%, now we are planning to grow it.

Is it a good idea to bet on small businesses when the macroeconomic environment is difficult?
SME is a very wide term. At one end of the spectrum, you have the MSMEs, small and cottage industries and at the other, you have much larger SMEs depending on various parameters. Essentially our policy has been to look at sectors first, if that particular sector is growing, how insulated it is from recession, if there is enough amount of competition or not. For example food, education and hospitality have very little to do with recession. So, if you choose the right kind of sectors and borrowers in a diligent manner, I think there is considerable amount of value to be taken. When we think about the so-called recession, we are still talking about 5.5% growth in the gross domestic product (GDP). So to that extent, there is always going to be strong performance exhibited in some of the sectors. This is exactly what we are doing.

What are the characteristics that differentiate small Indian businessmen from the rest?
I think the one clear factor is their ability to innovate, is something fantastic. Even in a tight spot, they are able to generate enough amount of mental energy to actually manage their situation pretty well. The second thing is their business becoming the reason for their existence, really brings in the level of seriousness to manage even difficult situations pretty well. The one thing that they still need to learn is how to scale up and grow beyond what they are today. Many of them fail to realise this.