Mumbai: L&T Finance Holdings Ltd, the recently listed unit of engineering company Larsen & Toubro Ltd, is focusing on rural India to expand, with most of its older rivals being well entrenched in the country’s larger cities.
Among the opportunities the financial services company is looking to tap are rural mortgages, newer geographies that show promise and microfinance products aimed at retail participants in the dairy and warehousing sectors, where returns are more assured than those from traditionally unsecured products.
The relatively untapped rural space, where about 69% of the country’s population is based according to the 2011 census, has largely been ignored by financial services firms that have focused more on urban areas. This is also being driven by the sharp rise in urbanization over the past decade as rural Indians seeking better opportunities migrate to the growing cities and towns.
“We’ve always grown on the basis of adjacencies and there are plenty of adjacencies in this business,” chairman and managing director Y.M. Deosthalee said in a recent interview. “There will be various needs of customers going forward and we will build our business around that.”
Chairman and managing director Y.M. Deosthalee talks about his company’s focus on rural markets and infrastructure
While there aren’t too many doubts about the growth potential of L&T Finance, the biggest challenge will be in balancing that growth with maintaining asset quality, said Devam Modi, an analyst with Equirus Securities Pvt. Ltd who tracks the firm.
“In the past, the company has had issues with asset quality, first during the slowdown in 2008 and then during the microfinance crisis in Andhra Pradesh in 2010 but the quantum of the shock hasn’t been very high so it will have to be watchful during the current economic slowdown,” Modi said.
L&T Finance has based its growth on first entering a market, consolidating in that space and then looking for “adjacencies”, or adjacent growth opportunities, to get into. In 2004, it entered the rural retail market when it began financing rural assets such as tractors and farm equipment. In 2007, it began financing commercial vehicles in the rural market and followed that with an entry into microfinance in the next year. In parallel, it began distributing financial products in September 2007 and commenced funding capital market products in 2008. In January 2010, L&T Finance acquired the assets of DBS Cholamandalam Asset Management to move into the crowded mutual fund business.
The firm has used the same model for growth in the infrastructure finance business, where it began with a focus on construction equipment in January 2007, but has since diversified into power, roads, telecommunications, oil and gas, urban infrastructure and ports.
Other growth areas the financial services company is considering include raising its own infrastructure debt fund after the government last week allowed banks and non-banking finance companies (NBFCs) to do so, and an infrastructure-oriented private equity fund.
The company’s businesses operate under divisions comprising infrastructure finance, retail finance, corporate finance and investment management. It has 837 points of presence in 23 states, with at least 700 of them in rural India.
India has over 600,000 villages but only 107,604 of those are covered by a branch, a banking correspondent or other modes such as mobile vans. State-owned banks have begun making more of a push to extend coverage to the millions of unbanked, encouraged by the central bank.
NBFCs such as L&T Finance, Mahindra & Mahindra Financial Services Ltd, Shriram Transport Finance Co. Ltd and Sundaram Finance Ltd have recently made strides in this space but some 500,000 villages still remain outside the reach of financial services.
When the global financial crisis triggered by the collapse of Lehman Brothers hit in 2008, the rural landscape remained relatively decoupled thanks largely to government spending on rural initiatives, while economic growth slumped in urban India.
Rising consumerism in the hinterland benefited manufacturers of automobiles, fast-moving consumer goods, packaged foods and electronics present in non-urban centres, helping them cope better than predominantly urban-centric peers.
L&T Finance’s asset base of Rs 21,232 crore is spread across infrastructure (41%), retail (34%) and corporate finance (25%).