Equitas Holdings Pvt. Ltd is hoping its year-old housing and vehicle financing units will transform from being crutches to its policy-crippled microfinance business into steadfast pillars in five years.
The Chennai-based company, India’s only microfinance institution (MFI) to spin off two new businesses after a controversial October 2010 Andhra Pradesh government law threw the sector into a crisis, facesm challenges in both the categories.
Financing low-ticket housing loans for small entrepreneurs is a fledgling business in India and the second-hand truck financing business is highly competitive and ridden with risks in the current economic slowdown.
“They are going to see competition like they have never seen before,” said Suresh Kalpathi, who retained a small share in Equitas after selling his 10% stake in the company two years ago.
Tackling hurdles: Equitas’s founder P.N. Vasudevan. Photo: Ganesh/Mint
According to the latest central bank norms, 85% of the total loans of MFIs should be advanced to low-income earners in order to qualify for cheaper, so-called priority-sector credit from commercial banks. To meet the Reserve Bank of India criterion, Equitas separated its housing and vehicle finance businesses.
Most MFIs in India have chosen to cut costs or diversify a permitted 15% of their assets into non-microfinance activities amid a halving of the size of India’s microlending in two years after the crisis sparked by the law enacted in Andhra Pradesh, India’s biggest market for MFIs.
The law, enforced after complaints that coercive loan recovery practices by MFIs had prompted some over-extended borrowers to commit suicide, tightened the norms for microlending. Among other steps, it forbade MFIs from giving a second loan to existing borrowers without government approval and barred the lenders from the doing business at the customers’ doorstep.
Equitas’ income from microfinancing activities too fell 25% to Rs 178 crore in 2012 and its profit after tax dived 40%.
“Equitas is following a cost-heavy model with a separate distribution line for each of its three businesses,” said Vineet Sukumar of IFMR Capital, which helps microfinanciers access debt.
In early 2011, Equitas had decided to enter the commercial vehicle financing business, a choice that seemed sound as a majority of Equitas’s top executives, including Equitas Vehicle Finance’s national head Naveen Vashisht, came from founder P.N. Vasudevan’s former employer Cholamandalam Investment and Finance Co. Ltd—a Chennai-based commercial vehicle financier.
“We understood the vehicle financing business and so we entered it,” said Equitas’s managing director Vasudevan. “The entry barrier is the knowledge of the market and we have that. Five years from today, vehicle and housing finance will contribute to one-third of our business.”
For now, Equitas Vehicle Finance (EVF), offering Rs 1-14 lakh second-hand truck loans, comprises 17% of the holding company’s business. That’s no small feat for a unit that was started in July 2011 with 12 branches spread across six states that today stands at 70 branches over eight Indian states. EVF’s current loans outstanding of Rs 135 crore are expected to triple to Rs 400 crore by March 2013.
EVF reached out to prospective customers by cold calling transporters and also through middlemen, which a rival terms as dangerous.
“Top class banks with a similar scaling-up model have failed miserably,” said Umesh Revankar, managing director of Shriram Transport Finance Co. Ltd, India’s top financier for used commercial vehicles, which saw 5% growth in borrowings for second-hand trucks last year, but expects a stronger 15% gain this year.
While EVF was formed last July as a non-banking financial company (NBFC) with a Rs 60 crore investment, Equitas Housing Finance Pvt. Ltd saw an equity infusion of Rs 18 crore. The microfinance arm is a separate NBFC-MFI, comprising 80% of parent company Equitas Holdings’ business.
Compared with Equitas’ used-truck loans unit, its housing finance business contributed just 3% to the holding company’s revenue. The business started by targeting Equitas MFI customers needing Rs 5-25 lakh housing or home improvement loans.
Often, the property owner wasn’t the female household member who was entitled to borrow, being part of the microfinance group. And that was a problem.
So, in October 2011, the company started zeroing on small entrepreneurs in Tamil Nadu. From solicitations via 10 branches, Equitas Housing Finance (EHF) has about Rs 10 crore in loans outstanding that it hopes will touch Rs 50-75 crore by March 2013.
Changes are planned as existing branches shift to metro cities from small towns in Tamil Nadu where EHF has found lacklustre demand for low-cost dwellings. Most recently, EHF opened a branch in Bangalore to finance budget home buyers.
“There is no cut and paste solution to Equitas’ current businesses that I think they are growing at appropriate speeds,” said P. Pradeep, a partner at Aavishkaar Venture Management Services—one of the first investors in Equitas that sold a large part of its stake in 2010. “The team has a solid vehicle financing background and they’ve grown fast there and they are rightly not rushing into housing finance, which is unfamiliar territory.”