Fullerton India looks at small businesses, rural markets for growth
4 min read . Updated: 24 Jun 2013, 09:45 AM IST
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The company suffered huge losses due to a sharp rise in non-performing loans in fiscal year 2010
Mumbai: : Fullerton India Credit Co. Ltd’s decision to tweak its India strategy three years ago has paid dividends and it now plans to sustain the momentum by focusing on demand for loans from small businesses, managing director and chief executive officer Shantanu Mitra said.
The company, a non-banking subsidiary of the Singapore-based $155 billion sovereign wealth fund Temasek Holdings (Pvt.) Ltd, suffered huge losses due to a sharp rise in non-performing loans in fiscal year 2010.
Over the last three years, Mitra said in an interview on 19 June, Fullerton has reduced unsecured loans, increased borrowers’ income requirements, insisted on a credit bureau records and raised an in-house team to analyse credit profiles of borrowers before disbursements to ensure that the 2009-10 experience is not repeated.
Fullerton’s net profit tripled to ₹ 151.67 crore for the year ended 31 March from ₹ 49.79 crore a year ago. Its loan book rose 22% from a year ago to ₹ 4,823 crore, and up from ₹ 3,040 in fiscal year 2010. Bad loans have dropped to 2.10% of total loans from a peak of 11.25% in fiscal year 2010, when Fullerton suffered a ₹ 717.09 crore net loss, largely because bad loans had to be written off.
Besides indiscreet lending, Fullerton also added too many branches too quickly, Mitra said. Between 2007 and 2009, the company went from zero to 800 branches, giving unsecured loans mostly to individuals. The losses forced the company to close more than 400 branches in 2010-11 as they “centralized delivery in terms of systems processes and capabilities," according to Mitra.
Fullerton now runs 361 branches and plans to add 30 more in 2013-14.
“One major factor that we’ve changed since then is our target loan group. The focus is now on balancing the book," said Mitra.
In 2007, over 90% of the book was unsecured personal loans, averaging less than ₹ 25,000 and targeted at the lower section of society. This has changed completely. Personal loans now average ₹ 180,000 as monthly income requirements have risen from ₹ 5,000-7000 in 2009 to ₹ 15,000 now, and bureau records are essential for granting a loan.
Unsecured loans now constitute 36.6% of Fullerton’s loan book, down from over 90% in 2009. Besides loans to individuals, unsecured loans also include group loans in rural areas.
Mitra said the company has a diversified loan book including loans for two-wheelers, commercial vehicles, and general equipment financing, specifically aimed at small businesses in small towns.
“The SME (small and medium enterprises) market is very large, still relatively underserved, and comprises almost half the economy. We are definitely looking at collateralized lending in the SME space, in both rural and urban areas, to fuel our growth," said Mitra.
This part of it business, started in 2011, makes up about ₹ 217 crore, or 5% of the company’s loan book, but the target is to increase it to 12% by March 2016. Rural business accounts for 12% of loans, mainly through the group lending model, across 139 branches in the hinterland.
“We consciously use a microfinance style delivery model but we offer it to a segment that is ignored by microfinance, households with annual income up to ₹ 1 lakh. Most of these customers have been with us for a few years. This is the market where incomes are gradually increasing," said Anand Natarajan, executive vice president and chief operating officer.
The average ticket size for these group loans is small at ₹ 18,000 but Fullerton is hoping that many of these borrowers can be sold other products like commercial vehicle and two-wheeler loans or insurance through ICICI Prudential Life Insurance Co. Ltd or ICICI Lombard General Insurance Co. Ltd.
Santosh Singh, analyst at Espirito Santo Securities, said getting its credit appraisal and underwriting skills right will be important if Fullerton has to continue growing.
“There is enough demand for both personal loans as well as loans to SMEs but the key in urban areas is credit appraisals before giving loans and in rural areas is knowing borrowers through doorstep delivery and servicing," Singh said.
He pointed out that almost all non-banking financial companies had suffered losses in 2009, forcing them to restructure their business and reduce unsecured lending.
In 2009, Fullerton’s loan sourcing, collection, underwriting and management operations were entirely contained in the branch, making the manager of every branch “essentially a CEO", Mitra said, adding this localization of operations and the consequent lack of skills when the going got tough led to a compromise on credit standards.
Mitra said Fullerton’s future growth will come from small towns. “Marginal growth in metros will probably not be that great for us," he said.
Last fiscal year, Temasek infused another ₹ 150 crore into the company, taking the total investment to ₹ 1,858 crore, but with capital adequacy ratio at 24.7%.
Mitra said he does not need more funds from the parent, even as he does not rule out listing in the stock market.
“The endgame is definitely to be quoted and listed," Mitra said. “Temasek will probably remain invested in us right now, since we’ve been through the pain and proved ourselves. And now we’ll need at least two or three years of strong numbers for the investment to pay off."
