N. L.

Dalmia Institute of Management Studies & Research

Industry Research on Housing finance, Micro Finance, Auto-Finance Industry.

Summer Internship Report

Submitted in partial fulfilment of the requirements

for

2 Yrs Full Time MMS Course

Batch 2019-2021

SUBMITTED BY

Name: Santosh Rawat

(MMS A) Roll No. MG1921-A37

Batch 2019-2021
 ACKNOWLEDGEMENT

I would like to express my profound gratitude to all those who have been instrumental in the
preparation of my summer internship project report. To start with, I would like to thank Care
advisory research and training, for providing me with the opportunity to undertake this internship
and allowing me to explore the NBFC Sector, which has surely helped my knowledge and skills
grow and benefitted my career. I wish to place on records, my deep sense of gratitude and sincere
appreciation to my Industry mentors, Mehul Parekh and Amit Shah who suggested and helped me
prepare the frame work of the project and provided support, advice and encouragement. I am
deeply grateful, to my faculty guide Dr Sasmita Singh for enlightening me with her valuable
suggestions, comments, feedback and support throughout the internship. I am very thankful to N.L.
Dalmia institute of management studies and research for giving me such a great opportunity to
experience the corporate world. Last but not the least, I would like to take the opportunity to thank
my family for their immense support.

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 Certificate

This is to certify that the Summer Internship Project Report is submitted in partial fulfillment for
the award of Finance of N. L. Dalmia Institute of Management Studies and Research. It is a result
of the bonafide research work carried out by Mr. Santosh Rawat under my supervision and
guidance during Summer Internship of 2 Months from May 6,2020 till July 15,2020.

No part of this report has been submitted for award of any other Degree, Diploma, Fellowship or
other similar titles or prizes. The work has also not been published in any Journals/Magazines.

Date: Place:

Industry guide

Signature of the Industry Guide: ____________________________________

Company: Care advisory research and training

Name of Industry Guide: Amit Shah & Mehul Parekh

Designation: Senior Analyst

Internal Faculty guide

Signature of Internal Faculty Guide: ___________________________

Name of the Internal Faculty Guide: Dr. Sasmita singh

Faculty <Dept Name>Finance

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Page | 4
 Executive Summary

The project is on “Industry Research on Housing Finance, Micro-Finance and Auto-Finance

Sector”
The main objective of the study was to understand industry research and its need in each sector.
The project was started on 6th of May 2020 after knowing all the relevant information related
to the industry, under the guidance of Industry mentor.

The first part of my project involves the study of industry research, identification of the process
and its importance, then utilization of authorized sources to collect information on the specified
sector. For this I read past reports provided by the company to have better understanding of their
outlook on industry research.

The second part of my internship was the study NBFC sector which involved research on
Housing finance, Micro finance and Auto Finance Industry. Based on the researched data from
authorized sources reports were made with few important attributes as the base of research.

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 TABLES

TABLE 1.1: INDUSTRY OVERVIEW OF HFC .................................................................................. 11

TABLE 1.2: CONSOLIDATED BALANCE SHEET ............................................................................. 12
TABLE 2.1 DIFFERENCE BETWEEN SHGS AND JLGS ................................................................... 34
TABLE 2.2 :LENDER TYPE OF MICRO-FINANCE ........................................................................... 36
TABLE 2.3: MFI INDUSTRY SNAPSHOT OF MARCH 2019 .............................................................. 39
TABLE 2.4: DISBURSED AMOUNT OF MICRO-FINANCE IN MILLION .............................................. 40
TABLE 2.5: PROFITABILITY IMPROVING WITH STABILITY RETURNING TO THE OPERATIONS ............ 51
TABLE 3.1: USED CAR MARKET AND CORRESPONDING AUTO FINANCING OVERVIEW..................... 65

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 TABLES OF CHARTS
CHART 1.1: RESOURCES MOBILIZED BY HFCS (AT END-MARCH) ........................................................................................... 13
CHART 1.2: FINANCIAL PARAMETER OF HCFS ................................................................................................................. 13
CHART 1.3: NPA RATIOS OF HCFS ............................................................................................................................... 14
CHART 1.4: URBAN POPULATION IN INDIA ...................................................................................................................... 19
CHART 1.5: GROWTH IN INCOME CHART 1.6: AFFORDABILITY .......................................................................... 20
CHART 1.7: PMAY-CLSS CATEGORY WISE DISBURSEMENT................................................................................................. 20
CHART 1.8: DEMAND SUPPLY HOUSING CHART 1.9: FINANCE PENETRATION ............................................................ 21
CHART 1.10: CREDIT TO HOUSING CHART 1.11: NBFC GROWTH ................................................................ 25
CHART 1.12: MORTGAGE TO GDP RATIO ....................................................................................................................... 29
CHART 1.13: MORTGAGE TO GDP (COUNTRY WISE) ......................................................................................................... 29
CHART 1.14: MARKET SHARE OF BANKS AND HFCS IN HOME LOAN...................................................................................... 30
CHART 2.1: PROGRESS OF SHG-BLP ............................................................................................................................. 32
CHART 2.2: PROGRESS OF SHG-BLP (NO OF SHGS) ........................................................................................................ 32
CHART 2.3: NO OF JLGS............................................................................................................................................. 33
CHART 2.4: HISTORICAL JLG GROWTH ........................................................................................................................... 34
CHART 2.5: PEER GROUP -WISE NO OF LENDERS .............................................................................................................. 35
CHART 2.6: NUMBER OF ACTIVE LOAN........................................................................................................................... 36
CHART 2.7: PORTFOLIO QUALITY .................................................................................................................................. 38
CHART 2.8: DELINQUENCY RATE................................................................................................................................... 38
CHART 2.9: AVERAGE TICKET SIZE ................................................................................................................................. 39
CHART 2.10: DELINQUENCY 30+ AND 90+ ..................................................................................................................... 41
CHART 2.11: TOTAL AUM OF NBFC-MFI ..................................................................................................................... 42
CHART 2.12: CHALLENGES FOR MICRO-FINANCE .............................................................................................................. 47
CHART 2.13: OVER BORROWING PATTERN ..................................................................................................................... 48
CHART 2.14: TREND IN AVERAGE DISBURSEMENT PER ACCOUNT .......................................................................................... 51
CHART 2.15: GROWTH IN CASHLESS DISBURSAL IN NBFC-MFL ........................................................................................... 54
CHART 3.1: EVOLUTION OF AUTO FINANCE MARKET ......................................................................................................... 57
CHART 3.2: EXPANSION IN ADDRESSABLE MARKET WITH LOW COST OF OWNERSHIP ................................................................... 58
CHART 3.3: AUM MOVEMENT OF NBFC-CV ................................................................................................................. 58
CHART 3.4: YOY AUM GROWTH TREND ........................................................................................................................ 58
CHART 3.5: AUM MOVEMENT IN NBFC-PV ................................................................................................................... 60
CHART 3.6: YOY AUM GROWTH TRENDS IN USED AND NEW PV SEGMENT ............................................................................. 61
CHART 3.7: AUM MOVEMENT IN NBFC 2-WHEELER ....................................................................................................... 62
CHART 3.8:TWO WHEELER FINANCE MARKET ................................................................................................................. 63
CHART 3.9: NBFC 2W PORTFOLIO CONCENTRATION (AS OF MARCH 19) .............................................................................. 63
CHART 3.10: AUM MOVEMENT IN NBFC TRACTOR SEGMENT............................................................................................. 64
CHART 3.11: USED CV DISBURSEMENT .......................................................................................................................... 66

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 TABLE OF CONTENTS

Table of Contents
Chapter 1: Introduction ........................................................................................................................... 9
Chapter 2: Housing Finance Sector ........................................................................................................ 10
Chapter 3: Key Players in Housing Finance Company ........................................................................... 15
Chapter 4: Demand Drivers of Housing Finance Sector ......................................................................... 19
Chapter 5: Challenges for HFCs ............................................................................................................ 23
Chapter 6: Government policy in Housing Finance Sector ...................................................................... 26
Chapter 6: Future Prospect of Housing Finance Sector ........................................................................... 29
Chapter 7: Micro-Finance Sector ........................................................................................................... 31
Chapter 8: Overview of NBFC-MFI ......................................................................................................... 35
Chapter 9: Key Players in Micro-Finance Sector ..................................................................................... 43
Chapter10: Challenges in Micro-Finance Sector ..................................................................................... 47
Chapter 11: Demand Driver of Micro-Finance Sector ............................................................................. 50
Chapter 12: Government policy of Micro-Finance Sector ....................................................................... 55
Chapter 13: Overview of Auto-Finance Market ...................................................................................... 57
Chapter 14: Key Players in Auto-Finance Sector.................................................................................... 67
Chapter 14: Challenges pre-Covid-19 on Auto-Finance Sector ................................................................ 71
Chapter15: The challenges before auto-financing industry post covid-19............................................... 73
Chapter 16: Government initiative in Auto-Finance Industry ................................................................. 75
Chapter 17: Findings and Recommendation........................................................................................... 77

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Chapter 1: Introduction

Industry Research

Industry research is the collection of economic, market and (sometimes) political factors that
influence an industry, typically presented in a report format.

An industry information resource provides you with access to a suite of standardized industry
reports that provide the data and analysis you need to make knowledgeable business decisions.

You should also be able to use your industry information resource to help you develop your
business plan.

Need of the Study

 One of the essential responsibilities for an equity research analyst.

 To analyze a particular industry, see its demand-supply mechanics, past trends and future
outlook.
 Sheds light on the economic health of the company- beneficial for the stakeholders to invest
or corrective actions to take in case of any untoward developments in the company.

Objectives of the Study

1. Review available reports and statistics

2. Approach the correct/relevant industry
3. Demand & supply scenario- studying its past trends and forecasting future outlook.
4. Competitive scenario
5. Recent developments
6. Focus on Industry Dynamics

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Chapter 2: Housing Finance Sector

Introduction

Housing is the considered to be the single largest investment by Individuals. In India Owning a
house is considered as a sign of prosperity and success, most of the individuals in India work hard
throughout their life to pay off their housing loans. Easy accessibility of housing loan was a major
area of concern for individuals in India, this concern was addressed by Housing finance companies.
Housing Finance Institutions fulfil the housing shortage in the country, and support the
development of over 300 other industries .Housing development is a key driver of broader
economic and community development, asset creation, employment creation and wealth
accumulation hence government has always shown huge concern on Housing development and
Institution that supports housing development in India. Few developments in government policies
are noted below

 Based on Chakraborthy committee report in 1985, RBI made many recommendations for
liberalization in Housing finance system.
 In 1987, Life Insurance Corporation and General Insurance Corporation were allowed to
enter Housing Finance business by HFC through amendment in Insurance Act of India.
 In 1988, the National Housing Bank (NHB) was set up as an apex regulatory and
promotional agency as a subsidiary of the RBI to Promote Housing industry in India.
 In 1989, the RBI allowed Commercial banks to issue large loans for housing without
imposing rigid restrictions on interest rate or loan quantity ceiling

Indian housing Loans has performed well during past couple of years even after economic
slowdown and other downsides in overall economy. Some of the reason for the consistent
performance are

 Normally the loans offered are upto 85% of the cost of property
 Attractive tax benefits on housing loans
 Record fall in interest Rates making loans Affordable
 Fewer alternative investment avenues with a poorly performing equity market.
 Deregulation of the sector have allowed new players to enter the market making the
industry more competitive which ultimately benefits the buyers and also helped widen the
range and reach of the product.
 Demographic and socio-economic changes, urbanization, nuclear families, greater
mobility amongst young professionals and a mindset that does not view debt negatively

This has led to increase in demand for housing and Housing finance Industry. Due to the slowdown
in the economy, credit off-take in the Industrial sector has been dwindling. Further, housing

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 finance is considered to be a comparatively low risk form of advance. These aspects have
compelled commercial banks also to become active in housing finance. All of this has led to cut-
throat competition in the market leading to interest rate war among players again benefitting the
buyers but somewhere affecting sustainability.

Industry Overview of Housing Finance Sector

Table 1.1: Industry Overview of HFC

(₹. in Million)

2018 2019
Nmber of
Type
HCFs Number of
Asset Size HCFs Asset Size
1 2 30 4 50
A -Government Companies 1 4,89,300 1 7,28,390
B- Non- Government Companies
(1+2) 90 111,08,370 98 127,23,000
1-Public Ltd. Companies 72 110,93,240 78 126,96,340
2- Private Ltd. Companies 18 15,130 20 26,670
Total (A+B) 91 115,97,670 99 134,51,390
Source: NHB and RBI

 The main provider of housing Finance are HFCs and SCBs , but after the liquidity crunch
mainly due IL&FS crisis there was a sharp deceleration on growth of credit disbursed by
HFCs,simultaneously bank credit to housing started picking up and grew at an unprecedented
pace in 2018-19 , it made up partially for the slowdown in HFC credit.
 There were 99 HFCs at the end of March 2019 out of which only 18 were deposit taking
companies. Non -Government owned public limited companies had major contribution when
it comes to total asset size with 94.4% of total asset, it grew by 14.5% in 2018-19.
 The government company grew drastically by 49% in 2018-19 (Table 1.1)

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Table 1.2: Consolidated Balance Sheet

Percentage Variation Percentage

2017 2018 2019 Variation
2017-18 2018-19
1 2 3 4 5 6
Share capital 9,352 30,548 34,360 227 13
Reserves and surplus 94,283 125,922 154,807 34 23
Public deposits* 112,099 121,886 107,389 9 (12)
Debentures 337,199 411,317 476,297 22 16
Bank borrowings 177,877 235,958 327,500 33 39
Borrowings from NHB 22,732 28,870 28,287 27 (2)
Inter-corporate borrowing 2,008 4,013 35,627 100 788
Commercial papers 68,587 98,324 80,646 43 (18)
Borrowings from Government
Subordinated debts 16,279 20,200 18,595 24 (8)
Other borrowings 18,599 21,146 25,103 14 19
Current liabilities 24,673 32,052 14,003 30 (56)
Provisions 8,425 12,812 8,578 52 (33)
Other** 17,101 18,410 40,397 8 119
Total liabilities/Assets 909,214 1,161,458 1,351,589 27.7 16.4
Loans and advances 7,37,461 9,45,149 11,91,727 28.2 26.1
Hire purchase and lease assets 2 4 0 121.5 -94.6
Investments 55,151 73,877 90,406 34 22.4
Cash and bank balances 22,729 19,578 34,376 -13.9 75.6
Other assets*** 93,871 1,22,851 35,082 30.9 -71.4

Source: RBI, NHB

Consolidated Balance sheet of HFCs

 The moderation in credit and investment growth has led to decline in growth % of
consolidated balance sheet of HFCs, although it has grown reasonably in 2018-19.
 Although bank borrowing on the liability side has grown at a decent pace, Due to the
declining market confidence the borrowing through market instruments like debentures and
commercial paper decelerated (Table 1.2)

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Resources Mobilized by HFC

Chart 1.1: Resources Mobilized by HFCs (at end-March)

Resources Mobilized by HFCs (at end-March)

120

100 1.9
4.8 1.6
4.2 2.6
4.2
16.1 17.5 17.4
80
11.4 9.9 9.5
60
21.6 23.7 27.9
40

20 44.2 43.1 38.4

0
2017 2018 2019

Debentures Banks Public Deposits Others NHB Foreign Borrowings

Source: NHB

Though HFCs majorly rely on debentures and bank borrowings for funding (Chart 1.1) but during
recent times as the domestic market remained risk-averse, the dependency on external sources
grew from 1.6% in 2017-18 to 2.6% growth in 2018-19.

Financial Performance

Though Income and expenditure grew at faster rate in 2018-19, expenditure grew at a relatively
faster pace and hence leading to decline in profit (Chart 1.2). the Overall expenditure increased
due to higher financial and operating expense.

Chart 1.2: Financial Parameter of HCFs

Financial Parameter of HCFs (Y-o-Y Growth %)
60
37.6
40 27.9 24.4
20 14.5 14.4

0
INCOME EXPENDITURE NET PROFIT
-20
-17.5
-40 2017-18 2018-19

Sources: NHB

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Soundness Indicators

NNPA and GNPA ratios increased in 2017-18. While the GNPA ratio stabilized in 2018-19, the
NNPA ratio jumped up further during the year, reflecting a decrease in provisions maintained by
HFCs.

Chart 1.3: NPA Ratios of HCFs

NPA RATIOS OF HFCs (At end-March)

1.5 1.3 1.3
1.1 1.1 1.1
1 0.8
0.6
0.5 0.5 0.5
0.5

0
2015 2016 2017 2018 2019

GNPA NNPA

Source: NHB

The liquidity stress caused by the NBFC crisis had a spillover effect on Housing finance
companies leading to a huge hit on companies profit due to reduction in credit extension, Since
August 2019, housing finance companies has been brought under regulatory purview of RBI
which has then taken much required measures and steps to address different issues related to
HFC like payment defaults and governance concerns thereby building confident among the
investors.

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Chapter 3: Key Players in Housing Finance Company

LIC Housing finance ltd

LIC Housing Finance Ltd (LICHFL) is one of the largest housing finance companies in India with
a key objective of providing long term finance to individuals for the purchase or construction of
house/flat for residential purposes in India. The AUM of LIC Housing Finance company has
Doubled from 10,83,610 Million to 21,05,780 Million. The Profit after Tax has also seen a steady
growth since 2014-15 but the NPA has been a concern as it has increased to 1.99% in 2019-20.
Though overall the the growth in disbursement is steady but we have seen a decline in
disbursement in 2019-20.

(₹. in Million)

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Disbursement 3,03,270 3,61,510 4,15,410 4,93,780 5,39,080 4,69,360

AUM 10,83,610 12,51,730 14,55,680 16,74,670 19,46,460 21,05,780

Revenue from Operation 1,05,466.7 1,22,508.5 1,39,869.4 1,48,369.8 1,73,550.2 1,96,966.9

Profit after Tax 13,861.8 16,607.9 19,310.5 20,025.0 24,309.7 24,018.4

CAR 15.30% 17.04% 15.64% 15.49% 14.36% 14.37%

Return on Total asset 1.34% 1.37% 1.38% 1.25% 1.31% 1.50%

Net NPA 0.22% 0.22% 0.14% 0.43% 1.08% 1.99%

Return on Equity 18% 20% 19% 17% 16% 14%

Profit Per employee 8.72 9.62 10.53 9.52 10.52 10.04

Net Interest Margin 2.24% 2.52% 2.70% 2.38% 2.38% 2.34%

Net Profit Margin 12.91% 13.35% 13.78% 13.50% 13.99% 12.21%

Return on Capital Employed 1.40% 1.44% 1.51% 1.41% 1.47% 1.32%

Debt to Equity 10.56 10.43 9.98 10.15 10.45 10.89

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Indiabulls Housing finance ltd

Indiabulls Housing Finance Ltd (IBHFL) was incorporated on May 10, 2005. The company
provides home loans and loans against property. They also offer plot loans and loans against
residential commercial and rental property. The company is headquartered in New Delhi. The
revenue from operations has shown huge jump in from 56,030.20 Million to 1,32,164.6 Million
but Profit after Tax has declined from 40,910 Million to 29,040 Million, this was mostly to decline
in disbursement and liquidity risk faced by the Industry itself , IBHFL has used all the reserves
and hence the NPA for the year 2019-20 was 0%. They were also able to maintain the CAR ratio
way above the required rate. The major concern for IBHFL is to sustain the Net Profit Margin
which has decline in the year 2019-20.

(₹. in Million)

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

AUM 5,22,350 6,86,830 9,13,010 12,25,780 12,05,250 11,82,530

Revenue from Operation 22,065.58 30,848.37 43,904.67 58,229.80 56,030.20 1,32,164.6

Profit after Tax 19,010 23,450 29,060 38,950 40,910 29,040

CAR 18.35% 20.51% 18.28% 18.61% 20.60% 27.09

Return on Total asset 3.74% 3.53% 3.24% 3.30% 3.11% 1.9%

Net NPA 0.36% 0.35% 0.36% 0.34% 0.69% 0%

Return on Equity 30.82% 27.07% 25.48% 29.42% 26.53% 18.7%

Net profit Margin 26.21% 25.42% 24.82% 26.04% 24.84% 16.37%

Return on Capital Employed 4.21% 3.65% 3.37% 3.54% 3.43% 3.12%

Debt to equity 6.18 4.66 5.95 6.99 6.42 4.0%

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PNB housing finance ltd

PNB Housing Finance Limited (PNB Housing) is a registered housing finance company with
National Housing Bank (NHB) incorporated under the Companies Act 1956 and commenced its
operations on November 11 1988. It is promoted by Punjab National Bank (PNB) which holds
32.8% of share capital in the company. The AUM of PNB housing finance ltd has increased
drastically in since 2014-15 along with the revenue from operations but the net profit margin has
declined drastically in 2019-20 due to with the PAT has also got affected and declined to 6,462
Million in 2019-20 from 11,920 Million in 2018-19. The profit per employees has also seen a
drastic decline in 2019-20.

(₹. in Million)

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Disbursement 94,400 1,44,560 2,06,390 3,31,950 3,60,790 1,86,260

AUM 1,72,970 2,75,550 4,14,910 6,22,520 8,47,220 8,33,460

Revenue from Operation 17,767.2 26,979.2 39,077.0 54,880.6 76,793.2 84,818.4

Profit after Tax 1,960 3,260 5,240 8,412 11,920 6,462

CAR 13.76% 12.70% 21.62% 16.67% 13.98% 17.98%

Return on Total asset 1.28% 1.34% 1.44% 1.56% 1.61% 0.80%

Net NPA 0.12% 0.14% 0.15% 0.25% 0.38% 1.75%

Return on Equity 15.59% 17.52% 13.86% 14.20% 17.44% 8.12%

Profit per employee 3.6 4.8 6.2 7.3 8.2 4.0

Net Interest Margin 2.98% 3.10% 2.97% 3.19% 2.93% 2.98%

Net profit Margin 11.03% 12.10% 13.40% 15.32% 15.51% 7.61%

Return on Capital Employed 9.67% 9.00% 9.16% 7.90% 8.50% 8.12%

Debt to equity 9.20 11.23 5.74 8.19 9.66 7.72%

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Can Fin homes limited

Can Fin Homes Limited (CFHL) is a key player engaged in the business of housing finance in
India and one of the few Institutions permitted by the Regulator National Housing Bank (NHB to
accept deposits. The Company offers a range of products on housing such as loans for home
purchase home construction home improvement / extension site purchase as well as non-housing
finance. Though the AUM has increased throughout the years it has not increased at a pace at
which Industry is growing. the PAT has seen a consistent growth along with CAR much above the
compliance requirement. Can fin homes has given good return on equity throughout the years.

(₹. in Million)
2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Disbursement 33,460 39,230 47,920 52,070 54,790 54,810

AUM 82,310 1,06,430 1,33,130 1,57,430 1,83,810 2,07,080

Revenue from Operation 8,163 10,829 13,528 14,905 16,995 20,189.1

Profit after Tax 862.4 1,571 2,352 2,861 2,967 3761.2

CAR 18.39% 20.69% 18.50% 19.08% 16.44% 22.28%

Return on Total asset 1.23% 1.69% 1.97% 1.98% 1.76% 1.93%

Net NPA 0 0 0 0.20% 0.43% 0.54%

Return on Equity 17.75% 19.05% 24.06% 22.33% 18.15% 17.44%

Net Interest Margin 2.54% 3.24% 3.54% 3.53% 3.33% 3.52%

Net profit Margin 10.56% 14.50% 17.38% 18.85% 17.18% 18.52%

Return on Capital Employed 9.69% 10.49% 10.28% 9.16% 8.86% 8.25%

Debt to equity 9.0 9.82 10.32 9.36 9.37 8.64

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Chapter 4: Demand Drivers of Housing Finance Sector

Upward trend in Urbanization

About 10 million people migrate to cities every year, the demand for new homes has been
increasing consistently and is expected to speed-up with governments focus on building new smart
cities and governments keen interest to promote Tier 2 and Tier 3 Cities which will lead to growth
and employment in these cities and hence lead to people shifting to these cities and creating
demand for new homes. The trend of increase in urban population in India can be seen below
(Chart 1.4).
Residential segment contributes ~80% of the real estate sector. Housing launches across top eight
Indian cities increased 23% y-o-y in 2019 to 223,325 units.

Chart 1.4: Urban Population in India

Urban Population in India ( in Million )

600 525
461 460 471
500 429
400
300
200
100
0
2015 2018 2019 2020 F 2025 F

Population in Million

Source: Ministry of Tourism, KPMG, World Bank, CBRE

Nuclear Family Trend

There has been drastic change in composition of Indian families and their social set-up. Joint
family set-up has been replaced by nuclear family concept, As the trend of nuclear family is
spreading in urban sections of India, it has become a new norm and hence the demand for homes
are increasing tremendously, today both the married couples are the bread earners therefore
making buying house a viable option and also increasing the overall increase in household Income

Due to Growth in Household Income the affordability has increased consistently throughout the
years as seen in Chart 1.6.

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 Chart 1.5: Growth in Income Chart 1.6: Affordability

Growth in Household Incomes in Indian Increasing Affordability (Amount in Lacs)

Cities (2019)
40 35.1 4.0
3.8
12% 10% 35 3.4 3.5
9% 9% 30
10% 8% 8% 8% 8% 30 3.0
2.9
8% 25 2.5
6% 19.6 2.4
20 2.0
4% 13.3 14.6
2% 15 10.2 1.5
0% 10 5.7 1.0
3.5
5 0.5
0 0.0
2005 2010 2015 2019

Growth in % Price of House Annual Income Affordability

Source: IMF World Economic Outlook Database, JLL, RBI, NHB.

Affordable Housing for all (PMAY Scheme)

 In a bid to provide a home to every Indian by 2022, the Pradhan Mantri Awas Yojana
(PMAY) housing for all scheme was launched by the Government in 2015.
 Looking at the hugely under-penetrated LIG and MIG market, PMAY will act as a much-
needed catalyst to support the growth for declining housing Industry at least for Next few
years. Government has focused a lot to bridge the Demand –Supply Spread in LIG housing
Market and incentivizing the housing companies to develop more homes for MIG and LIG
section.

Chart 1.7: PMAY-CLSS Category wise Disbursement

PMAY-CLSS Category-Wise Disbursement (July 2016 to June

2019) in %
0.36% 1.20% 0.22%
14.15%
14.16%

69.90%

HFCs PSBs Pvt.Bank RRBs Co-op Banks SFBs

Source: NHB

Page | 20
 The under-penetrated market and governments initiative (PMAY) together compliments each
other and will act as a demand driver for HFCs, it has been noticed that HFCs and housing
developers have already shifted their focus on developing homes for economically weaker
section of the society.
 The finance penetration in rural India is very low (Chart 1.9) and hence HFCs are seeing this
as an opportunity to to enter the rural market and grab the opportunity in the existing scenario.

Chart 1.8: Demand Supply Housing Chart 1.9: Finance Penetration

Housing Demand-Supply in Top 8 Cities Finance penetration In urban And Rural

('000 units) India
47.5
50 39 41.2 41.5 42.2
717 34.3 35.8 37.1
HIG 351 40
1457 30
MIG 647 20 8.2 8.3 8.4 8.6 10.3
7.6 7.8 7.9
LIG 1982 10
25
0
0 500 1000 1500 2000 2500 2011 2012 2013 2014 2015 2016 2017 2020P

Demand Supply Urban Rural

Source: NHB, RBI.

 NHB has issued around 35 new licenses in past 3 years to start HFC business .Most of the new
entries are focusing mainly on financing affordable housing segment in informal sector. All
this development can reduce the demand –supply spread in LIG and MIG segment (Chart 1.8).

Technological development (Fintech)

 Technology has helped assist the HFCs to provide efficient, cost-effective and personalized
/customized product and services to the customers, it has also helped to utilize the resource
effectively, Increase productivity of manpower and automation of manual procedures. Given
that the consumer banking is on a verge of disruption, there is a greater emphasis on customer,
which will be complimented by fintech mechanism
 Technological advancement can help companies to closely monitor their NPA and ALM
problems. Collection and recovery process can also improve drastically and there can be
significant scaling up of businesses across geographies at cost-effective manner.
 Post Covid, Technology will play a huge role as traditional method of recovery and collection
especially for EWS section will no longer be viable and also it will help decrease various cost
to company and help Augment profitability.

Page | 21
Indian Population Age Demography

Two-thirds of India’s population is below 35 years of age. Share of population in the age group 0-
14 is 26.16%. Share of working age population (15-65 years) is 67.27%, This indicates a very
positive future outlook for Indian housing sector as of 2020 and can be used not only to boost
housing Industry but also can give impetus to economic growth and development

Page | 22
Chapter 5: Challenges for HFCs

Covid-19 Impact

The Economic Crisis caused by covid-19 is different than other shocks in recent times as Covid-
19 has caused
 Risk to human life
 Changes in lifestyle (social distancing and travel restrictions) to affect demand.
 Affected almost all geographic area and Industry
 Sudden shock and closure of business activity
 Uncertainty about the time taken for business recovery after covid.

Covid has given yet another jolt to already tumbling NBFC sector
 HFCs were on the path to recovery from recent shocks of GST implementation, demonetization
liquidity crunch.
 COVID-19 is likely to impact not only growth but also the asset quality across all types of
lenders
 Resilience of any lender from Covid will vary depending on:
 Target customer segment (salaried vs self-employed vs MSME vs large corporate)
 Operating model (physical vs digital)
 Operating cost structure

Effect on disbursement by Covid-19

Fresh disbursement have been halted by most of the companies
 Sanctioned and not disbursed cases have been put on hold, lenders are planning to re-evaluate
the customers post lockdown
 Limited disbursement to existing customers ,though tranche disbursement is still continuing

Effect on Collection by Covid-19

 Companies are reaching out to current and delinquent customers to understand their position
of payment
 Digital modes of collection are being leveraged in the absence of cash collection.
 RBI has provided a moratorium on EMIs
 Drastic decline in collection efficiency of delinquent cases

Page | 23
Low Sales and rising inventory level

HFCs after being hit by demonetization and GST implementation was on a verge to recovery, the
NBFC’s loan book was on a rise and overall confidence among buyer was also building, Low sales
and rising inventory has always been a problem for real estate but due to covid-19 pandemic the
sales declined unprecedently. Unemployment, job cuts, salary cuts led to downfall of sales and
confidence which is unlikely to see resurgence in this year, infact the already existing borrower
who took loans are not on a verge to pay back loans on time

Increasing Burden of Non-performing Assets

Recovery is a very integral aspect of HFCs business model, lately it has become a burden for the
companies as they are already facing liquidity crunch there any default by customers have direct
impact on the lending capacity of the company as the fund gets blocked which leads to halt in
companies growth of loan book and affects the future prospects of the company. Post Covid, due
to increase in default the company’s sustainability has become uncertain though government
policies are supporting the HFCs and helping the companies to come out of this situation.

Cut–throat competition

As housing finance loans were considered a safe bet by the institutions as the default rate were
comparatively less in housing loans, it led to tight competition and hence it started interest rates
war among companies, though it benefited the industry to a point but after that, when lenders have
to provide loans below their cost of funds, it Turned into a threat for the housing finance industry.

To survive in the industry and cope up with the competition the loan amount has gone up to 110
percent of property value to meet the legal expenses, Customers were given options to choose from
floating and fixed interest rates, Most of the HFCs are exempting processing charges to stay ahead
in the market.

Drastic reduction in per capita income & unequal distribution of national capital

Reduction in per capita income due to already existing economic downfall and then adding to that
the Covid-19 pandemic has led to uncertainty in buying decision among Indian homebuyers it will
take a while to make that decision to buy their homes and even for people who were in the midst
of making that decision of buying their homes or had booked their homes. Also, the distribution
of national capital among the population of the country affects the housing finance sector directly.
If the capital of the nation is distributed among the population in a rational manner, the most of
the population of the country will be in a position to dream for their own houses & the chances of
growth of the housing finance sector of the country will remain higher. Equal distribution of
income is an integral aspect for real estate industry. Equal income distribution can become a
growth driver for housing finance industry in near future.

Page | 24
 Liquidity crunch

HFCs credit to housing sector showed upward trend in FY18 (Chart 1.10), but the credit
disbursement declined during FY19 mainly due to IL&FS crisis which led to liquidity crunch
scenario. It’s been noticed that NBFC-HFCs who were aggressively increasing their loan book
during earlier years reduced their credit to Housing loans hence the NBFC-HFCs loan book growth
has declined drastically in every quarter since Q4FY18 (Chart 1.11). Some major HFCs had also
temporarily withhold disbursements in order to maintain essential liquidity. To build confidence
among the homebuyers as well as the companies will be a daunting task for the government.

Chart 1.10: Credit to Housing Chart 1.11: NBFC Growth

Credit to Housing Sector by HFCs (at Non-banking Housing Finance Book

end-March) (YoY Growth in %) Growth

30 25.8 30%
21.1 21%
18% 18%
20 16.8 20%
12.7 10%
10 10% 5%

0 0%
2016 2017 2018 2019 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19

HFCs growth Non-banking Housing Finance Book Growth

Source: NHB

Subdued growth due to economic slowdown

HFCs loan book growth and disbursement is expected to remain quiet and subdued due to funding
challenges and slowing GDP which will lead to lower consumption, most HFCs have decided to
increase liquidity by keeping a check on loan disbursement and correct their ALM by selling down
and securitization.

Asset-liability Mismanagement Challenge

Home loans have long maturity, but it become difficult to find matching long term liability to avoid
ALM problem, most of the Funding source of HFCs have maturity less than 5 years, hence
consistent growth of Loan book and disbursement has created a structural challenge for HFCs.To
address this, the Risk management mechanism of HFCs have to be made robust by addressing
issues like Interest rate risk, monitoring, measuring and managing liquidity issue etc. To Support
ALM, securitization instrument could allow lenders to address the ALM challenge.

Page | 25
Chapter 6: Government policy in Housing Finance Sector

Housing sector has significantly contributed to the growth of Indian economy, and also to
government Funds as this sector attracts huge taxes. Lately HFCs have shown conservative
approach in terms of disbursement of loans, they already have NPA issue to tackle with and now
the covid situation has worsened the already struggling HFC industry. Though government has
taken various measures and policy changes specially to boost affordable housing in India, the result
of the policies implemented is yet to be seen in near future

Easing securitization norms

To cope-up with the current slowdown in economy and the liquidity issue in the market, RBI has
relaxed norms regarding Securitization. The holding period for securitization has been reduced
from 12 months to 6 months for loan having original maturity of 5 years and more. This will help
the HFCs to raise funds and add liquidity to their businesses.

Rs. 25000 Crore Alternate Fund for stalled housing projects

Government will put in Rs.10,000 crore, to help the stalled housing project to kickstart, adding to
this SBI and RBI will put in Rs. 15,000 Crore to support the same. This measure is taken to help
complete 1600 stalled project (4.58 lakh Units). Companies with positive net worth will be
provided with this fund. Overall, this will help build confidence among homebuyers and help to
support HFCs during Covid scenario

NHB modifies deposits and capital adequacy norms for HFCs

NHB has mandated to bring down total borrowings to 12 times their net owned funds and raised
the CAR requirement to 15%. this will be allowed in phased manner

 Public Deposits -The deposit-accepting HFCs are henceforth allowed to accept public deposits
amounting only up to 3 times its NOF, as against the limit of 5 times given in the 2010 Directions.

 Total Borrowing - All HFCs are mandated to bring down their total borrowings from 16 times
its NOF (2010 Directions) to 14 times its NOF, on or before Mar-2020. Further their borrowings
are to be brought down to 13 times its NOF by Mar-21 and then to 12 times by Mar-22

 Requirement of Capital Adequacy- All HFCs are required to maintain a minimum capital ratio
(CAR) of 13% on or before Mar-2020 as against 12% in the 2010 Directions. The CAR
requirement further would be raised to 14% by Mar-21 and then to 15% by Mar-22.

Page | 26
RBI rationalizes End-Use policy of External Commercial Borrowings (ECBs)

Earlier there were restriction on how the fund raised by ECBs has to be used, but that restrictions
now have been eased.

As per the RBI’s earlier Master Direction on External Commercial Borrowings, Trade Credits and
Structured Obligations issued on March 26, 2019, ECB proceeds could not be utilized for working
capital purposes, general corporate purposes and repayment of Rupee loans. Further, use of ECB
proceeds for on-lending for these activities was prohibited as well.

This has been done to relax the liquidity scenario for HFCs. The HFCs are likely to benefit on the
cost of borrowing given the interest rate differential between ECBs and domestic debt rates.

Removal of Debenture redemption fund for HFCs

The 25 % requirement of maintaining a DRR of value outstanding in respect to listed companies

has been removed. This will help increase availability of fund to HFCs and help control the
liquidity crunch scenario among the HFCs and also HFCs will have funds for fresh disbursement.

Pradhan Mantri Awas Yojana (PMAY)

The Pradhan Mantri Awas Yojana (PMAY) aims to build over 2 crore affordable homes across
305 rural and urban centres.Under this scheme, which is a part of the Housing for All vision, people
can avail interest subsidy of 4% on loans up to Rs 9 lakh and 3% for loans up to Rs 12 lakh. There
is also a 3% interest subsidy on an Rs 2 lakh loan for a new home in the rural areas. The subsidies,
which have made home loans affordable for the low-income group, have greatly helped people
working in the unorganized sector.

Applicability of concentration of credit/ investment norms

For calculation of Net Owned Fund (NOF), the loans given to/ investments made in companies in
the same group/ subsidiaries by HFCs, inter alia, are to be reduced to the extent such amount
exceeds 10% of the Owned Funds.

Maintenance of a minimum percentage of liquid assets

Deposit accepting HFCs are required to maintain liquid assets of 6% of their public deposit in
terms of section 29B of NHB act, 1987. This requirement has been increased by NHB from 6% to
6.5% of public deposit with effect from June 03, 2019, so now HFCs are required to maintain 6.5%
in liquid asset and remaining 6.5% in form of term deposit or COD with Scheduled bank or in
deposit with NHB or by way of subscription to the bonds issued by NHB) with effect from the
said date.

Page | 27
RBI proposes greater regulatory parity between HFCs and NBFCs

The Reserve Bank of India (RBI) on 17 June 2020 proposed to tighten the rules governing home
financiers, including putting restrictions on lending to builders and doubling the minimum net
owned funds criterion. RBI has also proposed that home financiers should not be simultaneously
allowed to lend to a real estate developer as well as homebuyers in the developer’s project.
Following the review of the rules, home financiers will now be regulated as a category of non-
banking financial companies.

The changes address the following:

 Defining principal business and qualifying assets for HFCs

 Classifying into systemically important and non-SI entities
 Increase in the Minimum Net Owned Fund (NOF) to Rs 200 Million
 Harmonizing definitions of Capital (Tier I & Tier II)
 Applicability of the Liquidity Risk framework and LCR
 Group entities engaged in real estate business
 Fraud monitoring, IT framework, Securitization, etc.

Other Changes proposed by RBI

 The minimum CRAR currently prescribed for HFCs is 12% and would be progressively
increased to 15% by March 31, 2022 (in line with NBFCs).
 Risk weights: HFCs depending on asset classification, LTV, type of borrower, etc. assign risk
weights in the range of 30% to 125%. NBFCs have lesser flexibility for risk weights, which
are broadly classified into 0%, 20% and 100%.
 Different provisioning norms applicable to standard, substandard and doubtful assets in HFCs'
books.
 NBFCs have certain exceptions in the norms on concentration of credit / investment compared
to HFCs.
 While no such limits have been prescribed for NBFCs, limits prescribed for HFCs for exposure
to CRE by way of investment in land & building shall not be more than 20% of capital fund
and for CME shall not be more than 40% of net worth total exposure of which direct exposure
should be 20% of net worth
 HFCs can issue public deposits for varying lengths compared to NBFCs and have greater
flexibility in terms of overall limits, interest on premature repayment of deposits and
maintenance of liquid assets.

Page | 28
Chapter 6: Future Prospect of Housing Finance Sector

Indians, generally take mortgage loans to buy a house, even though mortgaging loan has become
easier and slowly and steadily many norms has been relaxed to boost mortgage market in India,
still mortgage to GDP ratio hasn’t increased as expected (Chart 1.12).hence there is a huge
potential for HFC to fill the gap of under penetration with the help of government support.

Chart 1.12: Mortgage to GDP Ratio

Mortgage To GDP Ratio

15 11.7
8 8.4 8.7 9.1 9.6 10.2 10.9
10 6.5 7.5 7.9 7.9 6.9 6.7 6.9 7.1 7.4 7.7
5.3
5
0

Sources: CSO, analyst estimate, European Mortgage Federation.

When compared to other countries the mortgage to GDP ratio of India is low which shows the
under penetration in Mortgage business in the country, Denmark has the highest Mortgage to GDP
ratio of 88% (Chart 1.13).

Chart 1.13: Mortgage to GDP (Country wise)

Mortgage to GDP Ratio

100 88
80 67
52 56
60 38 40 45
31 34
40 18 20
10
20
0

Mortgage to GDP Ratio

Sources: CSO, analyst estimate, European Mortgage Federation, HDFC Investor Presentation

Page | 29
Providers of Housing Finance: Banks, HFCs

In FY2019 total home loans outstanding for banks was ~Rs.11.5 lakh crore, representing around
58% of the total home loans outstanding. On the other hand, HFCs, had outstanding home loans
of Rs.8.5 lakh crore, around 42% of the total home loans (Chart 1.14).

Chart 1.14: Market Share of Banks and HFCs in Home Loan

Market Share Of Bank and HFCs in Home Loan (In %),March Fiscal year-ends
100%
33.1 35.5 38.9 39.2 40.1 38 40.6 42.3 42.2
50%
66.9 64.5 61.1 60.8 59.9 62 59.4 57.7 57.8
0%
2011 2012 2013 2014 2015 2016 2017 2018 2019

Banks HFCs

Sources: RBI

As can be seen in Chart 1.14, HFCs have gained the market share consistently throughout the
years. Even though these numbers appear large and growing, as discussed above, India has a low
mortgage-to-GDP ratio, compared even to peer developing countries. This reflects the low
penetration of housing finance but on the other hand it can be seen as an opportunity and a growth
driver for the industry, this indicates that there is a huge potential in the industry but due to corona
scenario there will be temporary blip and hence new data about the industry which will come out
in near future will not exactly reflect or give a clear idea about the growth potential of the industry
As this pandemic is new to all, and this scenario has never been faced by any industry earlier, there
is lot of uncertainty as to how the Housing finance industry will shape-up in next few years, only
time will tell if the future prospects for the industry are bright or not but till then its seen that
companies have adopted conservative approach which will stay for at least next few quarters

Page | 30
Chapter 7: Micro-Finance Sector

INTRODUCTION

 The failure of financial market and institutions to address the credit requirements of less
privileged section of society was a huge concern for the overall economic development. Lack
of inclusion to the formal system led to people borrowing money from local money-lenders at
huge interest rates. The money lenders captured the rural credit market as they were able to
monitor borrowers need closely and offer credit to people who were known to them and
trustworthy clients
 Though the policy makers have made efforts to offer financial services to the rural borrower
through setting up of special agriculture banks but has not been successful in integrating rural
informal sectors into formal banking system
 Microfinance institutions emerged as a solution to these problems as they were able to access
financial service without requirement of keeping collateral. It helped them to establish their
own businesses to come out of poverty. The Micro finance institution also provided various
other services such as insurance, savings guidance, capacity building, skill development
training and motivation to start income generating activities
 These innovative programs have helped to reach out to poor people especially women and
empower them which has led to overall socio-economic development. this has also become a
tool to eliminate poverty throughout the world. Similarly, SIDBI encouraged and promoted the
growth story of MFIs through SIDBI foundation for micro credit (SFMC). The financial
inclusion pattern in last few years has been quite motivating and has empowered millions of
Indians to become financially stable
 Self-help group –bank linkage programme (SHG-BLP) and Joint Liability Groups (JLGs) have
made Microfinancing more appealing and has helped achieving overall financial stability.

Self Help Group – Bank Linkage Programme (SHG-BLP)

India’s Self-help group has emerged as world’s most successful and largest programme which has
act as a catalyst to integrate informal economy into formal system. It is network of women owned
community –based microfinance institution which was initiated in 1992 by NABARD to deliver
door-step banking services and was successful in achieving the stated goal of financial inclusion

On 31st March 2019, the SHG-BLP has reached total membership of 10 million group covering
125 million households across India

As on March 31, 2019 the SHG BLP programme has reached many a milestone with a total
membership of about 10 Million groups covering 125 Million households across India.

Page | 31
Chart 2.1: Progress of SHG-BLP

Progress of SHG-BLP (2016-17 to 2018-19) Amount in Million

1000000
871000
900000
800000 756000

700000 615800
583200
600000
471800
500000
387800
400000
300000 233200
195900
200000 161100

100000
0
Amount of Savings Outstanding Amount of loan Disbursed during the Amount of loan Outstanding
year

2016-17 2017-18 2018-19

Source: NABARD Report on Microfinance in India

Amount of Savings Outstanding has increased From Rs.161100 Million in 2016-17 to Rs.233200
Million in 2018-19. Similarly Amount of Loan Disbursed has increased from Rs.387800 Million
in 2016-17 to Rs.583200 Million in 2018-19 (Chart 2.1).

Chart 2.2: Progress of SHG-BLP (No of SHGS)

Progress of SHG-BLP (2016-17 to 2018-19) No of SHGs in Million

12 10
10 8.57 8.74
8
6 4.84 5.02 5.07
4 2.26 2.69
1.89
2
0
No of SHGs with Savings Linkage No of SHGs availed loans during the No of SHGs with loan Outstanding
year

2016-17 2017-18 2018-19

Source: NABARD Report on Microfinance in India

No of SHGs with saving linkage have increased consistently from 2016-17 to 2018-19. No of SHG
availing loans have increased from 1.89 million in 2016-17 to 2.69 million in 2018-19 (Chart 2.2).
Page | 32
Joint Liability Groups (JLGs)

Joint liability group (JLGs) was also introduced by NABARD as a pilot project in 2004-05 in 8
states. This was then rolled in a full-fledged in 2006 manner after looking at the successful results
in few states. JLGs are informal groups of 4-10 members who are engaged in similar business and
who have agreed to jointly repay the loans taken by the entire group

NABARD extended 100% refinancing support to the financing banks. The growth story of JLGs
has been spectacular and infact NPA Ratio in JLGs has been impressive when comparing it to
SHG-BLP.

Chart 2.3: No of JLGs

No of JLGs
6000000
5000000
4000000
3000000
2000000
1000000
0
North
Northern Eastern Central Western Southern
Eastern Total
region Region Region Region Region
region
As on March 2017 162931 88800 700427 397057 303577 800553 2453345
As on March 2018 242009 140134 1072190 511843 403446 1103122 3472744
As on March 2019 374281 218147 1689745 672115 549736 1572376 5076400

As on March 2017 As on March 2018 As on March 2019

Source: NABARD Report on Microfinance in India

The Eastern region has topped the list of number of JLG with around 1.6 million group as on
March 2019, followed by southern region with around 1.5 Million JLG groups as on March
2019.With a view to sensitize the stakeholders of the JLG programme, NABARD has been
organizing training programmes and exposure visits to successful JLGs. JLGs has become one of
the pillars to the growth story of Microfinancing in India.

Page | 33
Chart 2.4: Historical JLG growth

Historical JLG growth in portfolio size/number of clients and forecast

4000 70
64 60
3000 57
51 50
44 40
2000 34 37
26 30
1000 18 19 20
10
0 0
FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
GLP (INR Bn) 262 401 857 1069 1366 1786 2700 3163 3627
Clients (mn) 18 19 26 34 37 44 51 57 64

GLP (INR Bn) Clients (mn)

Source: MFIN Micrometer Report

Microfinance Institutions Network has forecasted the no of client growth to be consistent similarly
gross loan portfolio is also forecasted to grow almost two-fold from FY19 to FY22.

Table 2.1 Difference Between SHGs and JLGs

Parameters SHGs JLGs

Underlying Greater focus on savings generation. Greater focus on credit generation.

Strategy

Scalability SHGs are less scalable when JLGs have a faster turnaround and
compared to JLGs are more scalable

Average Group Size 10-20 members per group 3-10 member per group

Associated NPA NPAs vary from 7-8% for SHGs NPAs are less than 1% which is
quite low compared to SHGs

Future Landscape Capacity building for partner NBFC-MFI prefers the JLG model
institutions as it is more commercially viable
and scalable

The choice of disbursement model depends upon strategy of the institution, NBFC prefer JLG as
they have limited funding access and it’s more scalable with less NPAs.JLG reduces default risk

Page | 34
hence commercially more viable. The trend shows that SHGs share will decline in future as most
of the micro-financing institutions promote JLGs .

Chapter 8: Overview of NBFC-MFI

Standing As on 31st March 2019

NBFC-MFI accounts 36.8% of Overall Microfinancing Lending

Micro-finance Industry total Loan portfolio (outstanding) was Rs.18,73,860 Million where
NBFC-MFI accounted for Rs.6,88,680 Million(37%)

Overall Loan Portfolio Segregation 1) Banks-33% 2)NBFC-MFIs-37% 3)Small Finance Bank-

18% 4)NBFC-11% 5)Others-1.13%

NABARD has been Giving Long Term Refinance support to NBFC-MFIs. Refinancing has
Helped Support the Liquidity Positions for NBFC-MFI since 2014-15 when NABARD started
giving the Refinancing assistance to the NBFC-MFI. Rs.33,080 Million have been refinanced
during 2018-19, it has been disbursed to 14 MFIs.

Chart 2.5: Peer Group -Wise no of lenders

Peer Group-Wise Number of Lenders in Operation

200 184
180
160 149
140
120
100 86 79
80
60 50
33 27
40
13 13 16
20 8 8
0
NBFC-MFI Banks SFBs NBFCs Non-Profit MFIs Total

31-Mar-20 31-Mar-19

Source: SA-DHAN Finance report 2020

Page | 35
There was a steady increase in number of Micro-finance lenders from 149 in FY19 to 184 in FY20.
Except for Banks and SFBs which remained same, others show Positive jump in no of
Microfinance Institution from March-19 to March-20

Table 2.2 :Lender Type of Micro-Finance

Lender Type Q4 FY 19-20 Q3 FY 19-20 Q2 FY 19-20 Q1 FY 19-20 Q4 FY 18-19

NBFC-MFI 37% 37% 36% 35% 35%

Banks 35% 36% 36% 37% 37%

SFBs 18% 17% 17% 17% 17%

NBFCs 9% 9% 10% 10% 10%

Non-Profit MFIs 1% 1% 1% 1% 1%

Source: SA-DHAN Finance report 2020

When we understand the active number of loans by different lenders, we see that NBFC-MFI and
SFBs share in active loan has increased consistently but on the other hand number of active loan
for Banks and NBFCs have reduced, The Active loan for Non-Profit MFIs remain Constant
through the Quarters

Chart 2.6: Number of Active Loan

Number of Active Loans across lenders (In Million)

120 104.1
98.3
100
80
60
38.8 35.8 36.6 35.3
40
18.5 17
20 9.2 9.3
1 0.9
0
NBFC-MFI Banks SFBs NBFCs Non-profit MFIs Industry

31-Mar-20 31-Dec-20

Source: SA-DHAN Finance report 2020

The Client Base of Micro Credit Lending Has Increased from 98.3 Million on 31 st March 2020 to
104.1 Million Clients in December 2020. Most of the Lending Segments have shown consistent
increase in Client base.

Page | 36
Chart 2.6: Loan Portfolio O/s

Loan Portfolio O/s across lenders (In Millions)

2500000

2000000

1500000

1000000

500000

0
Non-Profit
NBFC-MFIs Banks SFBs NBFCs Industry
MFIs
31-Mar-20 749090 917150 413220 203160 19030 2301650
31-Dec-20 654390 842470 366960 193100 16630 2073540

31-Mar-20 31-Dec-20

Source: SA-DHAN Finance report 2020

The Combined Micro Credit portfolio outstanding of all lenders has increased to Rs.23,01,650 in
March 2020 showing 11% growth from Q3 FY19-20, the loan portfolio outstanding has increased
by 28% YoY

The unrest in Assam between lenders and borrowers has reflected in portfolio outstanding in
Assam and has shown 6.43% decline when compared to previous quarter. Loan portfolio
outstanding has reduced from Rs. 1,22,180 Million in December 2019 to Rs.1,14,330 Million on
March 2020

Page | 37
Chart 2.7: Portfolio Quality

Portfolio Quality of Microfinance Industry

1.78%
2.00%
1.40% 1.29%
1.50%
0.92% 0.81% 0.88%
1.00% 0.62% 0.51%
0.41%
0.50%
0.00%
Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20

PAR>30 PAR>60 PAR>90

Source: SA-DHAN Finance report 2020

The Quality of Asset portfolio has deteorated from September 19 to March 20 consistently as seen
in Figure 2.7.

Portfolio at risk (PAR)

Chart 2.8: Delinquency Rate

Delinquency Rate
0.035

0.03

0.025

0.02

0.015

0.01

0.005

0
NBFC-MFIs Banks SFBs NBFCs NFPs
Column2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Mar-20 1.90% 1.50% 1.10% 1.50% 1.10% 0.70% 1.60% 1.00% 0.70% 3.20% 3.10% 2.40% 0.30% 0.20% 0.10%
Dec-19 1.70% 0.90% 0.50% 1% 0.60% 0.40% 1.00% 0.70% 0.40% 3.00% 1.90% 1.20% 0.40% 0.20% 0.20%

Column2 Mar-20 Dec-19

Source: SA-DHAN Finance report 2020

Among the lenders, banks which had been at the low risk in the previous quarter, have shown
deteriorating asset quality with an increase in all buckets of delinquency. NBFCs were at the
highest risk in the previous quarter, have shown further deteriorating asset quality with an increase

Page | 38
in all buckets of delinquency. NFPs have shown improving asset quality with decrease in all
buckets of delinquency.

Chart 2.9: Average Ticket Size

Average Ticket Size Industry-wise lender wise Break-up

50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
Non-Profit
NBFC-MFIs Banks SFBs NBFCs Industry
MFIs
Dec-19 30235 43791 34685 38061 27253 36904
Sep-19 28838 40528 34558 36371 30562 34853

Dec-19 Sep-19

Source: SA-DHAN Finance report 2020

Table 2.3: MFI Industry Snapshot of March 2019

MFI Industry Banks SFBs NBFC- NBFCs Not for Profit Total
Snapshot FY 2019 MFIs MFIs Industry

Unique live 17.8 11.89 25.53 8.04 0.78 64.10

Borrowers (In Mn)

Active Loans (In 22.50 14.91 39.34 8.78 0.92 86.46

Mn)

Portfolio O/s (In 5,99,990 2,99,900 6,81,560 1,85,390 18,630 1,78,5470

Mn)

Market Share in 34% 17% 38% 10% 1% 100%

O/s Portfolio

Disbursed Amount 7,85,960 3,16,730 8,32,000 1,74,480 21,570 21,30,740

(In Mn)

Page | 39
Average Ticket Size 42,086 30,780 25,850 31,722 29,656 31,623
in Rs. (FY 2019)

30+ Delinquency 0.50% 1.13% 0.91% 2.73% 0.69% 1.00%

90+ Delinquency 0.22% 0.54% 0.37% 1.35% 0.26% 0.45%

Source: SIDBI Pulse Report

 NBFC-MFIs is leading and has shown promising numbers in Unique Live Borrowers
 Banks have the lowest delinquency when compared to overall industry as they disburse
loan to customers only after Stringent overall credibility check and has been conservative
in giving out loans to Micro borrowers.

Table 2.4: Disbursed Amount of Micro-Finance in Million

Particular FY 2016 FY 2017 FY 2018 FY 2019

Banks 3,48,590 4,42,250 5,41,070 7,85,960

SFBs 2,70,540 2,43,630 2,41,460 3,16,730

NBFC-MFIs 3,32,590 4,18,190 6,30,090 8,32,000

NBFCs 72,900 76,020 1,40,160 1,74,480

Not For Profit MFIs 27,290 15,080 19,330 21,570

Total Industry 10,51,910 11,95,220 15,72,110 21,30,740

Source: SIDBI Pulse report

 Loan disbursal in terms of value grew by 36% in FY 19 compared to FY 18

 Banks has shown highest growth of 45% from FY 18 to FY 19
 NBFC-MFIs witnessed growth at 32% from FY 18 to FY 19

Page | 40
Chart 2.10: Delinquency 30+ and 90+

30+ and 90+ Delinquency Lender Category-Wise

3.50 3.09
3.00
2.50
2.00 1.65
1.50
0.88 0.96
1.00 0.65 0.65
0.33 0.41
0.50 0.23 0.27 0.21
0.08
0.00
Banks SFBs NBFC-MfIs NBFCs Not For Profit Total
MFIs

30+ Delinquency 90+ Delinquency

Source: SIDBI Pulse report

90+ Delinquency of Overall Industry is seen at 0.41% as on September 2019.

Despite NBFC crisis, NBFC-MFIs has shown positive growth in AUM till Jan 2019.

MFI has displayed healthy performance in terms of overall AUM even though NBFC Sector was
struggling due to the liquidity crunch due to IL&FS crisis.The AUM of MFI grew by 47% y-o-y
in FY19 mainly due to increase in client base and increase in ticket size of loan disbursed .also
companies concentrated more on under penetrated states like West Bengal (AUM up by 83%),
Rajasthan(AUM up by 111%), Bihar (AUM up by 77%) which led to overall growth in AUM of
MFIs.

Page | 41
Chart 2.11: Total AUM of NBFC-MFI

Total AUM of NBFC-MFI ( Rs.in Million)

800000 60%
55% 682070
700000
50%
47%
600000
40%
500000 465460
35%
400000 30%
301130
300000 250180
20% 19% 20%
17%
200000
11% 12%
10%
100000

0 0%
Jan-16 Jan-17 Jan-18 Jan-19

AUM NBFC Growth Y-o-Y Microfinance Growth Y-o-Y

Source: MFIN

Even though there was huge liquidity crisis in NBFC sector, microfinance were least affected as
their business fundamentals provide safety against such crisis. The loan given by MFIs are of short
duration as compared to its borrowing which eliminates problem of Asset-Liability
Mismanagement, also In 2019, MFIs raised funds from securitization in order to keep its liquidity
position strong

The AUM growth was significantly hit by demonetization in FY17 and hence the growth declined
from 35% in FY16 to 20% in FY17, but it was just a matter of time when the growth in AUM
rebounded and is expected to sustain ,though there will be short term decline again due to COVID-
19 pandemic ,it is expected to come back strong to its original level. The proposal of increase in
household income limit for eligible borrowers and higher permissible indebtedness for companies
will help augment growth and help increase borrower base

Page | 42
Chapter 9: Key Players in Micro-Finance Sector

Equitas small finance bank

Equitas Small Finance Bank is a small finance bank founded in 2007 by Equitas as
a microfinance lender, with headquarters in Chennai, India. After receiving license from
the Reserve Bank of India (RBI) on 30 June 2016, Equitas began banking on 5 September 2016 as
a subsidiary of holding company Equitas Holdings Ltd. With effect from 4 February 2017, Equitas
became a scheduled bank. The AUM of the bank increased consistently throughout the years and
the revenue from operations has also been consistent with Rs.26454.45 million through revenue
from operations in 2019-20. Equitas has raised debt throughout the years and hence the debt equity
ratio has increased consistently.

(Rs. in Million)

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

AUM 40,100 61,250 71,820 82,380 1,17,042.88 1,53,669.45

Disbursement 36,060 51,940 51,430 71,820 85,783.11 99,110.73

Revenue from Operation 4352,1 10,368 14,426 15,427.1 21,119.34 26,454.45

Profit after Tax 2,208 1,671 1,594 314 2105.66 2,436.35

CAR 21.15% 21.70% 35.51% 29.63% 22.44% 23.61%

Return on Total asset 2.96% 3.09% 2.02% 0.30% 1.45% 1.39%

Net NPA 0.80% 0.94% 1.47% 1.46% 1.44% 1.66%

Return on Equity 11.2% 13.3% 8.92% 1.57% 9.85% 9.84%

Net Interest Margin 11.3% 11.1% 10.8% 8.1% 8.55% 9.11%

Net profit Margin 15.65% 13.25% 8.57% 1.78% 8.76% 9.20%.

Debt to equity 2.04 2.12 2.24 4.78 5.24 6.22

Page | 43
Credit access Grameen

Credit Access Grameen Limited (formerly known as Grameen Koota Financial Services Pvt. Ltd.)
was born out of the need for timely and affordable credit to India’s poor and low-income
households. The AUM of the company was 1,19,960 Million in 2019-20 due to consistent growth
throughout the years. The company has maintained a good CAR and the NPA throughout the years
is almost 0%. The Net profit margin jumped from 14.24% in 2017-18 to 25.07% in 2018-19 but it
declined in 2019-20 to 19.44%. The Profit after tax has shown a decent growth throughout the
years.
(Rs. in Million)

Particulars 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

AUM 14,470.65 25,387.76 30,754.43 49,746.1 71,590 1,19,960

Disbursement 32,432 33,490 34,030 60,820 82,210 1,03,890

Revenue from Operation 2,814.3 4,658.6 7,088.9 8,655.5 12,183 16,334

Profit after Tax 494.5 840 750 2,120 3,218 3,336

CAR 28.08% 21.5% 29.7% 28.9% 35.7% 23.6%

Return on Total asset 2.82% 3.9% 2.3% 5.1% 5.0% 3.6%

Net NPA 0.49% 0 0 0 0 0

Return on Equity 12.94% 19.8% 12.3% 22.2% 16.3% 12.9%

Net Interest Margin 9.56% 11.4% 11.4% 11.5% 12.7% 12.1%

Net profit Margin 17.57% 17.95% 10.61% 14.24% 25.07% 19.44%

Debt to equity 1.5 4.8 3.9 2.5 2.1 2.9

Page | 44
Avaas Financier limited

AAVAS is primarily engaged in the business of providing housing loan to customers belonging to
low- and middle-income segment in semi-urban and rural areas. These are credit worthy customers
who may or may not have the income proof documents like IT return, salary slip and hence are
financially excluded by other large housing finance companies and banks. AAVAS uses unique
appraisal methodology to assess these customers individually. The financing solution need to be
appropriated and suitable to them. AAVAS also launched Special Urban Low-Income Housing
Product and Specific Women Ownership Product in line with NHB's refinance scheme for the
Special Urban Housing Refinance Scheme for Low Income Households and Refinance Scheme
for Women. The company-maintained Capital Adequacy ratio of 56.03% in FY 2020 which is way
above complied requirement. The Net profit margins has shown a consistent growth and hence the
profitability has increased substantially from 191 Million in 2014-15 to 2,291 Million in 2019-20.

(Rs. in Million)

Particulars 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

AUM 8,429 16,799 26,935 40,730 59,416 77,961

Disbursement 5,369 10,504 13,916 20,512 26,724 29,304

Revenue from Operation 1064.0 1969.8 3054.9 4572.5 6,056.6 7924.3

Profit after Tax 191 328 571 929 1,473 2,297

CAR 26.72% 27.52% 47% 61.55% 67.7% 56.03%

Return on Total asset 3.09% 2.49% 2.78% 2.82% 3.64% 3.75%

Net NPA 0.43% 0.37% 0.48% 0.39% 0.37% 0.34%

Return on Equity 28.47% 22.1% 14.65% 14.90% 11.64% 12.66%

Net Interest Margin 7.19% 7.16% 7.84% 9.0% 9.32% 8.16%

Net profit Margin 17.94% 16.27% 18.95% 18.83% 24.74% 27.59%

Debt to equity 6.04 6.45 2.81 2.32 1.99 2.57

Page | 45
AU Small finance Bank

AU Small Finance Bank Limited (AU Bank) is a small finance bank with operations across its
500+ touch points including 306 bank branches 106 asset centres 23 offices 291 ATMs across 11
states of North West and Central India and a team of 10000+ employees. AU Small Finance Bank
Limited was originally incorporated as L.N. Finco Gems Private Limited on 10 January 1996 as a
private limited company under the Companies Act 1956 with the RoC. In 2020 its AUM stand
strong with Rs.3,08,930 Mn and profit after tax of Rs.6,750 MN. The company’s net profit margin
has declined drastically due to increase in operating expenses hence though the revenue from
operations has increased throughout the years but Profit has not increased in that pace.

(Rs. in Million)

Particulars 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

AUM 55,680 82,210 1,07,340 1,61,880 2,42,460 3,08,930

Disbursement 33,780 56,190 67,300 1,08,250 1,60,770 1,86,340

Revenue from Operation 7,374 10,104 13,870 17,671 29,490 42,860

Profit after Tax 1400 2120 3050 2920 3820 6750

CAR 18.5% 17.1% 23.0% 19.3% 19.3% 22.0%

Return on Total asset 2.8% 3.1% 3.2% 1.7% 1.5% 1.8%

Net NPA 0.7% 0.8% 1.2% 1.3% 1.3% 0.8%

Return on Equity 21.9% 27.7% 20.4% 13.7% 14% 17.9%

Net Interest Margin 4.10% 5.25% 8.01% 4.99% 5.5% 5.4%

Net profit Margin 18.97% 20.88% 21.47% 13.54% 11.1% 13.52%

Page | 46
Chapter10: Challenges in Micro-Finance Sector

Chart 2.12: Challenges for Micro-finance

Challenges For Micro-finance Institution

8%
27%
18%

23% 24%

Lack of Financial Literacy Limited Awareness of Sources Lack of Collateral

High Interest Rates Any Other

Source: 2nd SIDBI National Microfinance Congress 2019

 Despite governments initiatives to fill the gap of financial literacy issue, it still remains the
huge problem which is limiting the growth potential for MFIs
 Lack of Collateral is also one of the major concerns and has become a challenge for MFIs, as
entire MFI concept is based on collateral disbursement, this is a downside as customers default
increase there is no collateral available to fill that default gap
 One more Fundamental problem with MFI sector is the high Interest rates charged to customers
as generally the cost of disbursing fund and collections from customers is higher. this has also
acted as a threat to MFIs as more and more people are getting connected to formal banking
sector which charges less interest rates.

Over-borrowing pattern in microloans

One of the major challenges for MFIs is overborrowing. According to the MFIN around 35 % of
the borrowers have taken loans from two or more lenders. with increase in borrowing and the no
collateral-based disbursement, there is a huge challenge of maintaining a stable NPA ratio.

Page | 47
Chart 2.13: Over Borrowing Pattern

Over-borrowing pattern in microloans

80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
1 Lender 2 Lender 3 Lender 4 Lender 4+ Lender
Mar-17 74.80% 20.20% 4.30% 0.60% 0.10%
Mar-18 72.70% 20.90% 5.40% 0.90% 0.10%
Mar-19 64.80% 22.90% 9.30% 2.30% 0.60%

Mar-17 Mar-18 Mar-19

Source: 2nd SIDBI National Microfinance Congress 2019

As credit needs of borrowers grow, the risk of over-borrowing from multiple lenders becomes
unavoidable. Even though RBI has set up certain restriction to control the overborrowing but it
hasn’t been that effective as of now.

Robust credit risk assessment mechanisms

As the borrowers are mainly from LIG( low income group) most of them don’t have any credit
history , hence it becomes very difficult to understand the credibility of the borrowers which
creates huge challenge in front of MFIs .Decentralized information ,dependence on borrowers for
data on customers , lack of past data makes it difficult to understand customers creditworthiness

Extensive risk management system is required to be developed by MFIs which may increase the
cost further leading to competitive disadvantage. A holistic customer credit profile is must for
better analysis of customers borrowing behavior.

Page | 48
Technology enablement for the ‘high-touch’ industry

Technological development is required specially in Micro lending industry to understand the risk
associated with disbursement and understand the customers well. technological intervention will
lead to efficiency in providing doorstep services which in turn will bring down the overall
turnaround period and operational cost. technology will also help safeguard customers data and
maintain strict privacy norm but there are monetary factor that would add to this and not every
company can afford this technological advancement.

 Increased costs
 Additional resources required

Page | 49
Chapter 11: Demand Driver of Micro-Finance Sector

Micro-lending institution has seen huge growth which was driven mostly by small ticket size loans
to customers who are new and have no past credit records but the trend is changing the
Microlending organizations have also started strict credibility check and risk management policies
to tackle increase in NPAs ,hence MFIs have stopped aggressively disbursing money , the have
changed their growth plan and have realized that future of MFI industry will mostly be driven not
by aggressive disbursement but by systematic disbursement and by deepening the relationships
with their existing customers , they have also started focusing more on income generating loan
rather consumption based loans.

Availability of alternative capital funding channels

In FY19, a total of Rs.357.59 billion was received through debt funding from banks and other
financial institutions, a 63% increase in debt funding when compared to FY18 . Accessibility of
funds from banks is easier for bigger MFIs (69% from Banks) hence medium and small MFIs
source their funding mostly from other financial institution

As the Industry grows and micro-lending market grows ,the need for venturing into new funding
sources will increase ,especially for small and medium MFIs with low credibility and small
portfolio. Also high dependency on debt funding increases the risk from external factors which in
turn affects the overall market liquidity . hence the need to explore new sources of fund arise
which lead to new and reliable business model. This need for sources of fund has led to peer to
peer lending model which is regulated heavilty by RBI to prevent systematic risk. Alternative
funding channels will allow micro lenders to get access to cheaper capital, thus creating
opportunities for increased customer reach and better loan portfolio .this will also enhance and
better the product and service offering.

Page | 50
Disbursement size growth

Chart 2.14: Trend in Average Disbursement per Account

Trend in Average Disbursement per Account

30000
25543
25000 22567
18818
20000
15419
15000
10000
5000
0
2015-16 2016-17 2017-18 2018-19

Source: MFIN

 The demand for credit has been increasing in rural areas of India as household
requirements is increasing day by day ,this can be seen in the above figure 2.14 ,the
average disbursement per account has increased from Rs.15,419 in 2015-16 to Rs.25,543
in 2018-19.

Table 2.5: Profitability improving with stability returning to the operations

2015-16 2016-17 2017-18 2018-19 2019-20 F

Interest Earned 19.3% 19.5% 19.4% 18.7% 18.7%

Interest 9.2% 9.6% 8.5% 7.3% 7.1%

Expended

Net Interest 10.1% 9.9% 10.9% 11.5% 11.6%

Margin

Operating 6.7% 8.5% 6.5% 6.2% 6.0%

Expense

Other Income 2.3% 2.6% 1.4% 2.5% 2.0%

Provision for 0.2% 1.4% 1.6% 0.7% 0.7%

NPAs

Page | 51
 Net Profitability 5.4% 2.5% 4.3% 7.0% 6.9%
Margin

Return on 2.4% 1.7% 2.3% 3.6% -

Managed Assets

Source: Company Filings, BWR.

Employee cost and Interest costs are two major expenses which affect profitability of micro-
lending institute. Increase in efficiency has led to decrease in operating expenses. The net
profitability margin as has increased from 2.5% in 2016-17 to 7.0% in 2018-19 (Table 2.5).The
average portfolio handled by a loan officer has grown by 15% in FY19. As of FY19, a loan officer
caters to 488 clients, on an average basis. The efficiency is further set to increase in further years
which will have positive impact on profitability, but the only major concern is credit costs which
is expected to increase in near future which my hamper the profits of MFIs going forward.

Credit plus/additional products and services

Initially the only broad objective of MFIs was availing credit facilities to LIG and MIG segments
who are not connected to the formal system and have no past credit records. MFIs have now went
beyond this basic objectives to product and services diversification and target the same existing
customers to avail their products and services which help them improve their standards of living
and overall economic development. The extra services and product can include education loans,
affordable insurance etc. Given the pathway that MFIs have already created to reach the rural areas
of India, they have an upper hand in expanding their credit-plus products/services and gaining a
larger consumer base, while retaining existing customers. MFIs are modifying themselves to
provide more than just financial assistance to their customers. Providing credit plus products and
services is the new normal as we go ahead. the positive impact of Credit plus products are

 Customer loyalty
 Potential customers
 High repayment rates
 Financial Self-sustainability
 Greater social outreach
 Access to client information

Role of data in driving growth

In this world which has completely become data driven, even simple decisions are backed by data,
Microlenders has also understood the importance of data and digital development. digital
disbursement has already started as Internet is becoming easily accessible and cheap. There are

Page | 52
huge number of tools to analyze the data’s and offer suitable and personalized loans to the
customers

MFIs has already collected huge data since the inception of Microlending industry, Information
on age, gender, occupation, income and most importantly repayment pattern. Different tools can
be used to analyze the data and forecast NPAs and default patterns. These data can act as a demand
driver as it can help on assessing the MFIs to develop strong risk management structure and also
other things which will help the industry develop further.

 Product development- Based on the available data, MFIs can improve the efficiency to
service the customers by estimating the requirements and giving right size loans and
maintaining a check on repayment and its frequencies. Prediction of future default and
losses can also be done with help of data, this may also help in risk pricing of loans where
different rates can be charged to different customers

 Product and service positioning -Data analytics will allow to understand customers
requirement and allow to give personalized products rather than designing the product
internally. This is possible by using the analytics to generate a database of the needs of the
customer, price modelling and customer segmentation.

 Risk and data-based credit decisions- Automatic customer loan disbursement, crediting
and debiting the accounts in seconds, Division of customers according to their
creditworthiness and risk-based pricing etc can be achieved by Dara analytics.

Collaboration with fintech and other players

MFI are making use of fintech to target large number of audience and reducing the operational
cost. Artificial intelligence based analysis has led to increase in overall efficiency of MFIs . MFIs
has seen the penetration of mobile phones and internet in rural India as a great opportunity.

Cost optimization has become a very important factor that drive sustainability as many new players
have emerged recently leading to increasing pressure on yields. Most of the MFIs are integrating
technology in their system and collaborate with various players across value chain to reduce
portfolio risk and optimize cost. Collaboration with fintech can lead to

 Improvement in the operational efficiency and operating margins of players

To increase operational efficiency, Microlenders target the entire loan disbursal process
like loan origination, loan servicing and loan disbursal
Digitization of the above loan disbursal process by collaborating with fintech players
has been key focus of MFIs in past few years
With the help of Fintech, MFIs are moving towards cashless disbursal of loans,
approximately 87% of the loans were disbursed through cashless mode in Q1 FY19.

Page | 53
Chart 2.15: Growth in Cashless Disbursal in NBFC-MFl

Growth in Cashless Disbursals in NBFC MFIs

100% 87% 85%

80%
80% 74%
61%
55%
60%
40%
20%
0%
Q2 FY 17 Q3 FY 17 Q4 FY 17 Q1 FY 18 Q2 FY 18 Q3 FY 18

Growth in Cashless Disbursals in NBFC MFIs

Source: MFIN Micrometer FY19

There are number of advantages of cashless disbursement like reduction in turnaround time,
reduction in cash management costs, frauds reduction etc. It is also beneficial for the JLGs as they
get to know the exact amount of liability on each member and also gets the correct proportion of
the total amount disbursed by the MFIs

Earlier, loan officers were required to visit branches in the morning to get the demand and
disbursement sheets printed and then again in the evening to update the data. With the use of
tablets, loan officers can update the data recorded during field visits in real time. This also reduces
data entry errors, reduces turnaround times and improves the productivity of loan officers.

Future trends in Digitization

 Making collections cashless and decreasing turnaround time

 Customer-centric digital intervention
 Singular point of access through a Public Credit Registry (PCR)
 Predictive collection model

Page | 54
Chapter 12: Government policy of Micro-Finance Sector

Micro Finance Programme

SIDBI offers microlending to micro, medium and small enterprises who are engaged in industrial
activity. This lending is offered through MFIs or NGOs; however, the MFIs have to make a
security deposit of 10% of loan availed from SIDBI.To keep the security deposits of 10% becomes
very difficult for MFIs due to financials constraint, this is where the Micro Finance Programme
comes into the picture.

In this Programme government provides funds to SIDBI on behalf of MFIs which is to be used as
security deposits. Only 2.5% of the loans amount has to be paid by MFIs as security deposit and
rest 7.5% will be funded by government.

Apart from providing financial assistance to MFIs, government also helps SIDBI to arrange
different awareness programmes, trainings to SHGs, JLGs etc to promote MSME sector growth.

Poorest State Inclusive Growth (PSIG) Programme

Sa-Dhan supported by SIDBI runs this programme to promote financial inclusion in India. this
programme targets Madhya Pradesh, Bihar Odisha and Uttar Pradesh to improve access to
financial services to 12 Million LIG (low Income Group).

RBI relief offer during Covid-19

To fulfill the liquidity requirement of NBFCs and MFIs, RBI on April 17 announced second round
of TLTRO of Rs.50,000 Crore

Also, all India financial Institutions such as NABARD, SIDBI and the National Housing Bank will
be provided with special refinance facility of Rs 50,000 crore at the repo rate

Eligibility Criteria increased to 1.25 lakh

The income limit was increased from 1 lakh to 1.5 lakh on October 2019 by RBI. The people who
earns income up to 1.25 lakh per annum can now avail the service of MFIs, this was earlier 1 lakh
per annum. This will lead to increase in overall market size of the Microfinancing Industry.

This will also help NBFC-MFIs to improve liquidity as banks will be able to classify more loans
as Microfinance loans on their book to ensure their Priority sector lending requirement and hence
banks may purchase microfinance loans from smaller lenders ,improving liquidity with small
lenders.

Page | 55
Loan Moratorium during covid-19

Though initially there was no clarity on moratorium guideline to MFIs, later on it was cleared that
MFIs will also receive the loan moratorium benefit and they won’t have to pay to their lender for
next 3 months .Also almost 70 % of MFI borrowers have opted for the moratorium period as most
of them are from LIG and their household cash flow has depleted due to Covid-19 pandemic. This
has acted as short-term relief to MFIs in this COVID situation.

Page | 56
 AUTO FINANCE INDUSTRY

Chapter 13: Overview of Auto-Finance Market

Chart 3.1: Evolution of Auto Finance Market

The Vehicle Finance market in India is estimated to be around Rs. 3 Trillion. The market is
comprised of commercial vehicles, private vehicles, agricultural vehicles, and two wheelers. While
Banks have been active in the organized segment, the unorganized segment remains untouched
due the borrower’s limited banking habits and their inability to provide formal employment
contracts, income proofs, and a lack of repayment track record with formal financing institution
The market for used commercial vehicles is estimated to be around Rs. 1000 billion. Despite the
opportunity, banks have stayed away from the segment due to the complexities involved – high
cost of delivery, understanding of local geography and the perceived high risk in the informal
sector. About 55% of this market is served by money lenders/ private financiers and 45% of this
market is served by formal sources. While this market is dominated by very large NBFCs, there
are a large number of small NBFCs which operate in the segment and have limited or no access to

Page | 57
debt capital markets. The used commercial vehicle market is driven by the aspirations of driver
turned owners, first time users and first-time buyers and small road transporters. Typical end
clients come from low income households who have limited access to formal sources of financing
and whose livelihood is directly dependent on the vehicle.
Chart 3.2: Expansion in Addressable market with low cost of ownership

Improving income to result in rise from the current estimated 28 vehicles to 38 vehicles per 1,000
people in fiscal 2023 Increasing urbanization, expanding working population and availability of
finance to aid growth in sales PMGSY investment expected to be 1.8 trillion from 2018-2022
resulting in increased demand.

Commercial Vehicle Finance

Chart 3.3: AUM Movement of NBFC-CV

(Source: NBFCs, investor presentations)

Chart 3.4: YoY AUM Growth Trend

Page | 58
 (Source: NBFCs, investor presentations)

 CV Industry Trends and Outlook

The wholesale dispatches of CVs, especially goods carriers, continued to contract in 2020, with
the transition to new emission norms scheduled in less than a month. Accordingly, CV original
equipment manufacturers (OEMs) continued to focus on liquidating the existing BS-IV inventory
in the system prior to the transition in April 2020. The M&HCV (Truck) segment continues to face
multiple issues, including a) overcapacity following the revision in the axle load norms in July
2018, b) tightened financing environment due to the liquidity crunch in the economy, c) viability
pressure on fleet operators due to subdued economic growth, freight availability and freight rates,
and d) slowdown in infrastructure projects. Slowdown in consumption, both in rural and urban
areas, and the general macroeconomic slowdown also continue to weigh on the LCV (Truck)
segment, along with weak credit availability.
The impact of the aforementioned factors to play out in the near term before the demand
environment stabilizes, going forward, with a stable government at the centre. Although vehicle
prices are expected to increases by approximately 10-12% (post implementation of BS-VI
emission norms from April 2020), the likelihood of pre-buying remains limited in the current
macroeconomic scenario, given the challenges posed by the slowdown in infrastructure investment
and the prolonged weakening in consumption trends in the country. We can expect volumes to
contract by 38-40% for the full year in pessimistic scenario post covid. Revival in the LCV
segment hinges on a recovery in demand from the consumption-driven sectors and in the rural
economy, in addition to investments in the e-commerce space.

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The decline in the new CV AUM could be due to the steady decline in new CV disbursements as
observed in chart, New CV disbursements are witnessing a downward trend since Q4 FY2019 as
demand slowed down. Used CV disbursements increased as entities faced higher competition from
banks in the new CV segment and focused on expanding their business margins by focusing on
the relatively high-yielding used CV segment, in view of the high borrowing cost and subdued
operating environment for CV operators.
The credit outstanding was flat at Rs.2.1 trillion as on December 31, 2019 vis-à-vis September
2019. NBFC credit to the new CV segment grew 3% YoY while the used CV segment registered
a YoY growth of about 13-14%.

Passenger Vehicle Finance

Chart 3.5: AUM movement in NBFC-PV

(Source: NBFCs, investor presentations)

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Chart 3.6: YoY AUM Growth trends in used and new PV segment

(Source: NBFCs, investor presentations)

PV Industry Trends and Outlook

The NBFC credit AUM to the passenger vehicle (PV) segment was stable at ~Rs. 1.24 trillion, as
on December 31, 2019, as the QoQ growth remained muted while the YoY growth was also low
at 6.6%.
• The growth in the recent past was supported by the focus of NBFCs on semi-urban and rural
borrowers and the used car segment while banks typically increased their share in the salaried and
new car segments.
• The used car market is estimated to be bigger (in volume terms) than the new car market, though
finance penetration is quite low (~20%) compared to 75-80% in the new car segment. The share
of the used car segment in the NBFC PV portfolio increased to 26% in March 2019 from 21% in
March 2015. The yield in the new car segment is about 9.5-12.0% (depending on the borrower
profile) while the same is about 14-18% for the used car category. Salaried borrowers enjoy better
rates compared to self-employed borrowers. However, weakness in rural markets, on account of
lower wage increases and subdued farm prices, directly impact the entry level car buyer segment
(used car or small car segment).
Growth in NBFC credit to the PV segment is expected to be quite muted at about 3-5% in FY2020.
Expected slowdown in demand, compounded further by the COVID19 related lockdown and
increased competition from banks offering better pricing in the new PV category would exert
pressure on AUM growth. Thus, growth in FY2021 is expected to be about 1-3%.

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However, the supply chain disruption in China/Europe due to Covid-19 could create issues for
most industry participants in the next 2-3 months.
The Covid-19 related impact will also be visible in the retail volume in FY2021 as customers will
try to avoid visiting public places including dealerships.
Given the slowdown in automotive demand across all major geographies due to Covid-19, exports
may also witness pressure in the near term. Outlook: A slowdown in the economy and inflationary
trend directly impacts consumer discretionary items like car purchases.
While the industry demand seems to have bottomed out, the recovery is likely to be gradual though
the prolonged impact of Covid-19 will be detrimental to the industry’s growth in the next fiscal.
The 90+ days past due (dpd) in the PV segment increased to 2.7% in December 2019. The
delinquencies in this segment are likely to remain rangebound at 2.5-3.0% in the near term.
However, the slowdown in economic activity because of Covid-19 is expected to exert pressure
on the asset quality, going forward, and could manifest as higher overdues in FY2021.

Two-wheeler Finance
Chart 3.7: AUM Movement in NBFC 2-Wheeler

(Source: NBFCs, investor presentations)

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 Two-wheeler Industry Trends and Outlook
Chart 3.8: Two-Wheeler Finance Market

(Source: CARE Research)

Chart 3.9: NBFC 2W Portfolio Concentration (As of March 19)

(Source: Equifax 2W Report)

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2-Wheeler finance market is dominated by NBFC and the market share is slightly higher for
captive NBFCs 32% in comparison to non-captive NBFCs 28%; while private banks have a market
share of 37%).
The portfolio performance of the private banks has been relatively more robust in comparison to
NBFCs. Amongst NBFCs, the captive NBFCs have display relatively stronger portfolio
performance in comparison to non-captive financiers.
Outlook:
 2W sales have reduced in recent months after years of sustained growth
 Hike in prices have impacted demand.
 Further price hike seen from Apr-20 with implementation of BS VI emission norms.
 2W demand expected to bounce back – being a necessity product
 Emerging NBFCs to target 40-50% growth in AUM at the least

 Tractor Finance Industry Trends and Outlook

The total NBFC credit to the tractor segment grew at a modest 6% YoY in December 2019 to
about Rs. 400 billion. The FY2020 performance was impacted by the decline in tractor sales,
further accentuated by the base effect of the higher AUM growth witnessed in the previous year.
While demand in the agri segment may be relatively less affected due to Covid-19 on the back of
a good rabi output expectation and healthy reservoir levels, the overall segmental demand would
be subdued because the haulage segment. Thus, growth in FY2021 is also expected to remain
modest, similar to the current levels.

Chart 3.10: AUM movement in NBFC Tractor segment

(Source: NBFCs, investor presentations)

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 The demand sentiments in the industry have remained weak since the turn of the calendar year,
with farm sentiments remaining weak. After a significant decline in volumes in H1, FY2020, an
improved precipitation (despite the erratic nature of the same) helped improve farm sentiments.
While concerns related to impact of excess rains on kharif yield led to volume decline of 10.9% in
November 2019, volumes reported by leading tractor OEMs indicating a growth in monthly
volumes over the past three months, raised hopes of a recovery in farm sentiments; the lockdown
measures undertaken in view of the Covid-19 pandemic, have however hampered the recovery in
industry volumes to an extent.
The lockdown measures undertaken by the government in view of the Covid-19 pandemic have
however hampered the recovery to an extent; the timing of the lockdown, which coincides with
the rabi harvest season, especially remains a cause of concern. The duration of the lockdown and
the disruption caused to the harvesting season remains uncertain and would determine the industry
demand prospects over the short term.
Industry volumes, after declining by 6-8% in FY2020 were expected to recover in FY2021. The
disruption caused by the Covid-19 pandemic and the impact of the same on farm sentiments is
likely to lead to a second consecutive year of decline in volumes. CARE expects industry volumes
to report a mid to high single digit decline in volumes currently; the same would however be
reviewed subsequently as more clarity emerges regarding the extent of the impact of the Covid-19
pandemic. Over the long term, CARE continues to maintain a long term CAGR estimate of 6-7%
for the industry, with the long-term industry drivers remaining intact.
The conservative lending practices and stricter credit quality measures employed by the financiers
are reflected in the improvement in the asset quality in the recent past. The 90+ dpd has stabilised
at 5-6% over the last few quarters vis-à-vis 13% in March 2017. The impact of the ongoing asset
quality pressure is not fully reflected in the 90+dpd as some entities have written off overdues.
The impact on the haulage segment because of the slowdown in economic activity would affect
the asset quality, which is expected to weaken in the near to medium term.
Table 3.1: Used car market and corresponding Auto financing overview

Average Price of Car Rs 3-4 Lakhs

Average Loan Disbursement Rs 3 Lakhs

Interest Rate 4.5-6.5% higher than New Cars

Average Loan to Value 75-80%

Average Age of the Car 4 Years

Average Number of Previous Owners 1

(Source: - Indian blue Book Pre-Owned car market report)

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Share of NBFCs in used CV disbursements

NBFCs lead the used CV disbursement market with approximately 80% share. Their niche focus
and deep understanding of the local economy gives them advantage over banks in this segment.
Two-to-three large NBFCs account for a significant portion of the business, keeping competition
low. These NBFCs have capitalized on the vast opportunity offered by the segment through
investment in processes and manpower. Auto-finance NBFCs that operate in this segment have
developed a deep understanding of the market, customer profile, products and their valuation,
credit appraisal, and efficient management of operations, and thus, have been able to capture the
market et.

In the used vehicles segment, financiers have their in-house valuation grid for evaluating vehicles
of different model, make, vintage, and area in which the vehicle is operated. They have greater
penetration in semi-urban and rural areas, which contribute to a majority of used-CV sales. Major
NBFCs in the space also have branches close to the transport hubs. NBFCs also accept payments
in cash, given that a large part of their customer segment earns in cash. Continuous monitoring of
the disbursed loans by field officers, who originate the loans through frequent visits to the
borrower, helps keep delinquencies under control. Banks have stayed away from the segment due
to the complexities involved – high cost of delivery, lack of understanding of the local geography
and the perceived high risk in the informal sector. A large part of the banks’ used CV portfolio is
refinancing

Chart 3.11: Used CV Disbursement

(Source- CARE Research)

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Chapter 14: Key Players in Auto-Finance Sector

HINDUJA LEYLAND FINANCE

HLF is one of the leading vehicle finance NBFCs in India with a focus on urban and semi-urban
markets. We provide retail finance through a wide range of vehicle financing products.
Hinduja Leyland finance was incorporated on November 12, 2008.hlf’s assets under management
have grown at a CAGR of 53% to Rs 1 Lakh million (as of march 31, 2016).the AUM as on 2018-
19 was 1,51,200 Million up from 51,250 in 2014-15.The return on total asset has increased from
2.51% in 2014-15 to 10.88% in 2018-19.
Fig. In Rs. Million

2014-2015 2015-16 2016-2017 2017-18 2018-19

Disbursement 51,250 70,750 99,330 1,30,320 1,51,200

AUM 65,500 1,00,010 1,40,700 1,92,630 2,54,170

Revenue 8,140 11,460 14,860 19,540 25,610

PAT 1,120 1,500 1,680 1,900 2,760

CAR 19.75% 16.19% 15.84% 17.15% 16.97%

Net NPA 2.90% 2.76% 3.10% 2.96% 3.04%

Return on 8.17% 7.20% 19.96% 23.70% 23.80%

Equity

Return on 2.51% 3.04% 8.71% 9.90% 10.88%

Total asset

Operating 1,652.76 2,245.80 2,598.59 2,873.80 4,228.50

profit

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CHOLAMANDALAM INVESTMENT & FINANCE COMPANY LIMITED

Cholamandalam Investment and Finance Company Limited (Chola), incorporated in 1978 as the
financial services arm of the Murugappa Group. Chola commenced business as an equipment
financing company and has today emerged as a comprehensive financial services provider offering
vehicle finance, home loans, home equity loans, SME loans, investment advisory services, stock
broking and a variety of other financial services to customers.

Chola operates from 1029 branches across India with assets under management above INR
5,92,920 million. Chola has given a consistent return on equity to the shareholders with Net NPA
decreasing from 3.7% in 2016-17 to 1.16% in 2018-19. The company has shown consistency in
PAT which has increased throughout the years.
Fig.in Rs million

2014-2015 2015-16 2016-2017 2017-18 2018-19

Disbursement 1,28,080 1,63,800 1,85,910 2,51,140 3,04,510

AUM 2,61,910 3,03,620 3,51,100 4,36,290 5,75,600

Revenue 36,904.58 41,924.6 46,595.5 54,792.3 69,919.7

PAT 4,350 5,680 7,190 9,180 11,860

CAR 21.2% 19.7% 18.6% 18.4% 17.4%

Net NPA 2.39% 2.35% 3.7% 1.83% 1.16%

Return on 15.8% 16.7% 18.0% 19.6% 20.9%

Equity

Return on 3.0% 3.6% 3.9% 3.7% 3.7%

Total asset

Operating 9,820 12,980 14,160 17,050 21,340

profit

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SUNDARAM FINANCE LIMITED
Sundaram Finance Limited is a financial and investment service provider in India. It is based in
Chennai and has more than 640 branches across the country. The company offers Vehicle loan,
construction equipment loan, consumer loans, wealth management, commercial finance, and
infrastructure finance, among others. Sundaram Finance Limited, a subsidiary of Sundaram
Finance Group, was established in the year 1954. The company is registered with the Reserve
Bank of India (RBI) as a Systematically Important Deposit Accepting Non-Banking Financial
Company. The company has a AUM of 2,89,840 Million in 2018-19 and a disbursement of
1,71,700 Million in 2018-19. The Net NPA has remained in control and under 1 % throughout the
years and the PAT has grown consistently.
Fig.in Rs million

2014-2015 2015-16 2016-2017 2017-18 2018-19

Disbursement 1,00,120 1,14,440 1,31,960 1,56,320 1,71,700

AUM 1,62,610 1,78,950 2,07,350 2,47,340 2,89,840

Revenue 21,849.5 22,528.4 22,695.8 27,633 33,621.2

PAT 4,541.4 4,772.8 4,953.5 5,634.4 6038.6

CAR 21.4% 18.4% 17.9% 17.6% 19.5%

Net NPA 0.52% 0.92% 0.55% 0.66% 0.83%

Return on 17.6% 15.2% 14.0% 14.5% 13.2%

Equity

Return on 2.40% 2.37% 2.18% 2.16% 2.00%

Total asset

Operating 6511.9 6832.3 7202.1 8497.1 8932.7

profit

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SHRIRAM TRANSPORT FINANCE COMPANY LIMITED
Shriram Transport Finance Company Ltd. a flagship company of Shriram group is India's largest
player in commercial vehicle finance. The company is a leader in organized financing of pre-
owned trucks with strategic presence in 5-10-year-old trucks. It has a pan-India presence with a
network of 1230 branches and employs 24533 employees including 15356 field officers. It has a
vertically integrated business model and offers a number of products which include: Pre-owned
CV financing New CV financing and other loans like accidental repair loans tyre loans and
working capital finance etc. Shriram has seen drastic increase in net NPA from 0.8% in 2014-15
to 5.5% in 2018-19 though the operating profit and PAT has almost doubled throughout the years
from 2014-15 to 2018-19. Shriram has maintained the CAR well above the compliance
requirement throughout the years.
Fig.in Rs million

2014-2015 2015-16 2016-2017 2017-18 2018-19

AUM 5,91,080 7,27,600 7,87,610 9,62,529.8 10,44,822.8

Revenue 1,02,890 1,02,890 1,08,280 1,07,950 1,60,400

PAT 12,378.1 11,781.9 12,573.4 15,680.2 25,639.8

CAR 20.52% 17.56% 16.94% 17.38% 20.27%

Net NPA 0.8% 1.9% 2.7% 6.2% 5.5%

Return on 11.09% 11.63% 11.16% 18.61% 16.13%

Equity

Return on 1.65% 1.74% 1.70% 2.61% 2.44%

Total asset

Operating 18,423.8 17,814.3 19,239.2 36,620.5 37,782.7

profit

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Chapter 14: Challenges pre-Covid-19 on Auto-Finance Sector

 DEMONETIZATION EFFECT
After Demonetization the growth of passenger vehicle declines up to 2 digit growth and infact
the month of December saw automobile sales decline to the lowest in 16 years . demonetization
led to permanent shutdown of showrooms and retail automobile shops.
The sales of Passenger Vehicles grew by 11.02 percent in April-October 2016 over the same
period in 2015. The overall Commercial Vehicles segment registered a growth of 6.92 percent
and Two-Wheeler sales were growing at about 16% during the financial year.

 GST IMPLEMENTATION–The lack of technological infrastructure ,compliance

complications since day zero , inability of the portal to handle the traffic and now the
amendment made by government in section 49 in CGST by introducing new segment 49A
further led to difficulty for auto retail sector, the amendment will affect the cash flows of the
companies while discharging tax liability . The complications in GST and further demotivating
amendments made it more difficult especially for small dealers in auto Industry.

 RISING CRUDE OIL PRICES- The rise in fuel cost due to rise in crude oil price affected
the consumers as it pinched the pockets of consumers, the crude oil price increased to $86 per
barrel in October 2018 , there was further rise in crude oil price due to drone attack in Saudi
Arabia’s largest oil production unit . this affected the Indian auto consumers and overall
automobile industry. the consistent increase in oil prices is leading to increase in the cost of
owning a vehicle and hence lead to decline in sales of automobile

 PATCHY MONSOONS AND CRASH IN FARM PRICES DENTED RURAL SALES-

Rural demand contributes majorly in overall sales and profitability of automobile Industry, the
rural demand declined due lack on monsoon rain which is the main source of irrigation for
Indian crops. the rural market contributes nearly 40% sales of consumer goods

 NBFC CRISIS – Due to IL&FS crisis which led to liquidity shortage among NBFCs as access
to credit became difficult, the onward borrowing declined drastically, the auto mobile industry
was also affected and showed a downward trend in borrowings by customers. As NBFCs were
affected the automobile industry had a halo effect by NBFC crisis as nearly 70% of the two
wheelers, 60% of commercial vehicles and 30% of car sales are financed by NBFCs. Soon
after a few big NBFCs defaulted on their obligations, mutual funds (prime supplier of credit to
the NBFCs) got alarmed and reduced their credit flows. As per SBI Eco wrap data, the overall
exposure of MFs to financial sectors decreased from Rs.2.66 lakh crore in July18 to Rs.2.02
lakh crore in June19.

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 HIGHER INSURANCE OUTGO DUE AN INCREASE IN PREMIUMS ON
COMPULSORY THIRD PARTY COVER – The cost of buying a vehicle further increased
as insurance regulatory body increase the mandatory third-party cover to 3 years for cars and
5 years for 2 wheelers. further stricter safety norms also increased the price of vehicles, also
anti-lock braking systems/combined braking system (ABS/CBS) was made mandatory for cars
and 2 wheelers, these steps led to increase in cost of owning a vehicle leading to decline in
overall sales
These above reasons resulted in negative sentiments across the market which directly affected
the sales , according to the estimates of FADA ( federation of automobile dealers associations)
, by February 2019 the inventory level increased drastically and touched a peak of 50-60 days
for passenger vehicles , 80-90 days for 2 wheelers and 45-50 days for commercial vehicles
whereas the ideal level was 3 weeks or 21 days inventory that is advocated by the body. It
hence necessitated production cuts from manufacturers and retrenchment of labor to cut costs.
Barring cars, the inventory levels for two-wheelers and commercial vehicles continue to be
high even today. As of July 2019, average inventory for passenger vehicles came down 25-30
days, thanks to production cuts and lower dispatches to dealers. However, average inventory
for two-wheelers still ranges from 60-65 days and for CVs, from 55-60 days.
According to reports, many huge vehicle manufacturing companies such as Mahindra and
Mahindra, Maruti Suzuki , Tata Motors etc closed their plant closed in recent months
The industry was already facing number of problems before covid-19 pandemic made it worse.
Unlike 2008 crisis, covid 19 gave both demand and supply side shock. Amid already disrupted
market due to unprecedented technological and business model transformation (electric
vehicle, connected, autonomous, electric and shared driving technology) covid 19 has put
additional stress to the automobile industry. The manufacturers are already facing issues due
to lockdown and halt in the production with limited room to cut fixed cost. auto industry
connects lot of industries together due to its upstream interconnection (eg-steel, chemical,
textile) and downstream industries (eg repairs ,mobility services), the industry also provide
huge employment opportunity hence government also have to show keen interest to revive the
growth of the industry

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Chapter15: The challenges before auto-financing industry post covid-19

 POSTPONEMENT IN PURCHASE -There is also a possibility that some customers are

waiting to buy the latest Bharat Stage (BS)-VI emission standard compliant vehicles or are
waiting for more incentives from vehicle makers who will be looking to sell off their BS-IV
compliant stocks before the April 1, 2020 deadline, such accelerated transition from BS IV to
BS VI, adoption of electric vehicles, safety rules and stringent vehicle standards are leading to
a shift in vehicle technology. This is creating significant challenges for the automotive
industry.
Many industry players have also expressed concern that too much focus on electric vehicles
(EVs) by the government may also be encouraging buyers to postpone the purchase of petrol
and diesel vehicles. This is leading to decline in sales for short duration and affecting auto-
financing industry tremendously.

 NBFC CRISIS EFFECT- After the COVID pandemic hit the Indian market , the already
existing liquidity crunch situation worsened. The NBFCs has become conservative while
disbursing the loans to consumers. they were facing issues of sustainability due to NBFC
crisis and COVID situation further added to the distress. Banks which were one of the major
sources of funding to NBFCs has also reduced their lending to NBFCs, and even if they are
lending to the NBFC sector they are charging high interest rates.
NBFC finances major chunk to the automobile industry. Deepening liquidity crunch among
India's shadow banks that has been the biggest single factor in an auto sales collapse, which
some fear may lead to more than a million job losses. Non-banking finance companies
(NBFCs), or shadow banks, have dramatically slashed lending following the collapse of one
of the biggest, IL&FS, in late 2018. Further Governments efforts to infuse liquidity has also
failed to help the Small and Medium size NBFCs

 POST COVID-19 REVIVAL –The value chain disruption due to COVID pandemic has
affected almost all the industry across the world, The Already existing problems such as
declining sales ,cash flow shortfall, decreasing profit margin ,shortfall of workforce etc further
accelerated and this led to some manufacture may have to shut down their plant permanently
Credit rating agency, Moody’s Investors Service, on May 13 said automobile sales in India
will fall 30% in calendar year 2020, as against a 20% decline globally and also highlighted
that the revival of auto industry heavily depends on the extent of the government support.

 ELECTRIC VEHICLE PUSH BY GOVERNMENT – This E-vehicle push by government

to reduce huge carbon emission in our environment can have a negative impact on the

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 manufacturers, government have to go slow on pushing e vehicles related plan to give
relaxation to auto industry which is already facing huge slowdown.

 ECONOMIC SLOWDOWN – The current economic slowdown was already affecting the
demand and supply side of the economy ,adding fuel to the fire came covid-19 pandemic, this
has led to decrease in purchasing power of the consumer due to job losses and shutdown of
production units , though auto finance industry may benefit a little from this as unaffordability
of vehicle will lead to more and more people opting for financing the vehicle ,but the trade-
off here is huge hence it will impact auto-finance industry negatively .According to the report
of CMIE 27 million youth in age group of 20-30 years lost jobs in April 2020.

 PROLIFERATION OF CAB AGGREGATORS – Incremental trend in use of rental car

services such as Ola and uber are posing threat to already deteorating automobile industry in
India. According to finance minister, The decline in sales of automobile is due to latest BS6
(emission norms) and the mindsets of millennial, who now prefer to have Ola and Uber rather
than committing to buying an automobile .but the argument is still continuing as the other
schools of thought thinks that the sales won’t get affected due to the cab aggregators, infact
both can go hand in hand and complement each other.

 POOR MONSOON CAN ADD FUEL TO THE FIRE- Already declining auto industry
with covid-19 after effect, can worsen if monsoon fail to deliver as expected, poor monsoon
will lead to decline in rural Indian sales and hence add insult to injury to Indian auto industry.
Weather forecasting experts have forecasted a decent monsoon this year, if this happens it
will bring some hope of light to declining auto industry and if it doesn’t the auto-mobile
industry will have to face the consequences.

 SALES SLOWDOWN NEEDS NEW BUSINESS STRATEGY FOR AUTO-FINANCE

INDUSTRY - Looking at the slowdown in automobile industry, sustainability has become a
huge issue for many auto-finance industry as they are already facing credit crunch, further
increasing non-performing asset and deteorating asset quality in is adding to the decline, In
such a situation new business strategies is the need of an hour, auto-finance industry cannot
wait for auto-industry to improve, infact auto-financing firm are the new driver of automobile
sales. HDFC Bank Ltd., has come up with a strategy of custom-fit car loans #AapkeHisaabSe
in Mumbai. As part of this offering, customers will now be able to buy cars at lower EMI (up
to 24% under Step-up EMI in first three years and upto 30% under Balloon repayment
program). This unique product is available for all categories of cars, from standard to premium
and helps people fulfil their dreams of a better car now based on future income. Such
innovative strategy is required from auto financing companies to come out of this difficult
situation.

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Chapter 16: Government initiative in Auto-Finance Industry

 SCRAPPAGE POLICY- According to the Road transport and highway minister

scrappage policy will help revive demand of Auto Industry as old and polluting vehicles
will be scrapped leading to demand for new vehicles in the market. The scheme is yet to
be finalized and regulation for scrappage policy is yet to be putforth. This will also help
the environment as well revive auto demand in India.

 GST RATE REDUCTION FOR ELECTRIC VEHICLE – government has reduced the
GST rate to 5% from 12 % to encourage the e-vehicle manufacturing, government has
taken many steps. Government has already started to develop an entire ecosystem to bring
e-vehicle on Indian road, the infrastructure required for vehicle requires huge capital hence
government has slashed GST rates and invested huge to push vehicle manufacturing. India
has great expectations of achieving a high level of penetration in e-mobility by 2030. The
reason is not very surprising; the alarming levels of pollution indices which keep on rising
and the colossal dollars the country must pay for annual crude oil imports. In December
2017, New Delhi was in a state of red alert and came close to Beijing in terms of pollution
toxicity, such are the pollution indices in India. If India successfully manages to achieve
this target by 2030, it could save about 1 Giga Tonne of emissions. The automotive industry
could benefit by viewing it not as a threat, but an opportunity. Major companies are already
planning to launch their e-vehicles, infact Electric policy finalized by the Government of
Kerala has an aim to get 6,000 electric buses for the state road transport corporation by
2025.Adding to this as per Union Budget 2019-20, government will provide additional
income tax deduction of Rs 1.5 lakh (US$ 2146) on the interest paid on the loans taken to
purchase EVs.
 FDI NORMS – Due to easier FDI norms and policies, the foreign investment stood at US
$23.89 Bn between April 2000 to December 2019.

 AUTO-MOTIVE MISSION PLAN 16-26

The objective of AMP 16-26 is

1. To propel the Indian Automotive industry to become the engine of the “Make in
India” programme.
2. To make the Indian Automotive Industry a significant contributor to the “Skill
India” programme.
3. Promote safe, efficient and comfortable mobility for every person in the country,
with an eye on environmental protection and affordability through both public and
personal transport options.

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 4. To seek an increase in net exports of the Indian Automotive industry several-fold.
5. Promote comprehensive and stable policy dispensation for all regulations impacting
the industry.

The overall objective of AMP 2026 is to make Indian automotive industry to reach top 3
in the world in terms of manufacturing, exports engineering, increasing the value of
industry to 12 % of the Indian GDP and generating around 65 million new jobs in Indian
market.

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Chapter 17: Findings and Recommendation

Housing Finance Sector

 Government’s initiative of “Housing for all” by 2022 will not be possible due to the uncertainty
caused by Covid-19 pandemic. The probability of achieving the ambitious goal has now been
hit hard by Covid-19 scenario and can only be possible if public and private investments takes
place significantly.
 While the government will continue to create housing in both rural and urban areas for people,
such construction will cater only to a small proportion of the underlying demand. A large
proportion of the demand will have to be met by the private sector - private individuals buying
from private builders and financed by various banks and HFCs. Creating a vibrant mortgage
market and allowing a secondary market where mortgages can be sold to the appropriate risk-
taking entities, will support the development of a stable funding model for the lenders, thereby
significantly increasing the number of people who can access funding to own their homes.
 Such democratization of home ownership will give people an incentive to be invested in their
community. Many players will play a critical role in such democratization including both banks
and HFCs as the originators of the mortgage product. The emergence of specialized HFCs for
the low-income and informal segments of the economy is an important trend that must be
encouraged given the need for alternative under-writing approaches.
 Sustainable funding models will be especially critical here because these entities will, at least
initially, have weak balance sheets, even if they have strong operations and under-writing.
There are parallels here to the experience of Micro Finance NBFCs whose growth in the last
decade has been fueled by diversification of liabilities, including securitization
 While the relative shares of the banks and HFCs continue to change over time, HFCs are and
will continue to remain especially critical in the unbanked segment. The funding sources for
both entities hence need to be stable and reliable for achieving their business objectives while
meeting the social objective of ‘Housing for All’.

Micro-Finance Sector

 Due to Covid there was a huge shift in population from urban to rural places as workers from
the cities went back to their hometowns , major portion of that population will retain in their
villages due to future uncertainty and hence this will act as demand driver for the micro-
finance industry as more and more people will plan to do their own thing post covid in their
respective hometown
 Due to governments push for digital India and boost to digitization, Micro-finance have
benefitted largely out of it, more and more people are using mobile phones for payments and
apply for loan online, hence the entire system has become more efficient.

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 As the loan given out is of shorter duration and fund acquired by MFIs is of long duration the
Asset liability mismanagement issue is least experienced in MFIs, though it was largely
affected during the demonetization but it recovered back strong and its yet to seen how it will
recover from covid-19 impact
 Due to the reverse migration growth is expected to boom in micro-finance industry after the
covid situation is completely consumed and normal life starts again, this can act a huge
demand driver for the entire industry for next few years
 But as there will be more disbursement the NPAs will also increase drastically hence its is to
be seen how companies strengthen their risk management system to reduce the default risk.

Auto Finance Sector

 Though Covid had a few positive effect on Auto industry specially 2 wheelers as people may
prefer to travel more by private vehicles rather than public vehicles but the increase in demand
for private vehicles will be short lived as on the other hand the household which has been
drastically hit by Covid-19 will take time to get back to normalcy
 Another impact due to Covid on auto-finance sector is that the affordability of vehicles has
decreased drastically due to job losses, pay cut etc., which will lead to purchase of vehicles
through financing and hence increase demand and disbursement by Micro -finance industry
 The rural demand for Auto-Finance sector will mainly depend on the monsoon season and
hence better the monsoon better will be future potential demand for vehicles such as Tractor
and other heavy vehicles.
 The Concern of NPA will definitely remain as companies may accelerate disbursement to
cover up for the lockdown during the covid and hence companies’ disbursement policies will
play a crucial role in future NPAs and recovery.

Overall, after the lockdown due to covid the small and medium NBFCs will face huge problem
as governments schemes has also not helped them and their sustainability is under threat,
governments policy has mostly helped the bigger NBFCs and hence the liquidity and NPAs
problem in MSME is yet to be addressed by government

This will benefit the bigger NBFCs as smaller NBFCs will wipeout if government don’t address
their issues and bigger NBFCs will be able to hold larger shares in the market. the future
prospect of Bigger NBFCs looks good but government policies will decide the faith of smaller
and medium sized NBFCs.

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