By Shefali Anand for The Wall Street Journal
The amount of money involved in such loans is still small compared with credit extended by the big banks that dominate India’s economy, but it is growing far faster. Lending by nonbank finance companies jumped 40% to an estimated $200 billion in the two years ended in March, versus growth of 15% to $1.1 trillion for bank loans, according to India Ratings & Research, a unit of Fitch Group.
What’s more, loans to the small businesses that are the main target of India’s nonbank financiers pay well, in an era when investors the world over are scrambling for higher returns for their money.
“It’s a pretty attractive [business] from a risk-reward perspective,” said B.V. Krishnan, an executive at KKR in India, noting that expected yields are in the high teens—the kind of returns his U.S. colleagues target for a successful leveraged-buyout deal. KKR has lent nearly $4 billion to Indian companies and real-estate developers, partly through two nonbank lending firms it runs, one of which was started last year.
A fund partly owned by New York-based Apollo Global Management LLC invested $300 million this year to buy GE Capital Services India, a nonbank finance firm that lends to companies and individuals. Private-equity firm General Atlantic LLC recently invested around $80 million in Indian home financier PNB Housing Finance Ltd. Credit Suisse Group AG recently put $20 million into New Delhi-based motorcycle financier Hero FinCorp. Ltd. Goldman Sachs has invested in IndoStar Capital Finance Ltd., which lends Indian companies, including small and medium-size firms. IndoStar’s profits rose 28.5% year on year in the year ended March 31, according to the company’s financial statements.
The bulk of India’s nonbank financial firms are specialized lenders such as Cholamandalam Investment & Finance Co., which has $5 billion in assets in the South Indian city of Chennai and focuses on loans to truck and van drivers who deliver milk and vegetables. Like many of India’s nonbank financiers, it raises money by borrowing from Indian banks and in turn lends it to companies and individuals the banks deem too small and risky.
When Satyendra Prasad Yadav, who runs a transport business in northern India, wanted to buy a truck to carry onions across the country, he first tried the branch manager at his local bank, who told him they don’t finance vehicles but offered a personal loan. The manager asked Mr. Yadav for documents on his property holdings and told him he would have to make multiple visits to the bank, a process that could take up to a month.
Mr. Yadav went to Cholamandalam instead, and within two weeks, he had $33,000 worth of rupees. The loan is for four years at an interest rate of around 7%. Norwest Venture Partners, a U.S. investment fund that manages $6 billion, and private-equity firm Apax Partners are investors in Cholamandalam.
“Banks don’t like to do too-small transactions,” said Arulselvan D, Cholamandalam’s chief financial officer. Cholamandalam’s profits have jumped 42% in the quarter ended Sept 30, compared with the same period last year.
Another reason Indian banks aren’t jumping on potential customers like Mr. Yadav is that they are weighed down by bad loans. The country’s financial system is dominated by nearly two dozen state-run banks, which control 70% of the country’s banking assets and lend mainly to large businesses and projects. When India’s economy slowed between 2012 and 2014, many of the country’s large infrastructure projects stalled, saddling the banks with bad debt. Some 5.7% of loans at Indian banks were nonperforming last year, compared with 1.5% for U.S. banks, according to World Bank figures.
‘Banks don’t like to do too-small transactions.’
Of course, the rise of nonbank financial firms comes with risks. In China, the rapid rise of a lightly regulated, opaque “shadow banking” sector has sparked concern, in part because such loans are estimated to equal about one-third of the country’s output and have fueled speculative bets on assets such as property. In India the sector is still relatively small—at about 13% of gross domestic product.
India’s central bank has tightened some regulations for nonbank lenders. Analysts say financiers that have lent against real estate could be at risk since property prices in India have been slipping.
India’s recent push to replace large-denomination bills could also delay repayments for nonbank lenders, which usually settle bills in cash.
For now, though, India’s army of smaller financiers is seeing business boom.
Dinesh Anantrao Patil, who runs a manufacturing plant that makes hydraulic presses near Mumbai, took a 1 million-rupee (about $15,000) loan in October from nonbank financier Edelweiss Retail Finance Ltd. Mr. Patil said that in the past he had borrowed from a cooperative bank but that to do so he had to go to the bank and meet with their managers.
Edelweiss officials came to his doorstep. “Everyone wants to get a service while sitting at home,” Mr. Patil said.
First appeared at WSJ