By AltG Research On Behalf Of Poornima Vardhan And Taponeel Mukherjee
As the impending entry and interest of global investors such as Carlyle, Oaktree, Apollo, and the likes gather steam into India’s credit market, it’s worth thinking about exactly where is the opportunity set in India’s credit spectrum? We’re focusing on the retail and MSME space here and not Infrastructure and Real Estate.
What’s The Current Scenario?
Our APEXX Formula has analysed data across millions of retail credit consumers across India’s top 20 cities, and we’re yet to meet someone who doesn’t have access to secured credit(minus the idiosyncrasy)! Essentially, if you’re looking for retail credit growth, get ready for a bloodbath in India. It’s hyper-competitive - The top end of prime consumers are aggressively serviced by the big banks such as HDFC, ICICI, SBI etc. The sub-prime and self-employed have plenty of credit providers in the form of over 9600 NBFCs in India.
But we often read a blanket statement in major news publications about how India lacks credit access! - The only credit demand that is underserved in India today - is in the MSME side or the rural and semi-rural areas for retail. Check out the statistics here from the RBI report https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=924#CH7
So the MSME credit gap is approximately USD 3.5 Trillion.
But, within the MSME space, the micro-enterprises with a credit exposure of less than USD 125,000 have the fastest growth of 22.3% CAGR between 2016 and 2018 and an NPA of 8.5%. When you benchmark that against credit exposures north of USD 12.5 Million in larger MSMEs, you see that the larger MSMEs have an NPA of 20% and have low credit growth. Essentially, the borrower’s size isn’t improving credit performance, at least not for the base of MSMEs getting credit.
So, How Do Credit Investors Build Businesses In India?
Well, that depends on what strategy you choose to adopt. Here are a few ways AltG’s APEXX Formula suggests:
Variant Perception: If you’re looking at urban retail credit profiles, you need to look at investing in both private and public lenders at a reasonable valuation. Now that’s easier said than done. With high competition, the real value creation here is the ability to study slightly distressed lending portfolios to really understand the mispricing of credit value in retail portfolios. Quite simply, look at where you can see value in a distressed portfolio and others can’t.
MSME lending: Now, if you’re looking at MSME lending, we’ve heard people talk of lending against GST receipts. We at AltG don’t see how a smaller NBFC succeeds in doing that better than the large established banks. This is a war that the large low-cost balance sheets will win in the end. If you think that’s the play, you’re better off investing in some equity of these lenders.
Essentially, one of the big questions is can you DIFFERENTIATE VIA ORIGINATION PLATFORMS? If yes, are you able to value some collateral better for secured lending than the market, or can you value credit better for unsecured lending? On the MSME side, the opportunity lies in creating a credit business that answers the above two questions or investing in market infrastructure businesses that can remove credit opaqueness from the market.
Right Entry Point: For the next phase of retail lending, the answer lies in finding the right point in the business cycle to get into micro-finance businesses that have reach within the rural and semi-rural areas where the relatively underserved credit in the retail space sits.
Differentiation will be the key to generating returns in India’s credit market; the big question credit investors need to answer is how? We’ve seen too many institutions adopt “copycat” credit strategies in India to deliver disastrous results. AltG, powered by The APEXX Formula, sees MSME and semi-rural retail credit unlocks as the crux of the matter.