A transformation is underway in how rural India finances itself. In many parts, multiple income streams are helping reduce dependence on agriculture. Some individuals are buying vehicles to transport goods and people, while others are finding work in government-run infrastructure projects. Banks and finance companies have penetrated deeper into rural India, replacing local moneylenders and finding new business opportunities there.
In rural areas of India compared to the previous year, cash purchases have gone up substantially this year. Earlier, about 15% of the buying population made full cash payments; that is now 25%-30%. The others bring 20%-25% [of the cost of an asset] in cash as their contribution or margin money, and take a short-term loan for the balance. This gives us a good logic of the rural economy. The blueprint and prospect of the economy come from customers' buying patterns, the pressure in paying margin money and their capability to repay loans through installments and the market.
Until 10 years ago, the only source of organized finance was the banking system, the rest were the moneylenders. They gave money to a segment that may not have got any support from the banking system because of their asset base, ability to pay, etc. Rural customers have been well served by moneylenders, whom we call the ATMs of the market -- they give you money even at 12 midnight. There is still a role for moneylenders in this market for certain activities, certain segments and during certain periods. These could be health needs -- a health emergency may occur in the late evening - or weddings in the family. Moneylenders are expensive; interest rates range from 3% to 5% a month. Unfortunately, the rural population has not been cost conscious but it has been very, very cash-flow conscious. They always talk about how much money they need and how much they can repay each month. They have never looked at the cost of acquiring an asset, as their needs are urgent and alternatives are limited. But over a period of time, with banking getting more aggressive and little more deep-pocketed through finance and microfinance companies, the dependence on moneylenders for everything has come down.
Two things have resulted in more cash in the hands of rural customers. With gold prices being so high, many people are willing to liquidate some of it and putting it into earning assets like vehicles. They wonder if they will get another opportunity of such high gold prices. The second reason is good support prices for crops [government-guaranteed minimum prices], and crop yields have been good in places like Uttar Pradesh for sugarcane and Madhya Pradesh for soybean. That has left farmers with a decent cash flow.
Besides enjoying higher support prices for crops and more streams of cash flow, people in rural India are also looking to retain their vehicles for fewer years. Tractor ownership used to be for nine or 10 years earlier, but that has reduced to five years. For one, people are able to get better resale prices for their vehicles in the secondhand market. Two, they don't want to overspend on vehicle maintenance. They think it is better to exchange them for newer vehicles. That has increased demand and dealers have now started offering many exchange programs. A lender like Mahindra that is very much present in that market and is also willing to participate in secondhand vehicle financing makes the job easier for sellers to find buyers and also get financial support.
With that, the whole process becomes even more aggressive. All this makes the whole package good for everybody in the system -- the dealer, the manufacturer, the financier, the seller of the old vehicle and its buyer. Also, auto manufacturers and dealers see financial institutions as a major support because financing allows them to penetrate that market.
Almost all passenger car makers are today entering rural markets. Cars which was presumed to be only for salaried class, business owners or commercial operators like owners of taxis, etc. has broken down over a period of time, with road infrastructure improving in rural India, professionals and well-to-do people operating in the rural markets are looking for luxury through cars. What used to be a strong two-wheeler market for the well-to-do in rural India has progressed to become a market for cars. Makers of small cars, like the Maruti Alto or the Maruti Wagon R, are penetrating deep into rural India by appointing more dealers and allowing them to have more sub-dealers. This progression has turned out to be a huge opportunity for financial players to reach out and make a strong foothold.
Mahindra Finance is India's largest nonbanking finance company operating in rural and semi-urban areas. With close to 8,000 employees across 490 branches, and asset management worth Rs. 10,329 crore [US$2.35 billion], our customer distribution is predominantly rural -- farmers, shopkeepers, vehicle operators, individual entrepreneurs and contract laborers. About 70%-80% of our customers would be 50-100 kilometers [31-62 miles] from Mahindra Finance's branch offices. About 40% of the financing we provide is for utility vehicles and people carriers; another 22% is for tractors; some 10%-15% for small cars; the rest is for secondhand vehicle sales. We have a customer base of one million, including guarantors.
Typically, in rural India, Mahindra Finance offers credit to somebody for the first time, and that person will not produce much by way of financial statements. We take the risk on the basis of our understanding of his ability to earn and repay. A cash flow is plotted basis understanding his entire earning potential, his cost of operation and other costs and then look at the net surplus before taking a decision on whether or not to give the loan.
The rural market is still a cash-driven economy. People using utility vehicles as people carriers earn all their money in cash, with each passenger paying the fare in cash - two rupees or five rupees or 10 rupees. People pay in cash even for goods carriage, and towards loan repayment installments. Most of the installments received from the customers are in cash, across the country. So, in a month if one has Rs. 400 crore (US$87 million) of installments coming in, up to 95% of that is collected in cash. You hence need your own people to receive this cash. More importantly, rural people have limited earnings and always have something else waiting for expenditure every month. You have to go and pick up the installment before the due date, or you are giving your customer the opportunity to spend that on something else. If you don't go pick up the installments, it could actually push up your overdues. It is cash, and therefore your own team is more reliable than an external agency. Also, while your customer might have traveled 100 kilometers [60 miles] to your branch office to borrow the loan, he may not travel that distance for repayments -- you need to go to him.
Some finance companies are good in new commercial vehicles, others in secondhand commercial vehicles, and some others in particular geographies. In Mahindra Finance's case, it so happened that the parent company Mahindra & Mahindra has sold utility vehicles largely as people carriers in the rural markets. We were set up as a captive finance company, and it was natural for us to be in those markets. We started off by financing Mahindra & Mahindra's auto products, but over a period of time we have expanded that to include tractors and vehicles manufactured by other companies.
Mahindra Finance's average loan size is about Rs. 3.5 lakh [US$7,600]. Our interest rates range from 12% to 14% for new vehicle loans and 18%-19% for secondhand vehicles. Interest rates in urban India would be cheaper by 2%-3%. Since you are recognizing the customer's creditworthiness -- there is a cost and risk involved. Once a better credit understanding can be created, and customers make regular repayments, the interest cost will come down.
Fortunately, we have not seen any dip in demand since cash flows in rural India have been good. Another interesting feature -- although not a recent phenomenon -- is that in the last couple of years, a lot of projects have come up providing employment in rural India. Projects such as power or telecom plants, airports and road construction are absorbing a lot of rural people into the labor force. 3-5 years ago, tractors were predominantly for farm applications; now 40% of the applications are for haulage. So, 40% of the cash flow of our customers is from tractors being deployed for non-farm applications. With more and more infrastructure projects in the last two years, tractors are increasingly being used for haulage. Now almost all tractors sold are not sold solely for farm applications, and the pattern of purchasing is no longer restricted to crop seasons. People are also buying excavating equipment, loaders and trailers. It is a very clear indicator of how people want to use their assets for multiple applications, and protect their cash flows much better.
Secondly, farmers are now willing to accept quarterly repayment options, unlike earlier when they used to ask for annual or half-yearly payments. It is a clear show of the strength of multiple cash streams. Tractors are being used for multiple applications; money is flowing in every month or every quarter. Earlier, tractors used to be financed mostly by banks because only they have the ability [or financial resources] to accept annual payment installments. But now, finance companies like Mahindra Finance have become much more active because of both the ability to collect quarterly payments and the profile of the customer being not just a farmer, but becoming a farmer-plus-contractor.
Delinquencies are a major factor for any financial institutions and you need to foresight it from two points of view. One is the statutory delinquency rates provided to the Reserve Bank of India [nonperforming loans, or NPAs, as a percentage of total advances]. The other is the eventual credit loss that happens after all that. Mahindra Finance enjoys a AA credit rating from Crisil, which is the highest rating available to an NBFC. Our securitized portfolio [comprising loans for tractors, etc.] has a AAA rating. Our independent audit committee strongly recommends we aggressively provide for NPAs, because of the nature of the markets we operate in. We have an NPA coverage ratio of 78% [provision for nonperforming assets], which is probably the highest in the NBFC industry. Our net NPA is below 1% [of all assets]. But what is important is the eventual credit loss. We finance assets that can be repossessed and sold in the secondhand markets. So historically, over 15 years of our existence, our credit losses have not been more than 1.75%-1.8%. The rural market is riskier and less cost-efficient than the urban market.
We are excited by the opportunity in 2010-2011. The rabi crop is expected to be above normal and that will have a positive impact. Infrastructure projects are also in an aggressive mode and will bring in more cash flows. The National Rural Employment Guarantee Scheme's programs are going on pretty well and there is a decent amount of money in people's hands. All manufacturers are projecting increases in sales from rural and semi-urban markets.
The only concerns are about learning from the past, creating deeper networks and building capabilities through coaching to improve local cash flows. It has to be a strong partnership -- living with the customers in their environment is our challenge and for that excellent training is to be given to the people. We want to look at every little credit opportunity in that market and become a strong credit provider to the requirement and try and substitute costlier alternatives.
Rural customers are becoming more cost conscious. One fundamental change that is exciting Mahindra finance today is the rural family's willingness to stretch for their children's education. In many cases, at least one member of a family has moved out of the village for education, and they are willing to borrow to finance it. This may not have an immediate impact on our business, but we are getting people back in the system that ask relevant questions, are educated and understand the importance of credit -- the quality of our assets will go up. Also, development will get more organized and process-driven. Right now, the development outline is based on opinion makers. But acceptance to experimentation is increasing.
Article Source: http://www.articlealley.com/transformation-of-rural-finance-in-india-by-mr-ramesh-iyer-managing-director-mahindra--mahindra-1697425.html
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