Summary of comments which I posted about SCUF on some public forums Shriram City Union is a NBFC engaged in lending to SME, 2W finance, gold finance and Auto finance. Still more than 90% of MSME financing is by unorganised sector. I think if these companies can get their act together they can easily grow by 5-10x or more over next 5-10 years. Main advantage which SCUF enjoys is that it uses the chit fund history of customers to lend to them. Majority of lending is to its chit customers and its for large part it takes creates lien on Chits as security. SCUF lends to people who do not have any proper documentation to show to prove their income. We know that in India hardly anyone correctly file their tax returns. These people cannot satisfy banks stringent credit requirements. More over, very few banks and NBFC can deal with average loan of 7-8 lakhs. OPEX simply will be too high In the conference calls, management maintain that over next 5 years major growth will continue to come from Chit states [AP & Tamilnadu] Majority of SCUF branches are there in underbanked areas [ie where banks are already present] and not in UNBANKED AREAS. Despite that they have reported superb growth in the past. The reason is if credit worthy guys like you and me go to bank, who can submit our salary slips and bank statements, we will get loans. Some concerns 1. More reliance on security than the repayment capability of customers: I feel management is relying more on the credit history of the customers and collateral available to it. Company does not have capability to review viability of customer business model. By insisting it’s a collection company and saying we are industry neutral, is company completely ignoring the risk which can arise through non-viable businesses... NOT SURE ON THIS, BUT WORTH EXPLORING AND THINKING MORE.. 2. In one of the conference call one question was on early foreclosures. My GUESS IS one of the reason MIGHT BE because 1/3rd of SME loans are against collateral of immovable property and with interest yield of more than 17-18%. Many of its competitors are offering loan against property at much lower interest rates 13-15%]. SCUF has no clear policy on prepayment penalty. Second point is with all segments of asset financing down except for housing and SME, there is a POSSIBLITY THAT lot of money is chasing SMEs… 3. Asset side of Balance sheet is very illiquid for loans above 10 lakhs. Here collateral is immovable property. In case of default recovery might take COUPLE OF YEARS. Ofcourse this will be a valid concern ONLY IN WORST CASE SCENERIO. To me protection in WORST CASE SCENARIO is very important, so need to think deeper on this 4. SCUF grants loan against lien on Chit. Financially it’s more beneficial for customers to either withdraw chits or NOT to go for chits and use own funds to finance its business. Is company getting benefited because customers do not understand this simple maths or is there something more
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5. WHAT WILL IT DO IN NON-CHIT STATES? No collateral of chits or credit history of clients is available. 6. In the past the growth is mainly lead by banking on Shriram chit fund ecosystem. They are mostly concentrated in Tamilnadu and Andhra Pradesh. How much more growth can happen within these two states lead by introduction of SME products in all branches [currently SME product is offered only in 50% of branches] 7. In the past NPAs were low, because Shriram had access to its customers credit history via Shriram chits. This played a very crucial role in keeping the credit costs low. What would happen to credit costs for branches in non-chit states? 8. SME finance was started only in 2006 and major expansion in loan book happen posts 2007-08 crises. So the business model is not really tested in a slowdown. 9. In the past conference calls company guidance remains aggressive but their actual result was below guidance. During June-12 quarter results, company guided for growth in AuM of more than 25% but actual growth was only 16%. In Dec-13 management guided 3035% growth for MSME and 20-25% overall growth for 2014 [interview to CNBC]. Gold loans & Auto loans [which together contribute 30% to AuM] are declining in high double digit for last 2-3 quarters and growth in SME loans has declined steeply from high double digits [around 18-20% during Dec-11 to Dec-12] to low single digit [5-8% during Mar-13 to Sept -13]
Opportunity Size: Let’s assume that from current Chit based customers they can grow 2-3 x more from current levels. I guess by that they would have exhausted majority of the chit based customers. So after that they need to expand in non-chit based states, where they will not have BENEFIT of collateral of chit funds or access to credit history of customers. Let's fast forward 5 yrs ahead. Without having access to credit history, chit collateral and CAPABILITY to assess the customers business, how SCUF is going to lend. Yes opportunity size is huge, but one also needs to think what would be the credit cost [provisions + write-offs] in such a scenario. Would prefer a business like Gruh, where company takes pain to analyse business of its customers Read this excellent article on Gruh Finance, to understand how much its important to thoroughly evaluate the customer source and ability to generate income and not relying merely on collateral. Even when the collateral is immovable property and that too customer first home. http://forbesindia.com/article/work-in-progress/building-homes-the-gruh-financeway/34819/0 Some extracts:
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“Let’s take the case of Vaishnav. His stall sells bhajjiyas and puushak. Both sell for Rs 10 and, on an average, he sells 150 puushak and 50 bhajjiyas, earning him Rs 2,000 a day. He has two workers who are paid Rs 80 a day each and he spends Rs 300 a day on ingredients, leaving him with a profit of Rs 1,540. The stall does business five days a week, generating a monthly income of about Rs 30,000 for the father-son duo. Information like this is gathered individually for each borrower by a loan officer. Next come interviews with his neighbours, a copy of his bank statement, educational records and so on. Each file contains over a 100 pages of documentation, complete with photographs. Once this is complete, the company determines the loan. “ “What helps GRUH is its decade worth of experience in dealing with such buyers. It knows how much a taxi driver would make. So, if a taxi driver says he owns the taxi, GRUH can check prior loans to see if what he makes sounds accurate. If he doesn’t own but rents the taxi, his salary is different. Different weightages are given in each case. The value of the taxi permit is also counted.” – I would say, Gruh is checking base rate of probability. Standard procedure: Officers put in details of whether the person files IT returns, if he has a guarantor, if he smokes, if he has a history of family illnesses, if he has insurance and so on. Once this is recorded, the computer puts out an interest rate at which he can be lent money and no one in the company is allowed to change that rate. It was with this step that Choksey eliminated any scope to tamper with the system Chit business Regarding Chit business model, I do not have very clear idea. But this model is very unique to India and its saving cum borrowings scheme. It’s also an investment product. Indian chits act, lays down maximum cut at the time of chit auction. They collect monthly from INR 500 to higher amounts, they collect weekly and monthly from customer locations. If chits are surviving, despite all the negative news and scams, there must be some benefit to common person...Again here do not forget the integrity of Shriram Group.... Chit business runs on TRUST, which itself is biggest moat or entry barriers. We all are aware of how many chit companies have disappeared overnight. So SCUF have access to millions of customers CREDIT HISTORY. They can decide whom to lend. In addition to this, they can have lien over chits as security. As only 9% of the customers are mined, even if we ASSUME that only 30% are viable customers, company can still grow 3x. IN addition to that only around 50% of branches do SME business. So opportunity is huge.
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