In an exclusive interview with ETAuto, he says his job doesn’t end with the loan being disbursed, but it starts there, and highlights the important role data and analytics play in lending, customer service and loan portfolio management.
“We focus on making use of data to eliminate human bias, subjectivity, bringing in more objectivity, transparency, robustness, and reliability. Ours is a complex data-centric model that allows us to take a broad view of how the sector is likely to perform over the medium and long term. This ensures that we are able to look ahead and decide what stance to take and are not caught responding to the performance of the above variables. The data has to play a very important role in giving us the ‘Early Warning Signals’,” Prabhune adds.
The excerpts:
Q: Rural economy has been the silver lining for the automotive industry in India for the last couple of years mainly because of good harvest. How does that reflect on your portfolio and what kind of growth has L&T Finance witnessed?
A: Amid the harsh realities of the past 18 months with unforeseen economic and human cost, India’s agriculture sector has shown its reliance and ability to bounce back from one of the most dreadful tragedies the country has witnessed in decades. All through the difficult phase of the Covid pandemic, the resilience of the rural and agricultural sector continued, as was evident from the new tractor sales numbers. It was also seen in our particularly robust portfolio performance and collection efficiencies since last year. While the second wave was harsher on our country in terms of human cost, the ability of the rural economy to bounce back was on display this year as well.
In broader terms, we feel that this is a sector of opportunity and resilience. If we are willing to take a granular view of this sector in terms of multiple states, districts, pin codes, agro-climatic zones, rather than a broad-brush approach, we believe this will remain the sector of opportunity for decades to come.
Q: A major challenge in banking is when new consumers without any track record show up for loans. How does technology help you in this regard?
A: In developed markets, where agriculture is far more mechanised, close to 100% of tilling is done with machines. In India it is only 50% and the rest is done with animal or even human power. Hence the extent of the opportunity is very clear.
Moreover, our country represents 1/6th of humanity. So, the responsibility or the opportunity is to feed 1/6th of humanity. That is the second opportunity.
The third is from the perspective of the glass being more than half full. Today, when we underwrite our farm equipment finance book, about 60% of the customers come to us with the existing credit bureau data, 40% are new to credit. So, one way to look at it is that only half or so of the market is addressable. Another way to look at it is that there is still a very significant section of customers who have not had the opportunity, have chosen to access credit. They can potentially serve as new customers for mechanisation as well as finance.
Data plays a very big role here. Data allows us to create look-alikes for lending to customers who do not have any credit bureau history. We have a fairly long experience in underwriting for customers. We focus on making use of data to eliminate human bias, subjectivity, bringing in more objectivity, transparency, robustness, and reliability. We are for credit democratisation which we believe should be the driving force behind any organisation that is looking at financial inclusion as its mission.
Our job doesn’t end with the loan being disbursed, in fact, it starts there. Data has to play a very important role in giving us the ‘Early Warning Signals’. These signals are those which we get even before the account has gone one day overdue. When the account is still regular, what are those potential pitfalls? Is there something not going right in that particular pin code or agro-climatic zone? Has the borrower shown stress with regards to his other loan relationships or lenders outside our loan portfolio? All these factors are taken into account to trigger the early warning signals which allow us to have more specific conversations with our customer and ensure that the account stays in good health.
Q: Agriculture is an unstable sector that depends on factors such as monsoon, crop cycle etc. How do you manage these factors; does technology play a role here also?
A: Prudence is the backbone of financing. Given that, financing for the rural or agricultural sector cannot be a gamble as we play with the monsoons every year. The work in terms of application of data and technology starts way before the first customer approaches us with an application for credit.
In our case the work begins with the development of complex economic models that take into account not just how monsoons will behave but also factors such as irrigation density, reservoir levels, soil moisture levels, cropping patterns, prevailing MSPs, health of state finances and alternative sources of income available to the customer including public works.
Today, when we underwrite our farm equipment finance book, about 60% of the customers come to us with the existing credit bureau data, 40% are new to credit.Sunil Prabhune
It is a complex data-centric model that allows us to take a broad view of how the sector is likely to perform over the medium and long term. This ensures that we are able to look ahead and decide what stance to take and are not caught responding to the performance of the above variables.
Q: How do the Jan Dhan Account, Aadhar card, and high smartphone penetration even in the hinterlands of the country help you in your business of knowing your customers?
A: The fact that today Indians have access to banking through Jan Dhan Account, a verifiable identifier through AADHAR, represents tremendous opportunities on a scale that is very new to the industry. The penetration of mobile phones has allowed us to leapfrog over many of the phases. The data suggests that there are more mobile connections in rural India than in urban India and many of those connections are smartphones. It is not just about financiers harnessing the data. It is also about the customers consuming information, which makes their economic activity, farming, far more productive. All these things come together to make a better business model for the farmer in our country.
A bank account means that the payment received by the farmer is transparent and there are no leakages. National identifier enables the farmer to transact with multiple entities, including the financiers directly and transparently. The mobile phone provides a farmer access to information about the right price of the produce, and to right interventions that allow the farmer to take important economic decisions for preserving the health of the crop etc. In our opinion, all these make a more conducive ecosystem in which we can lend with more confidence.
From the financier’s side, we obviously need to respect our customer’s privacy. We must be ethical with the data we consume in the process of writing the credit or managing the lifecycle of that customer’s account.
The data we have through multiple channels and with the customer’s consent enables us to make well-informed credit decisions as well as take the right steps during the management of the account. One of the affirmations of all these is how delinquencies on our farm equipment finance book has come down in a secular fashion and has stayed down. Moreover, even in the worst of Covid phases, the collection efficiencies were as good as in the same months of the previous year and in many months even better. All of these testify to the above factors coming through on ground.
Q: Is the behaviour of the rural consumer/farmer, who is at times pampered by loan waivers and not overly bothered with CIBIL scores, different from the urban consumer?
A: We find our customers honourable and take their debt obligations very seriously. Sometimes the circumstances may force some of them to delay part of the payments. But as long as we are there to handhold such a customer through that phase, the likelihood of that customer turning back into a regular one is very high.
This is not a spectator sport; it is a close contact sport. This also involves us being intimately aware of the farmer’s cash cycle. When is the crop getting harvested? When is it going to the mandi? When is the crop getting monetized and money becoming available to the farmer to take care of his obligations? So long as we stay in close contact with the farmer’s cash cycle, the probability that the account will turn negative is very low.
Most importantly, I don’t think that the customer chooses to honour his debt obligation because of the credit score threat. It is because of an innate desire of ordinary human beings to honour their promises. It is up to us to create the right enabling environment to help them honour those promises. Are we in close contact with the customers? Are we aware of their cash cycle and are we making multiple payment options available to them, are we offering the option of digital to ensure that the re-payment becomes convenient?
On the topic of loan-waivers, whenever it is discussed, many times the NBFC customers are not even part of or eligible for discussions. But we don’t find that having any negative impact on our portfolio. Our relationship with our customers is bilateral. We trust in their sense of honour and robustness of our processes and systems to together ensure that the portfolio stays good.
Q: Beyond tractors, what are the other segments where L&T Finance is witnessing good growth, and what is the overall potential that you foresee in the farm equipment finance space?
A: We believe that there is scope for further mechanisation in our country. Within that there is one segment, farm implements, that is underserved. For about nine lakh tractors sold last year, only about 3 lakh to 3.5 lakh implements of a certain standard quality were sold. There could be locally-produced and distributed implements, but we are talking about implements that are standard and have a certain pedigree and track record in terms of the manufacturer etc.
We visualise that this particular area of implements, within the larger ecosystem of farm mechanisation, holds good opportunity. We have come up with innovative products that can generate financing options for our customers who want to buy better implements to improve efficiency of their agricultural operations. We definitely look at it as an opportunity as we move ahead.
