After studying law I vectored towards journalism by accident and it's the only job I've done since. It's a job that has taken me on a private jet to Jaisalmer - where I wrote India's first feature on fractional ownership of business jets - to the badlands of west UP where India's sugar economy is inextricably now tied to politics. I'm a big fan of new business models and crafty entrepreneurs. Fortunately for me, there are plenty of those in Asia at the moment.
It’s hard to assess whether Futarmal Vaishnav makes a worthy borrower. The 62-year-old runs a stall selling daal vadas outside a vegetable market in Vasna, Ahmedabad. He’s assisted by his son and says he makes Rs 1,500 a day after expenses. With his one bank account, he is just inside the formal banking system. But he’s never paid tax and he has no credit history. In short, he’s among the riskiest customers for any bank.
In fact, for all practical purposes Vaishnav would find it impossible to get a loan to buy a house or to renovate his shop at the interest rates you and I pay. Banks shun these customers in turn, making them prime targets for moneylenders and loan sharks.
It is with borrowers like Vaishnav that GRUH Finance has built a sustainable business. Building the business from the ground up and understanding these borrowers has been a hard grind for the past two decades. But as Madhusudhan Menon of Micro Housing Finance Corporation explains, “It’s almost like one of those businesses with infinite opportunity. Once you get set then the sky is the limit.”
It’s also something the markets agree with. GRUH has seen its stock rise more then five times in the last five years. The company has a loan book of Rs 5,000 crore—by far the largest in the business—and its non performing assets are at 0.52 percent. In the last year alone the stock has doubled to Rs 220. Investors point to the company’s pedigree—it is a subsidiary of blue-chip housing finance company HDFC—when they explain why they continue to have faith in its business model. Time and again they speak about the integrity of its management.
Sure, GRUH charges a slightly higher rate from these borrowers. But at just up to 2 percent higher based on his or her risk profile, borrowers are more than happy to pay this.
So what makes this business tick? And is the model easily replicable?
The Initial Years
GRUH was set up in 1988. HDFC’s founder, the late HD Parekh, believed that there was a need for an institution to go to smaller towns and villages where the credit economy operates in a largely informal manner. In its initial years GRUH worked in towns with a population of less than 50,000. While HDFC was present only in Ahmedabad, GRUH went to Rajkot and Surat.
But the company realised that in rural areas a house was not a priority for borrowers. This was unlike a city where housing is among the first large purchases a family takes a loan for. In villages most people had some sort of housing and needed loans for seeds, fertilizers and other farming activities.
With this learning the company quickly shifted focus to urban areas and began to work on a niche where it financed the first homes for low-income borrowers. Those were also the days when the business was highly regulated by the National Housing Bank. It stipulated the rate at which housing companies could borrow and the rate at which they could lend. Between the two the spread was only 0.75 percent and it was very hard for companies like GRUH to make money. GRUH, which was listed in 1992, also lent to developers so as to show returns to shareholders. But the real estate crash of 1998 hit the company hard. With its investments underwater, a large chunk of the loan book had to be reconstituted. With a management change, the company started its new journey.
The Story Today
GRUH’s present model is the brainchild of Sudhin Choksey, the company’s managing director. The shy, down-to-earth banker shuns the limelight and is rarely seen giving interviews. In 2000, he realised that with the country rapidly urbanising, there was a mass of people who had come to cities, who worked in informal jobs and needed to buy loans.
“The integrity and character of people has nothing to do with income levels,” he says. With that basic tenet he got the board to approve lending a small amount, initially Rs 2 crore, to people without formal income documentation.
It took the company the next five years to work out a model to assess credit worthiness of borrowers. The technique is intensive and involves working with individual borrowers to understand their income patterns and then working out their ability to pay. Each borrower has a lengthy file that notes information on him.