Vistaar Financial Services Private Limited

Vistaar Financial Services Private Ltd (VFSL hereafter) is a classic example of the conflicting choices between being small and beautiful vis-à-vis being big and little dirty. VFSL is a specialized non-banking finance company (NBFC) established in 2010 with primary focus on micro, small and medium enterprise (MSME) segment of borrowers. With their unique credit assessment practice, they have been able to make significant inroads in a sector that is largely unorganized and plagued by huge information asymmetry. Although, the MSME sector is a significant contributor to the gross domestic product of large economies like India, access to stable funding is a challenge for this sector. Despite regulatory guidance from the Central Bank, most banks (largely) try to shy away from lending to the MSME primarily because of information asymmetry, high transaction costs (low ticket size), and heavy cost of monitoring the loans. It is here where NBFCs like VFSL pitch in and with their tailor-made customised products and local teams who understand the local ecosystem better and are able to make forays into the largely untapped market.

Given the recent change in regulatory landscape, where in a bank license is available on-tap now, VFSL is contemplating whether it should continue to be a unique player growing organically or become a bank and join the mainstream. While there was a significant scope of growth in the current form, the temptation to become big was definitely not worth ignoring. On top of it, the duality in the regulatory regime further complicated the choices. While being a bank definitely meant access to cheap deposits (thereby reducing cost of funds) and a much wider visibility and trust, it came with its own set of regulatory compliances and statutory requirements. And this is where VFSL has to weigh its options very carefully. VFSL cannot completely ignore competition from other similar players such as Fullerton and Bajaj Finance, etc. and some of the big initiatives being taken by the state to reach out to the untapped MSME segment by schemes like Micro Units Development and Refinancing Agency (MUDRA) loans. They will definitely take a share of the cake and it will be a challenge to continue at a pole position in this space.

Looking at the recent performance, the loan book of VFSL has grown by more than 35 per cent, the top line has grown by more than 45 per cent and the bottom line by 35 per cent. The average yield on advances is still around 23 per cent, which is phenomenal and supports the argument of organic growth. The disturbing number is provisioning for bad loans that is still quite low and manageable (at less than 3%) but has trebled from last year. VFSL has seen phenomenal growth but its excellent track record is getting compromised with some poor lending decisions. This usually happens when you are growing aggressively at an astonishing rate and your support systems are not ready to support that exponential growth. This also puts a question mark on the scalability of the unique lending model of VFSL. Most of the tailor-made solutions work till the time the scale is small, once the firm becomes big, the structures start showing weaknesses.

The question that is actually more significant is whether VFSL is ready to be a bank? Do they have in them what it takes to be a bank? The right kind of organizational structure filled with right set of people, a professional board with proper governance structure, robust risk management architecture, world class reporting and disclosure practices, readiness for regulatory compliance are some of the key requirements needed before an NBFC should even think of applying for a Bank license. It is true that with limited sources of funding options available to NBFCs, most of the good ones will be forced to graduate to a full-fledged bank and continue making wider and more visible impact on the society and the economy. But then, as they said, ‘Don’t say yes, if you want to say no’.