Role of NBFCs in Financial inclusion KASHIF YAQOOB

Contents Leasing Globally Access to finance for SMEs Success Story in Pakistan Future trends

Leasing globally

% of New Capital Investment Lease Penetration Country New Leases (US$ b) % of New Capital Investment % of GDP USA 337 22.0% 1.95% China 115 3.4% 1.3% UK 78 28.6% 2.8% Germany 68 16.4% 1.9% Japan 56 8.9% 1.0% Australia 35 40.0% 2.5% Korea 11 9.8% 0.9% Turkey 9 11.0% Pakistan 1 2.9% 0.4%

Key statistics Global leasing market is around US$ 1 trillion, with 1/3rd share of US China is the fastest growing leasing markets with growth rate over 30% 85% of the clients in German leasing markets are SMEs Access to finance is 2nd most pressing issue for SMEs in emerging markets after electricity After own equity and bank loans – leasing is most popular source of financing

Access to finance for smes

Banks & SMEs Total private sector financing by banks Rs. 4 trillion SME financing by banks Rs. 298 billion SME financing as % of total private sector financing 7.3% NPLs of SMEs 27.4% SME borrowers 164,733 As on June 30, 2016

Facility wise break up Working capital finance 66% of outstanding SME portfolio Trade & finance 11% Fixed investment 23%

Constraints for banks Lack of collateral Lack of verifiable information High transactional cost High risk Historical portfolio quality issues

Challenges for clients Lack of proper documentation. Assets are not registered in business/ owner name Fear of entering tax net – prefer informal credit Low financial literacy Lack of credit history Cumbersome processes of financial institutions Absence of collateral

Lending NBFCs Currently 8 Leasing companies and 25 Modarabas are lending NBFCs Total assets of leasing companies and Modarabas increased from Rs. 62 billion in June 2010 to Rs. 78 billion in June 2016 (Only 26% growth in last 6 years) Number of lending NBFCs has reduced significantly over the years

Problems with NBFCs Absence of strong deep pocketed shareholders Lack of banks’ investment in NBFCs to capture SME market Lack of product innovation Strategy of directly competing with banks

Success story in Pakistan

SME financing – the ORIX way 70% clients are SMEs 50% business from smaller cities/ towns (over 100). Close to customer strategy. Start small and build big (regular interactions and visits) Top 20% customer represent 10% exposure Low delinquency ratios

Case Study: Chakwal & Talagang Small & undocumented market dominated by farmers and small traders Mostly associated with transport business as shareholders in 1-2 vehicles or as drivers Used to resort to private lenders for financial needs Mostly used or reconditioned vehicles Very few or no vehicles in their own name

Case Study: Chakwal & Talagang ORIX Staff started visiting the area, to understand business dynamics Acquired knowledge and expertise to assess & mitigate credit risk Started taking smaller exposures Established small branch & educated clients how to document the business Motivated clients to register vehicles in their own names & acquire new vehicles

Case Study: Chakwal & Talagang ORIX Chakwal has leased more than 500 vehicles worth over Rs.2.0 billion Leased to more than 150 transporters 90% clients availed formal credit for the first time; majority obtained NTN for first time Less than 1% delinquency Many have grown from small to Medium enterprises & have formal financial statements Customers have now active relationships with banks and started insuring their assets

Gul Muhammad Awan (Talagang) Started transport business from scratch in Bilalabad (a village near Talagang) Built small fleet of used transport vehicles, had no access to formal financing Leased first truck to GM in year 2005 Business grew and GM involved his friends, relatives and unemployed youth ORIX leased 14 trucks of Rs.54 (m) to GM so far Now GM is a leading transporter of area. His success has inspired many other entrepreneurs of area to start transport business.

Ashfaq Brothers (Village Tamman, Talagang) Started business as Cement Trader in Tamman (small village, 30 KM from Talagang) Had no access to formal financial sector ORIX leased first Truck Trailer in 2005 ORIX has leased 15 commercial vehicles worth more than Rs.67 million ORIX also leased Cement Bulkers to modernize the fleet. Now leading transporter of the area with annual turnover of Rs.400 million

Future Trends

Key future trends Banks’ increasing interest and exposure in SME financing Value added financial services Rental Modarabas New products based on residual value Increasing role of technology

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