BFSI: Money Purse

HDFC Life’s Amitabh Chaudhry has been increasing the number of business trips to smaller towns and cities. The steep increase in business arising from tier-2 and -3 cities, and even from rural areas, is keeping the MD & CEO on the road. For HDFC Life, being a life insurance company, business depends a lot on business development from agents.

However, things are changing given that business distribution is both online and offline for life insurance. “Large part of the online business today is term products, which have got commoditised, and volumes are important considering the product structure. Since the absolute number of prospective customers is greater outside the tier-1 cities, the business from these cities will only grow faster.”

While tier-1 cities still bring in the bulk of profits, banking and finance chieftains are pointing their bazookas at tier-2 and -3 cities. Even products that have largely been traditionally confined to the larger cities are penetrating deeper in tier-2 and -3 cities. Says Arun Thukral, MD & CEO, Axis Securities: “For us, growth from smaller cities has been remarkable, with more than 55 per cent of our customers acquired from tier-2 and -3 cities. In terms of client acquisition, revenue and turnover, the contribution from tier-2 and -3 cities has been really commendable.”

Currently, much activity of all sorts is taking place in such cities. Economic activity is booming. Many industries are coming up and more businesses are being set up in these areas. There is a mini revolution in e-commerce, which throws up the need for access to products usually available in metros or top cities. This is now being made available in second–rung cities, as well.

Over a period of time, educational institutions are being set up here, and IITs have sprung up in tier-2 and -3 cities. Says Virat Diwanji, EVP and head branch banking, Kotak Mahindra Bank: “There is the general idea that these cities need to come up the curve. Earlier, there were infrastructure issues. Now, in cities such as Nagpur or Nashik, you will find a maze of flyovers. As a result, industries have started shifting closer to those places because of the cost of living.”
Diwanji also says that the real estate cost is going through the roof and setting up offices/branches in tier-1 cities is proving to be costlier. But, in the smaller towns, not only are branches nearly half as expensive, they are also breaking even much faster.

Smaller businesses have started to mushroom in these cities and are driving the need for working capital. A large slice of the population in these cities are small businesses in need of finance, and as businesses expand, low collateralised loans are the first steps taken in these smaller towns.

On the personal loan front, the home loan sub-segment is one of the fast-growing businesses in tier-2 and -3 cities, rising 25 per cent. In earlier times, such growth was seen in tier-1 cities; now, it is found in tier-2 and -3 cities too. In value terms, the former may still be high because of sheer size, but in terms of volumes, growth is higher.

Usually, growth starts with personal products. Those are the areas where demand for two-wheelers and four-wheelers starts going up first. Then comes the next level, loans against property by small-time traders, that type of community, is very high. When manufacturing is very high, you will have trader communities flocking. Then, you will have cities. Vapi is in a chemical belt. Rajkot is a mechanical-engineering base. These are entrepreneurs. After personal products comes unsecured business loans. Once business reaches a reasonable size, they get into working capital or CC. Then they get into leverage.

Earlier, such a businessman would have grown without a history to show for it. Once his business is established, he now has a good history. Perhaps he will secure higher funding (85-90 percent of his collateral). When his working capital cycle expands, the funding cycle goes. Then, he gets to become an SME, where turnover is Rs 10 crore.

Now, many large industries will be moving out of big cities and setting up in smaller towns. Hence, the need for a set-up for ancillary businesses. That growth too is substantial. Even mutual funds have classified B-category cities to differentiate from the tier-1 towns, and that seems to be paying off for this business.

Earlier one would have to struggle for a tier-2 and -3 branch to start generating profit. Now, it would start generating profit in three years. It has to catch up with tier-1 cities. Basic principles will apply even in India. Availability of electricity, of basic ways of commuting, and people will not migrate. Because it is more peaceful, and less expensive, the difference between the earning potential is narrowing. In the next five years, that’s where growth will come from.

In terms of business profits, certainly tier-1 cities contribute a larger chunk to the bottom line. But in terms of growth, it’s the tier-2 and -3 cities where growth is coming from. And sooner or later, these cities will start contributing to the bottom line — and in a bigger way.