Orange - Your Mobility and Livelihood Partner

Introduction

RBI vide Master Directions RBI/DNBR/2016-17/45 Master Direction DNBR. PD. 008/03.10.119/2016-17 dated September 01, 2016 under its Fair Practices Code advised NBFC to lay out appropriate principles and procedures so that usurious interest, including processing and other charges are not levied on loans and advances. The Master direction also prescribes fixing an appropriate ceiling on the interest & processing fees.

ORFIL Customer Segment

ORFIL caters to the growing needs of India’s increasingly Semi-Urban and Rural market consumers in the Middle Income / Lower –Middle Income demographic segments. These segments are usually not the core target segment for commercial banks or Regular NBFCs. ORFIL now offers a number of financial products and solutions like term loans to address the “Mobility and Livelihood requirements” of its target segment.

Some of the customer characteristics are

1. Income Criteria – The Target customers typically have lower income in comparison to the prime customers targeted by commercial banks or Other Large NBFCs. Also these customers have inconsistent and variable income stream due to seasonal nature of their businesses and hence they would need structured repayments solutions. ORFIL’s product suite includes unsecured loans, Two wheeler loans, secured loans and loans for purchase of income generating assets such as commercial vehicles.
2. Credit History – Typical NBFCs / banks operated with credit bureau scores of more than 700 or operate with new to loan borrower with collateral / guarantees from co-borrower having credit history. However the target segment of ORFIL may have little or no prior credit history with organized lenders. This requires detailed credit appraisal for relatively small value loans. It will be appropriate to state that this segment will have higher credit risk and hence, higher credit losses. This segment has in the past, relied on borrowing from the unorganized sector like local money lenders, pawn brokers etc.
3. Technology – This segment may not wish to deal with a financial institutions through modern delivery methods such as phone and internet based applications due to lack of access or comfort with such channels. Hence it is very important to have a “High-touch” method to understand and service this customer segment. However, given the growth of Internet and penetration of Smartphone’s, ORFIL offers loans to these customers’ through a “Traditionally Digital Method” i.e through assisted digital channels with the reach of ORFIL branch staff. The Company thus provides products and services in offline and online modes through branches, web applications and Apps.

Business Model

ORFIL has a differentiated business model to deliver efficiencies and contain risk based on the requirements of the target segment. Our business has the following characteristics:

1. Branch based lending with the branches being located in customer catchment areas which are closer to and convenient for customers.
2. Two wheeler and Vehicle Loans are offered through dealerships.
3. The Company also provides an option to customers to make applications online. This reduces the time taken to process loan applications.
4. Loans are structured based on customer needs, the cash flows and assets of the customer.
5. Higher operating costs (due to lower average loan size) and loss rates as compared to equivalent products offered by conventional Financial Institutions.
6. Loans are sanctioned after personal discussions with the customer for specific loan products where the customer has no substantial credit history. Hence an element of judgment is involved in assessing the credit worthiness of the applicant.
7. Credit decisions are centralized with auto-renewal process based on straight pass criteria as well as employees having credit underwriting authorities at the cluster / central levels.
8. Credit risk is managed by ensuring that underwriters adhere to a set of centrally developed but flexible policies. At the central level, management uses analytics and economic judgment to set these guidelines and monitor the risk equation.
9. A clear set of operational risk control procedures are also embedded in the branch workflow to ensure process adherence and adherence to credit and operating policy
10. Review at multiple levels so as to quickly identify and correct micro inefficiencies.
11. The entire application, credit appraisal and disbursement process is managed using a workflow software that enables quick information sharing and also addresses operational risk issues
12. The loans and advances on the Company’s balance sheet are disbursed at fixed rate of interest.

The product-wise interest type allocation is tabulated below.

Associated costs

There are two components of cost that need to be priced into a loan

1. Upfront costs – The following costs are incurred by ORFIL before a customer takes his loan disbursement.

• Acquisition costs – The cost of sales channel and sales promotion expenses.
• Verification costs – A verification of information supplied by customer in application form such as residence and employment details may be required. Additionally, verification may be required through credit bureaus.
• Verification costs – A verification of information supplied by customer in application form such as residence and employment details may be required. Additionally, verification may be required through credit bureaus.
• Credit appraisal costs – The Company needs to invest in competent resources that can carry out credit appraisal of the customer’s application.
• Technology costs: Financial services business requires extensive investment in Hardware, software, storage and analytics for efficient operations. These investments are ongoing in nature given the rapid changes in the technology industry and given the consumer expectations.

It may be noted that most of these expenses are incurred irrespective of the outcome of the customer’s application. For example, verification costs are incurred even if the customer’s application is finally rejected by the company.

The company recovers some of these costs through a processing fee payable at the time of loan sanction.

2. Ongoing expenses – The following expenses are incurred during the life of the loan

1. Funding costs – ORFIL uses a mix of debt and equity to fund its loans. This funding needs to match with the tenor of the loan and involves costs.
2. Servicing cost – This includes cost of managing repayments, books of accounts and addressing any customer queries on an ongoing basis.
3. Collection costs – Effort is required to call / address customers who may default in their repayments and prepare remedial plans
4. Management costs – Cost of Management overheads, IT infrastructure and software licenses and other overheads
5. Record keeping – Documents pertaining to loans have to be stored in safe custody as these are legal documents.
6. Customer Service – This includes cost of servicing customer requests such as interest certificate, statements, address change requests and other miscellaneous queries from customers

3. Other expenses

      Loan Losses and Provisions – The retail loan business works on a portfolio management model. The company needs to create provisions for bad loans and write off       loans that are not recoverable based on the Product / Customer mix.

4. The distribution & operating costs to service this segment are high and get even more amplified due to the small lending size of each transaction.

Pricing Strategy of ORFIL

1. The ROI to the customer is determined based on cost coverage and reasonable returns to the organization as measured through a targeted return on assets (ROA) and return on equity (ROE) and its shareholders.
2. The risk premium is determined through a comprehensive risk assessment and risk categorization of the borrowers. The risk assessment is done through analytics based models that predict future portfolio losses. ORFIL pricing methodology will continue to evolve and be more and more refined as we get more insights into risk levels of each sub segment.
3. Given the higher cost of funds, operating costs, expected credit losses and investments required to build a strong model, our pricing will be higher as compared to banks / traditional NBFCs.
4. We will offer only fixed rate loans to our customers depending on the tenor / Product.
5. The company’s offering in the market will be in line with the offering from other similar players in the target market and consumer segment and reasonable as compared to other informal sources of funds that the targeted segment has availed in the past.
6. ORFIL offers loan rates based on on risk categorization of the borrower, loan size, perceived credit risk, nature and value of collateral and credit history with other FIs. Existing customers who take a repeat loan from the Company will also get benefit of lower rates as they have a demonstrated track record. Various other parameters like income source of customer, risk profile of asset, geographical variations, government policies, method of sourcing, bureau records, past transactions with the borrower are also considered while determining the rate of interest
7. Further, at a product level, in addition to the risk and tenor premia, the other key factors that determine the interest rates are

• Two Wheeler Loans (TW) – Assets are classified based on the model re-sale values and the Interest rates are variable based on the same. Interest rates also vary based on dealer subvention schemes carried out at specific market / manufacturer inputs.

8. The proposal for the ceiling of interest rates not exceeding 50% p.a. and processing charges not exceeding 5% p.m.
9. The broad range of interest rates levied to the borrower is tabulated below

10. The company shall mention the penal interest charged for late repayment in bold in the loan agreement.
11. The customer will be given a copy of the loan agreement which will carry details of all charges and Interest Rates. Any nonrefundable charges collected from the customer towards application processing will be recorded in the application form, which is signed by the customer. In addition, the customer will be able to get information on effective rate of interest charged, all fees and charges and the grievance redressal system from the Company’s web site “www.orangeretailfinance.com”. The same will be prominently displayed in all its offices and in the literature issued by it.