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We visited Bengaluru (the topmost credit market in Karnataka, with advance base of ~Rs5trn) and Tumakuru (the 7th largest, Rs112bn) – to interact with key market participants including vehicle dealers, MFIs and SME lenders. Credit-to-deposit ratio in Tumakuru is as high as 98% vs 63% in Bengaluru. Significant takeaways:

2-wheeler dealers: Compared to pre-covid levels, sales volume is currently down for Honda dealership by 35-45% and by 15-20% for Hero. Financing penetration is 50-55% and rejection run-rate for financing application averages ~22-30%. Lending rates have increased by 50-100bps and rates offered are concentrated in the 21.5-22.0% slab. IDFC FIRST Bank is a tad higher in dealer payout at 3-4% vs an average of 2-3% for others. Registered EV vehicle sales proportion is not increasing to a discernible extent.

Tractor dealers: Tractor demand will pick up further as the festive season dawns. Financing penetration is ~80% of the overall sales volume. Farmers bring 30-50% as upfront margin money. Lending rate for tractor financing ranges between 15-17%. LT Finance Holdings (LTFH) has increased its dominance, Cholamandalam Investment (Cholamandalam) is improving its share, IndusInd Bank is another active player, Kotak Mahindra Bank (Kotak) is more prominent in southern Karnataka, Mahindra & Mahindra Financial Services is financing captive vehicles, and HDFC Bank is more stringent in underwriting norms. IDFC FIRST Bank (IDFCB) is aggressive with rates and payouts (particularly in Belgaum). Also, Adani Capital is making its presence felt in pockets. Average payout to dealer state-wide is 1.5-2.0%.

MFIs: Karnataka is one of India’s largest and oldest MFI markets with a total AUM of >Rs225bn. Key players are CreditAccess Grameen (>20% market share in Karnataka), Ujjivan SFB, LTFH, BSS, BhaFin, RBL, etc. Bandhan and IDFCFB are incrementally scaling their MFI book in Karnataka (amongst the best performing states in terms of asset quality across cycles). Rejection rate is 40% in urban (30%). Attrition rate at the loan-officer level has increased post covid. Collection efficiency in the new book (sourced post Apr’21) has remained healthy (back to precovid level of 98-99%) with no sign of stress build-up in any of the pockets.

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