ROLE OF NBFCS IN FINANCIAL INCLUSION KASHIF YAQOOB

Contents ◦ Leasing Globally ◦ Access to finance for SMEs ◦ Success Story in Pakistan ◦ Future trends 2

LEASING GLOBALLY 3

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% 0. 9% Pakistan 1 2. 9% 0. 4% 4

Key statistics ◦ Global leasing market is around US$ 1 trillion, with 1/3 rd 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 2 nd most pressing issue for SMEs in emerging markets after electricity ◦ After own equity and bank loans – leasing is most popular source of financing 5

ACCESS TO FINANCE FOR SMES 6

Banks & SMEs ◦ Total private sector financing by banks ◦ SME financing by banks Rs. 4 trillion 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 7

Facility wise break up ◦ Working capital finance 66% of outstanding SME portfolio ◦ Trade & finance 11% ◦ Fixed investment 23% 8

Constraints for banks ◦ Lack of collateral ◦ Lack of verifiable information ◦ High transactional cost ◦ High risk ◦ Historical portfolio quality issues 9

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 10

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 11

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 12

SUCCESS STORY IN PAKISTAN 13

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 14

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 15

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 16

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 17

Gul Muhammad Awan (Talagang) o Started transport business from scratch in Bilalabad (a village near Talagang) o Built small fleet of used transport vehicles, had no access to formal financing o Leased first truck to GM in year 2005 o Business grew and GM involved his friends, relatives and unemployed youth o ORIX leased 14 trucks of Rs. 54 (m) to GM so far o Now GM is a leading transporter of area. o His success has inspired many other entrepreneurs of area to start transport business. 18

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 19

FUTURE TRENDS 20

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 21

THANK YOU 22