Lending companies borrow money (its liabilities), at one rate and lends it out (its assets) to borrowers at a higher interest rate. The interest and principal paid back by the borrowers is used to payback its lenders. What happens when it funds its long-term assets by using short-term liabilities? The outflows to its lenders will be much higher than the inflows from its borrowers. In such a scenario the only way for it to service its liabilities is to borrow more money. Most of the times the company can get away by doing that. But once in a while that doesn’t happen."
"2. Difference between NIM and spread: NIM and spread are the two key parameters that give an indication of a bank’s operational efficiency. As a concept, NIM and spread are similar, but there is a subtle difference between the two. While NIM is arrived at by dividing a bank’s net interest income by its average interest-earning assets, spread is the margin between the yield on assets and the cost of liabilities, or the difference between interest income and interest expense as a percentage of assets. NIM can be higher or lower than the net interest spread."
"In India urbanization is on the rise. Around 34% of Indians live in urban areas compared to 18% in 1971. This created a shortage of 18.78 million homes. In order to buy a home people need credit. Majority of people in India are self employed and banks will not lend money to them. Why is that? Unlike salaried people, the cash flows of self employed are volatile. And banks don’t like volatility. So the self employed are perpetually stuck in the second level of Maslow’s pyramid. Is there a solution? Housing Finance Companies (HFC) give credit to these people and help them to fulfill their aspirations and progress to the next level of Maslow’s pyramid. And Repco Home Finance Limited (RHFL) is one such company."
"In India RBI governs all the banks. Similarly National Housing Bank (NHB) governs all the HFCs. NHB operates as a principal agent for promoting, regulating, and providing financial support to HFCs like RHFL. In order to facilitate priority sector and rural lending, NHB refinances funds to HFCs at lower than market rates. But with low rates comes tight regulations like capping the interest rate spread to 2%. And this spread is insufficient to compensate for the risks taken by RHFL."
"Low refinance rates from NHBs are available to other HFCs. So this can’t be an advantage. Around 65% of RHFL borrowed funds comes from banks. And banks are dinosaurs as they have access to low cost funds in the form of deposit accounts. So what is the source of RHFL moat? To answer this question let’s travel back 70 million years. You’ll see dinosaurs (banks) roaming all over earth. It would be hard to spot mammals (RHFL). But if you look inside the burrows you will find them. Why does it live inside the burrows? It is the only way for mammals to survive the onslaught of dinosaurs."
"Like mammals living inside the burrows, RHFL operates in tier 2, tier 3, and at the peripheries of tier 1 cities. And it lends money to non-salaried people the segment which banks don’t bother to touch. This unique strategy is the first source of RHFLs moat"