We did realise that for a good promoter-backed company, with an established track record and good rating, availability of money was not difficult, though it came at a price. So, we took the view that cost is not the decision point, but the availability in adequate quantum is.
For the industry as a whole, liquidity is available but sources may have changed. Instead of mutual funds, banks are providing funds. We’ve gone to the market for retail non-convertible debentures. There’s also the option of external commercial borrowings.
How costlier has money become?
The increase in costs has already happened. We don’t believe that in the next six months to a year, there could be a further increase in the cost of borrowings. But, if there are past liabilities which mature and you have to raise capital to retire them, then that will come at a cost.
If you were to take our situation, the marginal increase in cost would be about 100 basis points (bps) and the average cost increase is only 40 bps as we have some past liabilities on the book. What will happen is that for those correcting their book, the incremental money will not come cheap. This will put net interest margins to test, if fresh money is raised.
Does that explain your need to hold back on lending opportunities?
I don’t think one can flip the business model to say the cost of funds have gone up; I will accordingly find customers who’ll pay a higher price. All of us have a fixed model and we work with certain sets of customers. In our case, we lend to automobiles, tractors and we cater to rural and semi-urban customers. Now, one will also have to work around circumstances, where the costs are shared among original equipment manufacturers, dealers and financiers and a small portion passed on to the customer. And that is where the focus will be – on productivity, efficiency and using better technology to bring down overheads.
The deposit franchise is important for consolidation to happen…
Let me first clarify on the consolidation bit. The news that we are looking to pick up a stake in another NBFC – I must say, it was news for me as well. If there is anything of this nature, I don’t think we’ll wait for the newspaper to make the announcement. But is there a wave of consolidation in the industry, are there opportunities – I’ve been on record, and for many years, that whenever there is any opportunity on the mergers and consolidation side, we would surely review, and based on compatibility, will make the decision. Otherwise, we’d rather look at buying portfolios; why buy a company? But today, the way the industry is and the way some of the large players operate, if fundamentals keep getting challenged the way it is — whether on volumes or recoveries — people always see small players making themselves available for buyouts.
What is your deposit strategy then?
As far as our strategy on deposits is concerned, as an NBFC, we have always looked at multiple sources of borrowing and retail deposits have always been an important element of our borrowing mix. Presently, retail deposits are 5–7 per cent of our total borrowings and we expect this to reach about 15–20 per cent of the total borrowings. For the system as a whole, deposits as channel will be very important in the coming days. But truly, if you look at it, as NBFCs we shouldn’t miss out on any possible instruments. We shouldn’t miss out on any source of borrowings even if it isn’t the cheapest. Since these are very regulatory-built businesses, one change can suddenly put pressure on the business. The average cost is what we should look at and not one source of funds.
So, buying out Piramal’s stake in Shriram group is out?
I am not even aware of such a development. There are no discussions on this to my knowledge.
One of the main hurdles for industry houses to apply for an on-tap banking licence is the prohibitive norms on conglomerates keen on it…
When RBI was issuing new licences in 2012, we looked at the possibility and based on our analysis, we did not pursue the opportunity any further. Those conditions don’t change yet. We are an NBFC with a large network spread across the country and would look for an opportunity that would allow co-existence, if permitted.
Barring one applicant, we’ve not seen takers for banking licence…
The question is what can a new player incrementally bring to the system. Whether the new entrant is looking at an unbanked area, financial inclusion, and retail finance
will decide if the regulator should award a banking licence. Then comes the ability to bring capital sufficiently over time and finally, how they make an overall difference to the system will decide the banking licence. The space is already quite crowded.
I don’t think anyone is keen to enter a business where he or she will have to make such large capital commitments without thinking through the business models. These aren’t easy propositions. It’s a whole complicated execution model. There will be gaps available, but whether that excites you to be in the space is the question. For instance, rural lending has more space even for NBFCs to operate, but does it fit the strategic intent needs is to be seen. It’s about converting that intent into strategy.
Finally, is the dust settling down for the sector?
NBFCs will remain important entities in driving the retail lending growth – particularly for vehicle finance, tractor finance, housing, and small business loans. These have been NBFC specialities and would remain to be our forte. FY20 will see less volatility compared to the past because regulations have been tightened to the extent needed. The liquidity situation should improve and if that happens, focused NBFCs would benefit from such changes.