RBI's new norms to hit gold loan cos margins badly: IIFL
The Reserve Bank of India (RBI) on Wednesday issued a notification directing all non-banking finance companies engaged in gold loan business to maintain a loan to value (LTV) ratio of 60%.
In an interview to CNBC-TV18, Sampath Kumar, senior research analyst of IIFL Institutional Equities says, gold loan companies may see some pullback on the growth side. “There should be a margin contraction as well. For the next twelve months, we should expect a significant downside on the earning side,” he adds.
Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.
Q: Since you cover or track NBFCs, what are your initial thoughts on RBI restrictions which came in on the gold loan companies? How much of a material negative that could be for names like Manappuram?
A: We don’t cover stocks like Manappuram or Muthoot. There was some bit of a regulatory overhang for these companies. We are expecting some changes coming through, but we are not clear about what those changes would be. Now, we would say that that is crystalised.
Restricting the loan-to-value (LTV) to 60% at the time of grant of loans would mean that these companies might have to forego some amount of growth. The average LTVs as we understand at the time of granting the loan is much higher than 60%. So, there should be some pullback on the growth side.
Also, the impact on the margin is another thing that we need to understand because different LTVs will carry different interest rates. Typically, when you are lending at a higher LTVs, your margins are going to be better. So, to that extent, there should be a margin contraction as well. That should mean that atleast for the next twelve months we should expect a significant downside on the earning side. So, I would consider that very negative.
Second issue is that RBI has asked these companies to maintain higher tier I capital ratio. From whatever numbers I can see, Manappuram doesn’t seem to be affected by this. Muthoot is the one which probably we will have to consider raising capital in the next twelve months. So, that can be an added overhang for Muthoot specifically.
At this point of time, certainly the regulator has kind of crystalised. We need to get a better picture of how the earnings progression will take place over the next 12-18 months. I think we will hopefully get much better clear picture over the next two days from the management of these companies.
Q: What did you take away from the Budget for the infrastructure financing companies, names like IDFC etc from the whole NBFC basket?
A: I think for these companies Budget doesn’t seem to hold that much in terms of anything positive or negative. I think the key thing for these companies is how the government is going to resolve the issues of power sector ranging from electricity boards all the way to independent power producer (IPPs). I think the issues are well-known and well-documented.
The first and foremost has to be that some of the SEBs, which have very high accumulated losses, they have contracted a huge amount of debt to finance these accumulated losses. We need to see how that is going to get resolved. There was a news item about couple of weeks back saying that state governments of these respective SEBs would probably take these loans on the books. If they do that, definitely it resolves one big issue on the SEB side. That allows more liquidity for the SEBs in the first place. That means that they can buy power, they will not get constrained.
If these SEBs are let to run with the current amount of debt, certainly there is going to be a big question mark in terms of where they will be able to service the debt for in the foreseeable future. So, that overhang will also go. I think the first big step that we need to see is on the resolution of SEBs accumulated losses and debt position. Hopefully, we will see some action in the next one month.
Second thing is on the IPP side. On the fuel supply agreement, Coal India has been asked to sign FSAs which hopefully will get completed soon enough, next one month or so. But the consequent impact of that would be that the IPPs will incur higher fuel cost. That means that there will have to be some form of higher energy cost pass through and current PPS in many case does not allow such provisions. So that is another issue which the government has to take up.
If these two issues get resolved then we can hope that growth can come back not in FY13, but in FY14. Clearly, from asset quality point of view, the overhang both on banks and especially finance institution goes. That I would tend to think is an upside. If you look at the stock prices, whether it is IDFC, PFC or REC, they are largely reflecting that some of these actions will be taken but as and when these actions take, I see further upside from here. So, I think we need some clear idea in terms of how the policy is going to move in the next six months for these stocks to go up further from here.
Q: On this point of asset quality, a lot of people have started stressing about Hindustan Construction as the next big addition, Lavasa, to the NPA list of the asset quality list for many of the public sector and even private sector entities. What have you penciled in with regard to that asset?
A: It is very difficult to pencil any specific. But the view generally that we have taken over FY13 and FY14 is that there will be a large increase in restructured loans and NPLs for banks. If you recall, the NPLs for the banking system as a whole was at about 2.3%, restructured loans were about 3.5%. So, combine number, we are looking at somewhere between NPLs and restructured loans is roughly about 6%. We are looking at this number going closer to 10% by FY14. So, there are multiple sectors that can contribute to that right from power sector to construction, the gems and jewellery to even steel, some of the companies within that. So, multiple sectors will contribute to this.
HCC is going to be a part of that. So, to that extent, our thinking has been that provisions will continue to rise for banks year-on-year (YoY). As a result, there is going to be a downward pressure on profitability for some time. But if you have to look at basically the offsets for banks from such pressures, one we are seeing cut in CRR. That means that there is some buffer on the margin side.
Second, if RBI cuts rates by 75-100 bps next year, it would mean that banks can get some bond gains. So, effectively some of the additional pressures from asset quality that might come about can be offset by these sources of revenue. So, from that point of view, while stress level will continue to rise, there may not be a significant pressure on profitability going into 2013 and 2014.
What we need to see is basically the banks also needs to be recapitalise as stress level goes up. We have seen some downgrades from Moody’s. That has principally raised the concern that banks are not adequately capitalized. So, if the Government of India continues to demonstrate the kind of recapitalisation programme that they have run in the last two years, even those issues will somewhat get addressed in my opinion. So, to an extent, the margin in FY13, clearly things can get better for banks than getting worse.
What I would imagine basically is a lot will depend on the macro. If macro outlook deteriorates, suddenly there is going to be the downside. But that doesn’t seem to be the best-case scenario at this point of time.