Jun 20, 2013, 04.19 PM IST
Among group companies, L&T Finance Holdings is most likely to apply for banking license, CMD YM Deosthalee clarifies.
After the recent clarification issued by Reserve Bank of India on new banking license norms, many market participants believe that instead of L&T Finance, holding company Larsen and Toubro would have to apply for the banking license.
"I don't believe that any mergers or demergers are required, so that is not envisaged. It is not possible for me to comment on which entity is going to apply, but it is suffice to say L&T group is going to apply," Deosthalee said.
Most experts believe that companies like L&T, which are applying for bank license will face challenges in meeting RBI’s requirements on statutory liquidity ratio (SLR), cash reserve ratio (CRR) and non-performing loans.
Addressing these challenges, Deosthalee said that the group's business plan had already assumed that there will not be any forbearance for such requirements. "I hope we should be able to resolve the issues. It is possible that in the first one or two years there will be some impact on account of this. But we are not looking at this model for a short period of time. This is a long-term perpetual business model and one has to look at it from that perspective," he stressed.
Reacting on the sharp fall seen in rupee today, Deosthalee said that this was just a knee-jerk reaction and there is no need to panic. "I don't think that there is any reason for rupee to remain at this particular level,"
On possibility of rate cuts after such unprecedented fall in rupee, Deosthalee said that he was hopeful that given the fall in inflation RBI would cut rates. However wether the banks will pass on that 25-50 bps cut in repo rate to customers is questionable and would solely depend on liquidity situation.
Below is the verbatim transcript of the interview
Q: The Reserve Bank of India (RBI) did not give us rate cut in the previous policy a few days back and now given the way the rupee has moved and the fears about the concerns on the external situation in India worsening, can we expect a rate cut from the RBI perhaps in the next three months?
A: I am very hopeful because although they have not cut the rates inflation to some extent has softened up. We have to see the impact of rupee depreciation for some time to come because my view is that it is a knee-jerk reaction and one has to see where does this volatility goes.
Today, it is too volatile, the situation is very uncertain. Over a period of next one month or so one has to observe and probably it is some sort of an overreaction. That is why probably RBI did not go ahead with the rate cut with the expectation of imported inflation and widening of current account deficit (CAD). So, we have to see what is the effect of the recent measures on gold imports? How the oil price is stabilising? What is happening to these outflows form India? So, today it is a very uncertain situation.
My personal view is that it should settle down. I don’t think that there is any reason for rupee to remain at this particular level. It should come back somewhat and then once the situation stabilises hopefully RBI will take the decision.
But one important point is that rate cut itself is not going to be impacting the decisions of banks to pass on the rate cut to the customers, liquidity also is important and current liquidity situation is reasonably okay and if the liquidity situation remains comfortable and the other thing is banks are able to attract deposits.
They will be willing to pass on some sort of rate cut to the customers. So, it is not going to be dependent on what RBI does in terms of 25-50 basis point (bps) rate cut, but these other things also are going to very important for customers to get some relief.
Q: I am just asking you if the scenario gets that dire at all. I just want you to rewind to January of 1998, January 15 to be precise, with each passing day the rupee was hitting a new low because of the Asian crisis and bang on January 15, if you remember there was that two percentage point hike in repo rate and two percentage point hike in cash reserve ratio (CRR) and we saw call rates going one odd trade even got done at a 130 bps. Do you think the situation can get that bad? We have spoken to a bunch of foreign experts and all of them think that the selling in emerging market bond and equities is not over by any means. They are looking at a complete reset as they call it of the situation and therefore all of them are expecting more falls. When everyone expects a fall, it may not happen, but I am just saying that can things come to that pass?
A: I don't think so. I don’t have any crystal ball or I can’t really say what is going to happen, but there is no need to panic so much. As I said earlier it appears to me a bit of an overreaction and I hope I am right because the market movers, those who play in the market know better than what people like us know. I don’t think there is fundamentally any reason for anybody to panic. If you ask the rupee depreciation of course has caused some concern because of CAD and imported inflation. But on the flip side the competitiveness of Indian exports to some extent will improve and that might over a period of time help the CAD situation and therefore I am not very sure whether currently we are taking a balanced view of the situation. In this type of uncertainty people tend to overreact.
Q: L&T Finance Holdings also gives gold loans. With the sharp fall in gold prices in such a short period is there a risk or has any of your gold loans turn bad?
A: First of all, we don't have any gold loans in our portfolio. We are not in that business. Although, we have a diversified portfolio, we have not entered in gold loans. So, that question is a bit hypothetical. It is not relevant for us.
Q: The important development that is going to happen in the next one week is that the gates will close for putting in banking applications. Have you thought through in terms of which entity will apply for the licence and what kind of mergers or demergers your group will plan thereafter in the next 18-20 months?
A: We have definitely thought about it and work is still on. The application has to be submitted before July 1 and we will submit. Now which entity will apply and what kind of mergers? I don't believe that there are going to be any mergers or demergers required, so that is not envisaged. It is not possible for me to comment on which entity is going to apply, but it is suffice to say L&T group is going to apply. In the sense one of the entities from L&T group or one can say it is either L&T or L&T Finance Holdings. But as the things stand today it appears to me that it is going to be L&T Finance Holdings, which is the likely candidate. But we will let you know as soon as things are finalised.
Q: Would you contemplate any kind of acquisitions of non banking financial companies (NBFCs) companies with a decent reach or with priority sector portfolios in the run up to developing your licence. By the way, the mood is that you will definitely get a licence since you all are a diversified entity and don’t have an identifiable promoter family, so hopes run high on L&T? Are you looking at some kind of a merger of any NBFC company, buying any NBFC company or micro-finance institution (MFI)?
A: At this point in time we are not looking at any acquisitions. We have done already three transactions in the last year and we are in the process of integrating those entities. I must tell you that thanks to the work done by the team internally as well as the entities, which we acquired the integration has gone off very well and very smoothly. So, we are currently focusing on growing in those businesses, having said that if there are any opportunities whereby we are able to enter any area, which we don’t have today or if we are able to increase our geographical presence or if we are going to get some products, which are important or necessary in our overall basket we will look at and that is the way in which we have gone ahead as far as acquisition is concerned. So, it is not that we will acquire anything which comes our way. It has to make strategic sense to us and as you rightly said supposing something is available which will enable us to increase our geographical presence, possibly. But at the same time what comes along with that also will have to be seen. It is not only the geographical presence; many other things also will have to be looked at.
Q: Companies like yours are seen to have two problems while you all evolve into a bank - one is that the statutory liquidity ratio (SLR), cash reserve ratio (CRR) requirements will put a pressure at least in the year FY15, when the licence is there and perhaps is implemented or maybe FY16, when all the money that you have so far will have to bear an SLR, CRR burden and secondly even non-performing loans (NPLs). At the moment you all have the 180 days recognition, but as you move to 90 days it is not going to be easy for a small truck owner, the sheer ability to record that arrival of money is going to be a problem. How do you see yourself tackling these two issues? Especially, the NPL issue getting to the 90 days regimen?
A: As far as the second part of your question is concerned one thing you need to know in our lending business we follow a conservative policy of provisioning and therefore we don’t strictly follow RBI guidelines. We provide more than what is required under the RBI regulation. For example, in the infrastructure financing business the standard assets provisioning is more than what the RBI demand.
Similarly for outstanding over the four months period we make a provision between three-eight percent depending on the delay or our assessment of the situation. So, we have been providing and similarly in L&T Finance also we have been providing. But if you have to change to 90 days there will be a one-time reaction and one-time impact and we will factor that in our business plan, but I do believe that it will even out as we move ahead and as we grow further in this business, that is number one.
Secondly, as far as CRR and SLR are concerned we always presume that we will not get any forbearance or any time for this and therefore in the business plan it has been assumed. We are working towards that and I hope we should be able to resolve the issues. It is possible that in the first one or two years there will be some impact on account of this. But we are not looking at this model for a short period of time. This is a long-term perpetual business model and one has to look at it from that perspective.
L&T Finance stock price
On December 13, 2013, at 14:31 hrs L&T Finance Holdings was quoting at Rs 70.95, down Rs 0.7, or 0.98 percent. The 52-week high of the share was Rs 97.35 and the 52-week low was Rs 53.00.
The company's trailing 12-month (TTM) EPS was at Rs 2.56 per share as per the quarter ended September 2013. The stock's price-to-earnings (P/E) ratio was 27.71. The latest book value of the company is Rs 20.56 per share. At current value, the price-to-book value of the company is 3.45.
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