Demonetisation will certainly be good for the economy in the longer run but it is tough to ascertain how long the adjustments will take says Ajay Srinivasan, CEO-Financial Services at Aditya Birla Group in an interview to CNBC-TV18.
As of now Srinivasan sees no big impact on the non-banking finance business except some slowdown in logins and disbursements in the housing finance business and marginal drop in renewal premiums largely due to cash shortages. He believes there are no indications as of now that demonetisation will cause an uptick in non-performing assets.
Merger of AB Nuvo and Grasim is on track and likely to be completed by February-March and demerger of financial services business is scheduled to be completed between April to June next year following which AB Financial Services could get listed, he says.
The company is also on schedule to launch a payment bank and it could be launched in the first half of the next calendar year.
Below is the verbatim transcript of Ajay Srinivasan’s interview to Latha Venkatesh on CNBC-TV18.
Q: You are a veteran of many cycles in the financial sector, so, first up this demonetization. Nobody in the world has lived through this, what is your sense; initially will the economy get away with minor bruises?
A: It is early days and therefore we are all kind of trying to figure out what the impact is. Like you said, it has never been done before at this scale; 84-85 percent of currency notes disappearing from the system is a large shock. My sense is the initial impact is going to be probably slightly more than many people expected because I think it is taking time for the cash to come back into the system.
I don’t know how long that is going to last and I think ultimately this is going to be very good for the economy and for the financial services sector in particular because you move money from the informal sector into the formal sector, you get lower rates, you get better taxation, you get a better fiscal deficit, so, it is very difficult to not think of all the positive benefits that will accrue. I just don’t know how long this adjustment process will take.
Q: Financial services sector, the initial pain appears to be a little more, at least the stock markets are running down, many of the NBFCs which were the darlings until now. What are your people on the ground telling you?
A: At least as of now we have not seen any impact on our NBFC. In the housing side, we have seen a slowdown in logins, we have seen a slowdown in disbursements but a lot of this is just adjusting to things. So, for instance, in life insurance, we have seen a slight drop in renewal premiums that we used to collect but that is because we used to get some of the renewal premium in cash and if people don’t have cash in the system, they are going to delay the payment of renewal premiums. So, some of this in my sense is an adjustment.
I think the whole thing about there being a problem with credit and there being a problem that people are reacting to and the stock market anticipates many things way ahead of time, I am not sure it is actually playing out on the ground as of now. We at least haven’t seen the signs of that so far.
Q: You don’t see NPA uptick at least in this and the next quarter?
A: It could be but I just think it is too early and at least we have not seen anything so far that gives us a sense of that. However, a lot of that is going to be last mile. Last mile where people have trouble and therefore looking at making their adjustments to their business model.
We are not fully retained in the sense in our business model compared to many other players whose prices have adjusted; our model is slightly different and therefore at least as far as our model is concerned, we haven’t seen any impact so far.
Q: Before all that, when are you getting listed? How do we play the Aditya Birla pluses and minuses, the financial services unit was to be listed shortly, now what is the time table?
A: We are very much in terms of the time table we spoke about when we launched this scheme in August. We said that there will be a process of the merger first of Nuvo into Grasim and then there will be process of a demerger and that demerger we always said was going to happen in April to June of next year. I think we are pretty much on time for that. So, we would get listed between April and June of next year.
Q: In a sense therefore you missed the bright period of NBFCs starring the stock market lead. However, are all the issues resolved in the merger, people were complaining that probably Idea Cellular is going to get a lot of the money from the holding company?
A: We have been interacting with a number of investors since the day that has happened and explaining to them a lot of things that maybe many people did not quite understand at the original stage. So, I think many more people are understanding today what the logic and what the rationale is for what we have done and coming on board.
Q: So no tweaking needed, a little bit?
Q: When does the merger process get over, is there a time for that?
A: As I said earlier, the merger process would get over by February-March of this year, and then the demerger would happen thereafter.
Q: So you expect this fiscal the merger is complete?
A: That is right.
Q: There is just one more niggling issue on the merger but I have other questions on the demonetisation and the markets. Idea, that is a very big part of the merged entity when it is listed, rumours refuse to go away about Idea looking for partners or partners wanting Idea, will we hear something on those lines?
A: That is something I can’t comment on at all. I don’t have any idea on that.
Q: The payment bank, the financial services company apart, payment bank was to be the big bridge between the two, when do you think that will be?
A: Work is completely underway. Part of it is also getting approvals from the RBI for what we are doing. We are in process, most of our tech platform is ready, the team is in place, we are getting our product offerings in place. So, I think we should be, as I said earlier, we should be in the first half of next calendar year, we should be ready to go public.
Q: This would be a great time isn't it, demonetisation gives digital finance a big push, so, are you planning to therefore advance it?
A: It clearly does give a big push. I don’t think a few months is going to make a big difference because I think we are really talking about a complete change in the way people are going to be dealing with money and payments and all of that. So, I think that is a bigger consumer change and I think the impact of that is going to be long lasting; it is not going to be question of a few months. So, we still think we are in the right timeframe as far as that is concerned.
Q: When we last spoke when the payment licence was the big buzz word and UPI had not come, you were already expecting it in September or October. You have pushed it back a bit?
A: We were talking about December at that time. It will get pushed out in a few months.
Q: Is that because of the spectrum costs?
A: No nothing to do with that. It is just the preparation time and stuff that we need to get done.
Q: So, we should see it in the first six months?
Q: Now let me come to the markets itself. You said you are not exposed as an NBFC to the very small retail but do you think that this is going to be a two quarter pain even for the upper segment, say the NBFC, the higher level borrowers, the middle level segment midcaps?
A: I think there is one quarter pain for sure. I don’t know whether this will alleviate at the end of the quarter or it will spill into two quarters, it is very difficult to call whether it is one quarter or two but I think there is going to be a period of pain, there is going to be a period of adjustment and then there is going to be a period of rebound and it depends therefore what your time horizon is when you look at it from a market perspective.
Q: What are your mutual fund guys telling you, at the moment very penny of foreign institutional investor (FII) pullout has been matched by domestic institutional investor (DII) buying?
A: So, encouragingly mutual funds flows have continued to remain strong, in equities and across the platform on fixed income as well. I think because the market has moved so much to systematic investment plans (SIP), I think that is really working well today. We are hearing a lot of our investors saying it doesn’t matter; volatility gives us an opportunity to average down and therefore more opportunity to do SIP.
So, we are seeing actually no slowdown, it is actually an increment. So, if you look at two weeks post demonetisation, we have actually seen slightly more flows than we saw before and as liquidity comes back into the system, we think mutual funds will definitely benefit from the increased flows.
Q: Initially mutual fund investors would hold out but do you think they will have the stomach if the market were to slip another 5 percent?
A: I think we have really seen a big change in customer behaviour in mutual funds. There used to be a time when market correction would lead to everybody kind of looking at redemption and booking a loss or booking profit depending on where they were. I think today people are looking at much more as an opportunity to average and to continue to stay in the market. So, I think the SIP has really changed consumer behaviour in a way that we never saw before.
Therefore we don’t see that kind of reaction. People do expect market may go down some more but that doesn’t deter people who are looking at averaging out their holdings and keep playing the equity markets longer term and we think it is a really strong and good trend in the mutual fund sector.
Q: How much do you think the market might give up, do you think already it is good time, maybe as a mutual fund you have to be in stocks, you can’t be -- are you in cash by the way?
A: No, we are not. To the extent that we are getting cash and not deployed, there will be some amount of cash but by and large we are deploying the money.
Q: What is your sense; would there be much better and more attractive levels to get in?
A: Markets may correct a little bit more. I don’t think there is going to be that much more of correction. Everybody is guessing in terms of where earnings are going, how much earnings are going to be downgraded and then it is a guessing game today because it is so early in the process, nobody really has a clear view.
So, markets will over correct one way or the other. I think we are looking beyond this and we are looking at all the positive impacts that are going to come as a result of what is going to happen. As long as you pick the right sectors and you stay the course, we have seen at least with our philosophy it has worked.
Q: What are your right sectors?
A: I think you will have to look at things that play the underlying theme. I think infrastructure will become a very interesting sector now because with government getting money, clearly you are going to star t seeing hopefully more money going into infrastructure. I think consumer discretionary, obviously there is going to be a bit of a pain at the moment but that is going to come back as well. So, you just have to position yourself for the and look at opportunity as it comes back.
For full interview, watch accompanying videos...