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Sep 05, 2011, 03.35 PM IST | Source: CNBC-TV18

Will hold talks with RBI on banking foray: L&T Fin

The new banking license guidelines are in-line with our expectations, said YM Deosthalee, chairman and managing director of L&T Finance Holdings.

YM Deosthalee, CMD, L&T Finance Holdings

The new banking license guidelines are in-line with our expectations, said YM Deosthalee, chairman and managing director of L&T Finance Holdings .

The company now plans to hold talks with the Reserve Bank on its banking foray. “We need clarity on differentiated CAR requirement and also RBI’s take on inorganic growth for new banks," Deosthalee said.

He sees strong scope for the banking sector growth in rural areas. “We see strong growth and investment in infrastructure sector going forward,” he said adding a caveat, "…infra NBFCs might face challenges for one or two quarters."

But, he believes, as long as the fundamentals are intact, business cycles will not be an issue. "Our loan book is at Rs 18,000 crore for two NBFCs as on March 31, 2011,” Deosthalee informed.

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Below is the edited script of YM Deosthalee's interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

 

Q: What did you take away from the new banking guidelines? On which counts did L&T finance, in your eyes, has faired well and which ones were the tricky areas?

 

A: The new banking license guidelines are in line with our expectations. If you look at the broad framework, many factors are on expected lines including the minimum capital requirement, the holding company structure, the 40% lock-in period of five years, diversified ownership, strong credentials, etc.

 

We need to see some clarification in few areas. We need to understand the rationale behind the differentiated capital adequacy for the new banks. There has to be clarity on points, for example, new banks should not set up any other business in financial services for a period of three years and listing within two years.

 

We also need to get into some details about the rule of having 25% branches in rural areas. To the best of my knowledge, more than around 30,000 branches are already operating in these areas and these new banks may be required to go to even remote places, where the population may not be even 2000-3000.

 

As far as L&T Finance holding is concerned, we are going to have a dialogue with the Reserve Bank of India (RBI) and take a final call as to what we are going to do. But this is a natural extension of the financial services business, which we have today and the business is well diversified today into retail, wholesale infrastructure and rural; it has been structured well.

 

There is also a holding company in place with substantial number of independent directors and with minority directors from the parent company. So, the idea behind the new guidelines is to ensure governance and transparency. Hence, we believe that these guidelines will be discussed further and some clarity will emerge and some modifications may also be made.

Q: Is it the best possible way for L&T finance to grow from here? The other observation seems to be that once an NBFC steps into a bank’s shoes, a lot of the other technicalities such as return-on-equity start will start suffering, which is much higher for a company like yours at this point.

A: It all depends on the business model; the way you have structured your business. If you look at some of the banks today, they also generate reasonably good returns. Secondly, what is the focus of the entity? Is it the top line or the bottom line? In the financial services business, our focus is both on top line and on bottom line and that means returns.

Bank is a perpetual entity and therefore, it is unlikely that you start the business today and then make good returns and exit after a couple of years. Once you start an entity like bank, it has to continue for many years and therefore, one has to have very consistent performance rather than giving one superlative performance in a year.

So far as your business model is good and you are satisfied with sustainable, consistent, long term performance, then you should be able to generate reasonable returns. In any case, I do not believe that on a long term basis, one can expect very superlative returns in this sector.

Q: The guidelines also seemed to be silent on the issue of mergers and acquisitions (M&A) and whether a company could enter the banking space via M&A with a smaller bank. Your parent company L&T holds sub 5% stake in the Citi Union Bank. What is your view on whether there would be any elbow room for M&A activity here?

A: The stake is owned by L&T finance holding and not by L&T. So the small stake, which we have in two banking entities, Citi Union Bank and Federal Bank, was actually to make sure that we cover this space through the NBFC structure and have some stakes so there is a synergy benefit, which we can use for the benefit of our customers and that was the purpose of taking the stake.

In my opinion, if one allows inorganic growth strategy for getting into this business, then RBI should encourage that attempt because ultimately, we want strong banks, which can continue to grow, provide capital on a sustainable basis and have a Pan India presence.

So, if an inorganic structure is allowed by RBI for some of the reasonably regional banks, then it will help the financial services sector in the country. However, that is one root of getting into this business and if that is not permissible, then one has to look at the organic way.

Q: Are these two holdings strategic and if permitted, would you explore these routes with the two banks in which you hold these stakes?

A: These are strategic stakes but we didn’t have any intention of doing such transactions. We have too predominant NBFCs; one is in the retail business the other is in the wholesale infrastructure business. Some of the customers need other facilities, which the NBFCs cannot provide and therefore, we wanted to make sure that we have a relationship with some of these banks to make sure that our customers have an access to working capital and non fund based facilities.

We also wanted to make sure that we have a presence in the financial services sector either through business or through such strategic stakes. The stake is not with the intension of doing any inorganic transaction. If RBI encourages such inorganic transactions, it is one good way of growth in the financial services sector because we need strong entities for providing continuous capital to the businesses.

Today, the penetration is reasonably low. If you look at our loan to GDP ratio, it is about 50%, whereas a country like China has more than 100% and Brazil has about 55-56%. Similarly, if you look at the rural penetration, there is still a lot of scope for banks to grow. Therefore, if a regional bank and an all India entity are allowed to be merged, then it will be a good way of providing strong balance sheet for the financial services and for the bank.

Q: A larger chunk of your loan book involves exposure to structure financing and that’s the space the market has been quite nervous about in terms of defaults or delays. What has your own experience been and is merit a concern in terms that there may be a drop down in terms of infra and bad loans or assets there?

A: If you look at our loan book today, it is about Rs 18000 crore between the two NBFCs. For L&T Finance, which is largely a retail financing company, the loan size is about Rs 10,000 crore and for L&T infrastructure finance is about Rs 8000 crore. There are two concerns we have; one is whether there is enough growth and whether the quality of book is good?

As far as growth is concerned, if you look at our base, it is not that big and therefore, there is still potential and possibility for us to grow and select good quality assets. It is a fact that growth is slower in certain sectors with structural issues at least for the current year.

However, this business is not for one year or one quarter, and hence, on a long term basis, we still feel that infrastructure has to be built and private sector has to participate in financing infrastructure growth in the country. Hence, apart from the public sector banks, there is a scope for other entities to participate in infrastructure financing.

Q: A larger chunk of your loan book involves exposure to structure financing and that’s the space the market has been quite nervous about in terms of defaults or delays. What has your own experience been and is merit a concern in terms that there may be a drop down in terms of infra and bad loans or assets there?

A: If you look at our loan book today, it is about Rs 18000 crore between the two NBFCs. For L&T Finance, which is largely a retail financing company, the loan size is about Rs 10,000 crore and for L&T infrastructure finance is about Rs 8000 crore. There are two concerns we have; one is whether there is enough growth and whether the quality of book is good?

As far as growth is concerned, if you look at our base, it is not that big and therefore, there is still potential and possibility for us to grow and select good quality assets. It is a fact that growth is slower in certain sectors with structural issues at least for the current year.

However, this business is not for one year or one quarter and on a long term basis, we still feel that infrastructure has to be built and private sector has to participate in financing infrastructure growth in the country. Hence, apart from the public sector banks, there is a scope for other entities to participate in infrastructure financing.

Secondly, we also have seen some good projects from solar power areas and renewable energy areas and then, there are projects that are promoted by states. So while there are some issues with reference to thermal power, other areas provide growth opportunities. I believe we will have a reasonably good growth even in this environment.

As far as the margins are concerned, it depends on the quality of the order book. Since last three to four years, our focus has been on quality of assets and it is possible that there will be some normal stress in some of the assets. For example, we have stayed away from real estate business and therefore, the entire book is from the infrastructure sector. There is a possibility that in case of one or two assets, there may be stress but overall book quality still continues to be good and therefore, we do not think any excessive stress exists as far as the loan quality is concerned.

However, lending is a risky business. You need to have an extremely good quality risk management and your appraisal process has to be very good. As far as these fundamentals are in this place, you should be able to manage these cycles very well. In financials, these are the cycles, which have to be managed efficiently.

L&T Finance stock price

On September 30, 2014, L&T Finance Holdings closed at Rs 66.05, down Rs 0.55, or 0.83 percent. The 52-week high of the share was Rs 88.35 and the 52-week low was Rs 62.30.


The company's trailing 12-month (TTM) EPS was at Rs 1.12 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 58.97. The latest book value of the company is Rs 20.52 per share. At current value, the price-to-book value of the company is 3.22.

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