Indiabulls Financial aims to maintain NPAs at 0.5% level

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Indiabulls Financial Services witnessed a net profit of Rs 236.16 crore for the quarter ended March 31, compared to a net profit of Rs 96.36 crore (Y-o-Y). It's net interest income for the quarter stood at Rs 369 crore against Rs 239 crore (Y-o-Y).

In an interview with CNBC-TV18, Gagan Banga, CEO, Indiabulls Financial Services spoke about the company's quarterly performance and the road ahead. The company is aiming to achieve stability on the non-performing assets (NPA) front.

"The number I am comfortable with is a range of 50 bps, give or take 10 bps on the net NPA level. We will try to always maintain that number," Banga said.

Below is the verbatim transcript of Banga' interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also Watch the accompanying video.

Q: Growth has been strong in Q4 and for the entire year perhaps you could start by taking us through where most of the toppling growth is kicking in from, is it mortgage or other segments firing as well?

A: It is largely mortgage, we have invested in the last two years trying to convert the company into largely a mortgage lender. Most of the growth is coming from the mortgage segment.

Our focus on home loans and home loans to the salaried segment where we are lending, giving out home loans of 20-22 lakhs that is the segment, which is witnessing the maximum amount of growth.

Q: Interest rates have been swinging around quite a bit and the cost of capital has also gone up, how has that impacted your margins? How do you see the margin profile playing out given the flux in interest rates?

A: We as a company have been saying that our focus area is essentially mortgage lending. Which constitutes a majority portion of it being home loans and some portion also comes from loans against property. We also do commercial vehicles lending and then we have a small corporate book.

All of this blended yields us on incremental basis, a yield of around little over 12.5% blended for home loans, loans against property, commercial vehicles and the corporate book.

Then for Q4, we borrowed at about on an averaged out basis at about 9%. This is blended and not incremental cost. Our whole model is to be depending a spread, which is in the range of 3% to 3.5%.

Q: Where is it that you want to see your AUM at in FY12 and then what will that imply in terms of a quarterly runrate for addition for Indiabulls?

A: We have been growing at an average of about Rs 2,200 crore for the last four-five quarters. I expect the runrate to be maintained at about the same pace of about Rs 2,000 to Rs 2,500 crore per quarter, which should allow us to grow our business by about 30% and that is the book. Profits will follow with a small lag as leverage in the business increases and the equity component comes down.

Q: You have also scaled down your NPAs significantly over the course of this year, is this a level that you are comfortable with and is this an NPA level or rate that you think you can hold for the rest of FY12?

A: We have done a floating provision of Rs 50 crore in Q4 to ensure that any future aberration that may come in the portfolio is taken care of. The whole model going forward is one of stability.

We don't want to be growing very fast or trying to generate a very high type of a spread. We will want stability on the NPA front also. The number I am comfortable with is a range of 50 bps, give or take 10 bps on the net NPA level. We will try to always maintain that number.

Q: Can you give us an update on how things are progressing with other group companies like Indiabulls Securities and even Indiabulls Real Estate ?

A: They will all be coming out with their results in the course of this week. So, it is best that we take them up along with their results.

Q: Do you expect any significant cost challenges during the course of the year or do you expect to hold on to this 9% cost of capital even in the face of rising interest rates? Do you see any threat to that 3-3.5% spread that you spoke about?

A: 3 to 3.5% spread would be maintained. Most of our portfolio is floating so, if there is an interest cost increase, which means if we see in our underline cost of funds, we hope to pass on if not all almost most of it. That is why kept a spread of 50 bps.

I hope that we should be able to maintain a spread of 300-350 bps. 300 bps being on the lower side and incremental borrowing will not happen at 9%, incremental borrowing will happen in the range of 9.8%. But, that is a smaller portion of what is the overall book is.

I expect cost of funds to only increase with marginally and that also with a lag. So I am reasonably confident of maintaining this spread.

Q: Some of your peer NBFCs have indicated that they are not very keen on banking license, they are happy to do the business in the ambit that they have right now. How aggressively will Indiabulls pursue that opportunity if indeed it is presented?

A: I was probably the first NBFC or the second NBFC to go on record and say that banking licenses is interesting. But, in the short-term what is more interesting is the mortgage opportunity which we are pursuing and the overall business that we are trying to build out.

We have taken a pause and we have told shareholders that it will take us two years to rebuild the business and change the whole strategy which we have done. At Rs 750 crore of profits and 17% return on equity, I believe now the business is back on track. For the short-term, I want to pursue this business.

For the next two years, I am happier pursuing this business rather than pursuing a banking license. But, for the long-term, a bank license is very interesting and we will have to also wait and watch and see what the RBI wants us to do.

They are the institution which has to decide on the guidelines and see eligibility and all of that. In the short-term, I would much rather pursue the mortgage opportunity and grow the business.

I don't see a banking license as an essential ingredient in the overall growth strategy. I believe that for the next three-five years, the company can very comfortably grow its book at the rate of about 25-30% and it doest not require a banking license to essentially allow this to happen.

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