See deterioration in investor sentiment: IFCI

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Atul Kumar Rai, chief executive officer and managing director of IFCI said the company's net interest margins have been under pressure recently. 

IFCI's net profit was marginally down at Rs 198.26 crore for this fiscal's second quarter ended September 30. The increase in policy rates has affected cost of funds, pointed out Rai. "We have seen a deterioration in investor sentiment," he said.

The company had profit after tax of Rs 202.3 crore in the same period last fiscal.

Meanwhile, the total income rose to Rs 743.1 crore as compared to Rs 612.19 crore in the same quarter a year ago, registering an increase of 21.4%. "There has been no deterioration in non-performing assets so far," Rai said.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: The margin performance of IFCI has fallen a bit from the range that you had indicated for the full year. Where do you see it stabilizing at for the rest of the year?

A: The net interest margins have been under pressure, they are down from about 2.8% six months ago to around 2.5% level right now. One would of course not have expected that the successive rate hikes will leave the net interest margins unaffected and in fact there has been more than proportionate increase in the interest burden which is of course also reflected in our net profit figures.

So that is absolutely right. I think that from now on we expect that there would be some kind of letup in policy rates, may not be on October 25th, but we do not expect the policy rates to continue their northward movement. So somewhere maybe over the next three months there would be some moderation and that's the time we should expect that our fresh assets which we have created and where we are still in talks for reset of interest rate, should be able to recover some lost space over the next six months and improve the net interest margin for the year from 2.5% level.

Q: Are you facing issues of garnering funding and high cost of capital given the kind of environment that we are trading at today?

A: In fact non-banking finance companies (NBFCs) do have this problem; they depend upon the banks for finance. The increase in policy rates has affected our cost of funds. Availability wise also again there is of course the resource mobilization by the company which has to be looked at in growth terms. We have been raising fresh funds so there is no difficulty in terms of accessing funds.

But on the other hand, if we look at the resources from the point of view of what is the demand for or what is the offtake for credit, then we do find that at this point of time we do not have enquiries which are as strong or as robust compared with six months ago. So there has been deterioration in the investor sentiment and that is getting reflected in demand for credit.

Q: You disbursals are down more than 20% between Q1 and Q2. This is in sharp contrast to the private sector banks which are still growing credit at 20% plus.

A: We are also growing. In fact if you analyze the rate at which our topline is growing, we would still be ending up with more than 20%. If you look at just the asset creation, it would again be for the year as a whole around 20%, which is okay. I am saying that because the performance of 20% year on year increase would be on top of a very heavy increase by IFCI. Last year, our balance sheet and assets have grown by something like 40% over the previous year. I am not saying its time for catching one's breath, but when we have grown as fast as we have over the last three years, I think that the issue would be to keep the asset quality intact.

If you look at that, it's a great cause for satisfaction. Having factored in the economic headwinds, the asset quality remains very good and there is no further scaling up or further increases in the non-performing assets (NPAs). Our gross NPAs are still coming down, though at a trickle, and net NPAs are stable. So I think that is exactly what we expect to be our major gains during this phase, which as I said is a signal for us to consolidate. This is not the time to be gung-ho about expanding the balance sheet because this is a time to be looking at the quality of assets.

Q: So you are confident that net and gross NPAs will stay at these levels for the second half of the year and going into FY13 or are you pencilling in any upward risk right now?

A: There is an upward risk in the environment as I said and I think that does not require me to say so. There is a depreciation all around, globally and domestically, which is much widespread than that of the rupee exchange rate. So we are not expecting that it's going to be as easy for projects to continue to be on time for, the revenue forecasts of our borrower companies to remain as strong or as robust as they would have been six months ago.

So there are all those things and therefore in fact the question to ask is whether there should there be some kind of negative surprises, do we have the security cover, do we have the proper and appropriate clauses in our loan agreements which can take care of these kinds of exigencies and that is where our hope for IFCI's asset quality comes from. We expect individual cases of temporary stress which we should be able to take care of in terms of replacement or restructuring, of course so far very little of that has happened but if there are cases they can be taken care of. But on the whole we do not expect that our balance sheet quality is going to get affected by the impact of the deterioration in the economic climate.

Q: Can you give us an update on what is going on with monetizing of any of your group assets, either the listing of IFCI Factors or any of the real estate holdings that you were looking at monetizing?

A: In terms of the IFCI Factors process, we are somewhere now well off the block. We have filed the documents with SEBI and we expect their comments to be with us. Once we have those comments, I suppose we are required to go back to them with our observations and that should see us through the process of red herring prospectus.

Thereafter, the issue would be of timing. As you know, the market has been very volatile and is not looking very good for new issues. But those are still considerations which we would like to examine or look at in terms of our overall commitment to see IFCI Factors going public.