Does life become little difficult for non-banking financial companies (NBFCs) because after the Government's capital infusion plan, wholesale financing might become expensive and on the other hand, the public sector banks will be back as competitors.
To understand how all of this stacks up for the NBFCs, CNBC-TV18 spoke to V Vaidyanathan, Executive Chairman, Capital First.
Vaidyanathan believes that NBFCS will continue with their current growth rate due to different pocketing of financing. For example if one looks at companies that are specialized in financing particular segments like autos, gold etc and just because money is now available does not mean the skill sets required to finance at these micro level are developed overnight and therefore these NBFCs will continue to grow at 15-20 percent.
He thinks the whole idea that the 70 percent of the banking system was frozen and so NBFCs were growing was a juvenile argument.
According to him, this capital infusion in fact is good for the whole eco system as well as GDP growth etc., because the other financial arm, that is 70 percent will become healthy and begin to give credit again. So, recapitalization plan of government is a great news for NBFCs, private sector banks, says Vaidyanathan.
When asked if his customers were showing any disruptions due to demonetisation and GST, he said the loan demand was an issue post demonetisation for a quarter or two but it is back and is strong now.
Meanwhile GST is a transitory phase and the company hasn't seen any disruptions or credit loss.
He is confident of seeing credit growth in the range of 30-35 percent by FY18. Earlier they were expecting around 25 percent.
According to him, their return on equity is also directionally headed towards the high-teens 18-20 percent and are on track with that.
Below is the verbatim transcript of the interview:
Latha: Incrementally do the cost of funds rise and do margins get squeezed because of public sector bank competition?
A: It is very marginal. If you saw bond prices going up by 5 bps here or there, does not really matter to the margins because the NBFC margins are rarely between 7 percent and 9 percent.
Latha: But public sector undertaking (PSU) undercutting which may come six-nine months down the line.
A: If 70 percent of a banking system of a country works broadly frozen, if we were to put it like that then it can never be good news for the balance 30 percent even if they are growing by 15 percent. You will never want to be the sole lender for a customer. So actually the rest of the system eases up and starts pushing 2 lakh crore of credit in the system. It is good for the whole ecosystem and of course gross domestic product (GDP) growth and all that stuff. So in our opinion it is great news for NBFCs, great news for private sector banks that the other arm or the significant arm, 70 percent of the Indian system has become healthy again, it beginning to give credit again. It is good news.
Anuj: Of course it is good for the country but at the end of the day NBFCs have flourished especially in large parts PSU banks just could not lend but as far as competitiveness goes, NBFCs would be a disadvantage now. Do you think there would be an impact?
A: Because you are wearing a hat that this is a view that it will impact the NBFCs which is why you are unable to see this point. Genuinely for 70 percent to start lending again is good news for the system and if you see the break-up of 80 lakh crore of the banking system, 30 percent is the private sector and foreign banks and that was growing at 15 percent, the rest was growing zero percent, blend was at 4.5 percent. Now, for the Indian economy growing at 6-7 percent, the credit growth could be growing by about 15 percent, net worth growing only by 5 percent. The balance 10 percent was unmet need. It was not that the banks were doing it and NBFC was taking over a banking system's portfolio - that 10 percent remained unmet. So to that extent then coming back and lending will be a gush of cash.
Surabhi: If you were to take that point that there is probably room for everyone, it will mean a lot more competition and then what happens to margins in that case?
A: I am not making a philosophical comment that there is a lot for everyone kind of stuff. It is real. Let's look at NBFCs, let's take the names of somebody who is financing, for example gold financing, someone is doing tractor financing, someone is doing commercial vehicle financing, someone is doing small and medium enterprise (SME) financing, just because money becomes available, it doesn't mean the skill set required to finance these at a micro level or the cost structure is required to finance micro level has got developed overnight. So these companies growing at 15-20 percent will continue to grow because there are very unique pockets for them which they have developed over the last 15-20-30 years.
Latha: Coming to another theme, there has been goods and services tax (GST) disruption. We are told that a lot of SMEs are still grappling with it and informal sector is trying to board the bus of paying taxes; basically disruption first, demonetisation and then GST. A large part of that could be your universe. Are you seeing stress, albeit passing but do you see it in your customers?
A: Our results are due on October 31, so I got to be very careful with what I say. So let me ride on what I have said in the past and just build on that. Demonetisation is one year old story. It has come and gone. Most entrepreneurs just changed back the cash into new cash and life moved on. As far as GST is concerned, I think that whatever impact it is, it is truly transitory and it will just pass. Going by the past data of our credit numbers, we haven't seen any disruption to our credit loss numbers or to profitability numbers.
Latha: But on the ground, is there enough demand for these manufacturing units or is there a temporary lull? Is loan demand an issue?
A: Loan demand, as you know, was an issue, when demonetisation happened for a quarter or two, ending March, but now loan demand is back very strong. Let me again draw from the guidelines that I have given last time and I am not bringing fresh data because of the results. But let me say that earlier we were talking of a 25 percent growth of credit for Capital First.
Now, for the last few months, we have actually been saying we can grow at 30-35 percent this financial year. So, credit demand is really back and let me tell you one last point, with this kind of cash coming in and the GDP hopefully begin to grow again in the next two quarters and hopefully a nice strong recovery, jobs will be back, investments will be back and therefore, it is good for consumption, it is good for Capital First, good for all players who are playing in the system. Honestly, I genuinely do not believe there is any issue coming up as a result of this banking system. If anything it is going to strengthen all the players in the system.
Surabhi: I will just come back to the issue of the cost of money because while reaction in the bond market is not very severe over the last 24 hours, the fact is that yields have hardened, the fact is that the RBI did strike a hawkish stance in the last policy. So therefore, how will your cost of money move, the mix of capital that you are raising, how is that going to change and what can we expect by way of spreads and margins?
A: I explained that to you that the spread movement is just 4-5 basis points or 10 basis points. These things really do not matter in the large scheme of things. These are really marginal in the context of the income. In fact let me just say, what is the issue? The issue was that banks had lots and lots of money particular from demonetisation. They did not have the capital to lend it. Now with capital coming in, that money has to be lent or will be lent. Now lending can be done directly to borrowers or actually they will actually look out for finance companies to be able to lend so that they can get credit growth growing.
So my sense is that through this process, if anything, money availability for the system as a whole will actually increase meaning that banks will actually look forward to putting out credit either in the form of maybe non-convertible debentures (NCD) or even in the form of credit. So, money availability will go up, if anything and yields are really marginal. I think it is really marginal.
Anuj: The big question is that the kind of growth rate that you have seen, the kind of return on equity (RoE) that you have seen, is this likely to continue going forward or even improve? Are you in a position to say that?
A: Yes, we have always stated that our RoE is directionally headed to the high teens to the 20 percent. We are very well on the track of making that happen. It is happening quarter on quarter. Like I said, I cannot comment about the results coming up. So, the whole idea or the theme that the banking system was frozen or 70 percent was frozen and therefore, NBFCs were growing was actually a very simplistic argument or juvenile argument and certainly, I can say we are in a good position to see the numbers and it is not so. People have their own markets and own capabilities and their own skills and their markets and their own distribution. It was very much there.
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