L&T Finance looking at various aspects of RBI norms: CEO

N Sivaraman, President & Wholetime Director at L&T Finance, one of the prime contenders for a banking licence, says the move to switch to a bank needs to be thought out careful.

“NBFC's have large and diverse balance sheets. So, they need to be looked and planned out in a manner that fulfils the overall regulatory requirement", he told CNBC-TV18 in interview.

Below is the verbatim transcript of his interview to CNBC-TV18

Q: Would you be looking directly at a bank and then divesting businesses from your finance companies or would your (NBFC) be converted into a bank?

A: In the longer term we need to have one balance sheet and one entity. This will actually host all the loan related activities. While some of the other fee based activities can be outside the bank to the extent it is permissible.

It is a long-term plan and something which we will do on day zero. It has to be fully thought through because there is a liability side implication, the asset allocation across various sectors. So, all of them will have to be really worked on. However, in the longer term it will be one balance sheet is what we can say.

Q: Is it mandated by the Reserve Bank of India (RBI) that NBFCs need to merge their operations into a new bank or you all do have an option of starting a new bank or perhaps merging your existing business into an NBFC?

A: What I hear from various quarters is that there is perhaps an interpretation of that type available. However, from a business efficiency perspective it is ideal that it is on one balance sheet. We get the best out of that balance sheet is what will have to be looked at.

So, it is something which will be a long-term goal than immediate goal. However, there could be some specialised activities like the infrastructure finance. Given that it is a very long-term lending and housing it in a bank could pose an asset-liability mismatch. It may be one we can look at putting in a separate NBFC and within the overall supervision of the RBI.

Q: Are there any activities that do not fit into the banking structure because then the RBI says they will have to be taken out of that entity?

A: In a broader sense the regulatory mandated activities will have to be moved out of the bank like brokerage or a mutual fund, etc. In terms of the activities, which are around loan origination, which will be driven by nearest to the customer rather than being at a branch, need to be seen. Or something which may have to be really managed in a manner that is synergistic with the bank.

Other than that will be the brokerages, mutual funds. Those activities, in any case are mandated to be outside of the bank.

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Q: If an NBFC does convert into a bank do you see it hampering near term profitability as you look to meet the reserve requirements or the priority sector lending?

A: It is difficult to comment as of today. It will have to be something very carefully thought through because many NBFCs have got a very large and diverse balance sheets. So, they will have to be looked at and planned out in a manner that fulfils the overall regulatory requirement.

May be one will have to look at it in the context of what has been the existing balance sheet. The new balance sheet will have to originated and then matched with the way the liabilities can be built in the balance sheet.

For example we are also carrying a level of borrowing from various sources for the purpose of having supported the current balance sheet. They cannot be paid off in one shot. So, all these phasing will have to be done in a manner that really fits within the banking environment and put that together.

It is difficult to comment whether it will be an impact on profitability on upfront basis. However if the transaction can be managed well, I don’t see that posing as a problem.

Q: Do you think listing in three years is an easy option or will that be challenging?

A: The un-banked branches are not going to cost too much by way of infrastructure as well as manpower cost. Let us put a number of about Rs 20 lakh per annum. Let us say we have 200 branches in the first year, which is a very ambitious target to say.

These 50 branches will cost me around Rs 7-10 crore. I don’t think that is a big number in the context of large profitable operations. I don’t think so. So, yes it is imbalanced. It is a question of how one roll out these branches. Also how one builds it over a period of time.

So, I don't think that will have a big impact on the profitability of the bank. Yes, I am assuming zero contribution from these branches also. So, I don’t think that should really hamper us unless one plans for 1000 branches in a year. Then it poses a problem, but I don’t think it is feasible.

Q: If an entity were to convert its NBFC into a bank, that NBFC is listed, so the bank will be listed from day one?

A: It depends on whether the NBFC has got any other activities or not. So, it is a question if there is a promoter for the NBFC, then one needs to look through the non-operating holding company and those ways of taking it forward.

End of the day it is a guideline, it only puts together a framework in which RBI will approve bank license.

Q: Assuming you get the license and you convert your NBFC into a bank, you are already listed that is alright by the rules?

A: At the end of the period, RBI wants to achieve a very diverse shareholding for the bank. Now, if one is able to achieve it right upfront, I don’t think they will have an objection to that.

So, it is a guideline which sets a frame work. These regulators can always be engaged in what is an ideal way to take it forward. They want the banks to be profitable and they want serious capital providers to be backing the bank.

If these two are met with and it is well ring fenced from promoters, the other activities, if these three things are fulfilled then regulator or whoever is promoting entity can always engage with the regulator. Then make them understand how it fulfils the overall undertone of what is expected out of it.

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Q: I want your comment as an NBFC guy, what happens to groups which are only finance groups? Do largely finance groups get excluded?

A: I don't think so. They are allowing an NBFC to be converted into a bank. This means that they will have to really think through their ownership structure that exists today at the NBFC level or at any other level.

Then put together a path to really unwinding this ownership structure to satisfy what RBI requires. If the intent is there and we are able to fulfill the basic expectation of RBI as to how they want the banks to be operating, all this should be solvable issues in my view.

Q: Do you have clarity that if you all decide to convert into a bank do you have to meet the priority sector lending norms prospectively or even on old loans?

A: What I would interpret it is that anything that one would put on the balance sheet of the bank will have to meet with the overall guidelines. So, if one assumes that progressively one will start building the balance sheet of the bank while unwinding the balance sheet of the NBFC.

It is going to be on incremental assets. However it is only a guideline, the framework which will have to be talked to with the regulator. Then we will have to work on that. It is difficult to put a number at this point of time.

Q: And in your understanding of the industry and perhaps the way forward do you see a lot of merger and acquisition (M&A)? There is talk that smaller private banks could get acquired in this whole process over the next one year or so. Is that the scenario that you see?

A: First anybody who wants to own a bank will have to satisfy the proper regulations. Thereafter, we will have to see whether an M&A fulfills the objectives of RBI in having large sized, robustly capitalized banks being in position. It is little premature to really speculate on whether an M&A will be a route for establishing a new bank.

However having got a license and if there is an opportunity to consolidate further and the regulator is willing to looking at it favorably what would be a route of consolidation rather than starting of a new bank.

The important point that we need to note is that ultimately there is an existing management, existing set of shareholders. There strategy goals will have to be aligned with that of the new shareholders, otherwise it may not be valuable as one thinks.

Q: Will there be a lot of possible M&A at the holding company or promoter level because say groups like Shriram will have a problem or others like SREI, IDFC. There are pure finance companies galore. Would they want to look at joint venture with another listed company so that they can own this holding company in a non-financial sense? Do you see that kind of M&A activity at above the holding company level?

A: Firstly we have to satisfy that we are fit and proper or anybody who aspires to own a bank. Then the options will have to be examined. I don’t not want to pry into the regulators mind and then say how they will think about it at the moment.

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Q: Actually I was asking you to pry into promoters minds those who don’t qualify in the sense of having a promoter group.

A: Whether one qualifies or not, why will one want to go through the process of reinventing the wheel. An M&A does help one to get started on a good platform. From this one can really start building.

The pains of establishing green field operations can always be eliminated in this process. However, ultimately the first step is to get ourselves qualified as a fit and proper person to own a bank.

Q: To qualify as a fit and final banking candidate do you see any guidelines which are particularly onerous from an L&T Finance Holdings point of view?

A: We have seen these guidelines as they existed at the time of the draft other than the changes to the qualification criteria for the promoters. There has been no major change in the guidelines.

They have been very explicit on governance standards and disclosure standards and the compliance with the potential guidelines. All of them have been set out but other than that there is nothing that we did not know earlier.