Have 50% chance of getting banking licence: Srei Infra

The last date of application for a new bank licence ended on Monday. The Reserve Bank of India (RBI) received 26 applications from different institutions and Srei Infrastructure was one of them. Hemant Kanoria, CMD, SREI Infrastructure believes that the company has 50 percent chance of getting banking licence.

The company has not set ambitions loan growth target for FY14, but it is clear on the strategy. He told CNBC-TV18 that the strategy will be to focus on rural areas. According to Kanoria the licences will not be issued before March 31.

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

Q: Can you give us some idea as to how you will structure the bank if you are given the licence. Srei will be the holding company- you will demerge all your businesses will lower down? Can you thought through the process?

A: We were not expecting more than 25 to 30 applications to be submitted to Reserve Bank of India (RBI). So, 26 are well within the frame work of what we were thinking. I don’t think so that it has been unexpected.

From the perspective of Srei, it has been a very clear structure what RBI had stipulated in the holding company could be a listed company which Srei is and the 51 percent has to be public shareholding. That also we are in a position to maintain there.

It is a very simple structure that we are going to create. We will have under Srei, non operating financial holding company would be what we would be forming as required by RBI. Under that there will be banks and all the other companies which basically in financial services business but all come under the non-operative financial holding company (NOFHC).

Therefore, it is a very clear structure. Whatever the loan businesses that we have in Srei and other companies will come into the bank.

Q: What are the other businesses that you have to merge or demerge? Under Srei Infrastructure you will have non banking financial company (NBFC) kind of lending. Do you have other group companies in which they are NBFC like activities, listed or unlisted?

A: No. Basically all the loan businesses that we have infrastructure, all these will come under the bank directly. We have the venture capital company, western banking that is the merchant banking licence. Mutual fund and all these SPVs or the operating companies which are there will come under the NOFHC.

Instead of Srei holding these companies, NOFHC will be holding these companies directly. Also the banks will be held by the NOFHC. Over a period of time, all the project loans which are there will get transferred in the bank. RBI has given a time of about 18 months to complete everything.

So, within that particular time frame we are quite sure that we should be in a position to complete that, if we get the licence. We don’t know that when we are going to get the licence. We will get the licence or not that is a question because it is a 50:50 probability and also when RBI will give it.

So, it is all a very long drawn process. At present nothing changes in life, everything goes on as it is. When it comes then we will put all the loan businesses into the bank.

Q: When we had spoken to the banking secretary, Rajiv Takru indicated that the new bank licences are likely by March 31 is that the day we will come to know who exactly and how many applicants or you expect to hear from the RBI before that? How have you accessed the competition- 26 banking licences and what do you rate your chance as?

A: There are 26 applications and everyone is more suitable than the other. Therefore, it is going to be very difficult task for RBI to take a decision. I don’t think that RBI will give licence for more than 8-10 banks, for the new banks.

I am not very hopeful that by March 31, RBI would be in a position to give the licence because it is a long drawn process. It has taken them four years to be able to come out with the guidelines and receive the applications. So, it is not going to be very soon because it is quite a laborious process from RBI’s perspective also to go into all the details.

We see the applications which we have submitted it would be almost about 26,000 pages so it is not very easy. Al the other applicants also would be having papers which have been submitted to RBI.

Q: Your application was 26,000 pages?

A: Yes almost. It is huge and all the other applicants also because there are so many companies with balance sheets, income tax return and everything of the group companies have to be given. So, it is not very easy for RBI to just do it in two months time or three months time.

To be very fair to RBI, it being the regulator has to analyse, go into every detail and then only they will be in a position to take a decision.

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Q: How is business? What are you expecting in terms of growth in the current year itself and margins in particular? How will margins pan out this year and how will loan growth pan out. We are told that there is almost no growth?

A: On the loan growth side, we have not taken a very ambitious target for this particular year. I don’t think so that we will be disappointing the market. From the profit perspective, the profit should be better than last year because we have been concentrating more on the margin, reduction of our cost and whatever can be done to bring in more efficiency and to make the business more profitable.

Those are the areas of concentration for us and we think that we should be in a position to achieve that because of this financial year also then panning out into the election year, which is sometimes in April –May. It is not going to be very easy for doing infrastructure business this year. We would like to go a little slow on the disbursements, but still the profitability would not get scarified.

Q: When you will say you will go slowly on disbursement – how would it perhaps be in FY14 and how would it compare with what you did in FY13?

A: It will be almost plateau kind of disbursement. So, we don’t see much rise in the disbursement this year.

Q: What about joint venture with BNP Paribas for equipment financing? Will that have to be wound up if you have to subsume that business under the bank?

A: No. We don’t have to because RBI has made it very clear that leasing and equipment financing leasing business can be done. Therefore that is not going to get affected.

Q: Just getting a word in on Kingfisher Airlines. Is it true that you will be recovering only Rs 429 crore and giving the rest to the banks? Have you recovered it and have you sold it?

A: As a matter of fact, the deal when it was done last year by our debt fund it was not taken in the right spirit by anyone at all. They thought that the debt fund was doing a full hardy action by taking over this particular debt.

However, over a period of time the share value has increased, so the loan is well secured. But at the same time the loan was given to Kingfisher. If Kingfisher defaults in the loan then only we will be in a position to sell the shares. Though the value of the share has gone up it is like someone has taken a loan, a housing loan.

Q: But Kingfisher has already defaulted- isn’t it? Why is that a question?

A: They have not yet defaulted to the fund because there was a condition. Therefore, we had given the loan last year on June 30. So, the loan has not yet become due.

As and when the loan becomes due and if they default then only we can sell the share. There are certain conditions.

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Q: When does it become due?

A: There is a particular tenure which has been given.

Q: What is the tenure?

A: That I will not be able to give you the full details because it is not a very simple kind of a loan. We also had loans which were given to Kingfisher. If the loans are not paid back on time then we may have to sell the shares. We have to keep the debt fund will retain and the balance will definitely be given to all the bankers.

Q: Are they servicing the loan? The structure does not require them to service the loan?

A: No. It doesn’t because it is a bullet payment both for the interest and the principle. Therefore, it will not be right to just sell-off the shares of a company.

Q: Can you give us a ballpark time as to when the tenure ends?

A: They have been given the flexibility so the loan if I recall correctly it has been one year with the time which can be extended by another year so there is time. In between there is a prepayment also. If they want to make a prepayment they can also make a prepayment.

Q: What is the total loan outstanding?

A: It was about Rs 430 crore which was given

Q: Your assets under management is Rs 33,000 crore we understand – now that would make you one of the smallest banks isn’t it if you got the licence?

A: I think basically if we go get the licence our strategy has been very clear and in the application also we have articulated that that it would be focusing in the rural areas. That is where we bring value to the table because we don’t want to be in an area where we are competing with the large banks like State Bank of India, ICICI Bank, Axis Bank etc.

We don’t want to compete with them. We will create an own niche in the rural area and that is there so the size of the bank is not very material. It is the quality and the delivery what the bank will be in a position to give to its customers. So that is where our concentration would be and not on just making a very large balance sheet.

Q: Finally, this rule coming from the RBI that you cannot raise debentures on a private placement basis for more than 49 investors if there is a 50th investor all the public issue process will have to kick in – does that hurt you?

A: You see many of the finance companies are following that and many of them are not.

Q: Many of them were not. I have seen a crowd of NBFC outside RBI able to fight the way with the Reserve Bank, very clearly a lot of them are disadvantaged by it because they did not have public issue expenses now they have to if they sell debentures to more than 49 people. It is a big problem with NBFC and maybe the Reserve bank will issue something to ease the problem they think they are faced with but it is a very big problem for a lot of NBFCs. What is your stance? Are you disadvantaged by it?

A: No. I don’t see this as a disadvantage because we have taken a review with our team and we have seen that this is not going to because as it is when the private placement was being done we have never raised more than 49 – it has been 10-15 inventors where the private placement has been done otherwise we have gone in for the public issue.

Therefore, Srei in particular is not going to face any problem on this particular guideline which has come out from RBI. I don’t see any issue there.