Bharat Fin not eyeing a banking licence now: PH Ravikumar

Ravikumar: Based on the discussions with Dilli Raj and the documents that we have I have nothing to base any contrary statement to what you are alluding to. I have nothing to indicate.

Latha: Now for the other bigger development at hand, what sense you are getting, already several small bank licences have been given; do companies like yours now get a better chance to apply for a bank licence?

Ravikumar: Even last time when we applied, the opinion was divided whether we should apply or not between several shareholders and internally, the decision makers. We have three options – one is continuing as we are. Second is actually not applying for universal bank, apply for a small bank and the third is apply for a universal bank. The decision finally will rest with the full board and with the shareholders.

However, at this stage we are not going to rush into any decision for two reasons. One, non banking financial companies (NBFCs) are the flavour of the season and therefore it would be quite inappropriate at least in the current context for an NBFC to say that I am going to become universal bank unless we can demonstrate that it is in the medium and the long-term strategic needs it is imperative that we apply and become a universal bank.

We don’t think fundamentally and so far as the ground realities are concerned between our applying for universal banking license two years back and today there are have been any material changes. Having said that we are aware that Reserve Bank of India as a policy nudges large non banking finance companies to become banks because in any case a large NBFC indirectly relies on public deposits because the lines of credit from banks to NBFCs do come from the deposits segment._PAGEBREAK_Anuj: Of course we have been all discussing about NBFCs and some of them have done remarkably well, Edelweiss, IIFL, would you watch out for any of these and do you think they should be on the radar of investors on this news?

Haria: As Mr Ravikumar said that size is what matters when you want to become a bank. So, when you are small you don't want to be bothered with the regulations and the constraints that come out of a bank. When you become sufficiently large, say, Rs 20,000-30,000 crore or beyond that is when a banking license will help you because then the liability findings becomes increasingly challenging because India's bond market is still not very buoyant as we would like it to be.

So, yes, the Edelweiss and IIFLs of the world they are reaching the size of say Rs 15,000-20,000 crore in terms of their NBFC operations. They run a fairly diversified book. Therefore, just to give two data points, for Edelweiss, the broking revenue today is less than 10 percent though we still think of Edelweiss as a broker. For IIFL the capital markets broking income is less than 20 percent, we still think IIFL is a broker. But yes, these companies long back realised that broking is something which is not the way forward and NBFCs lending and building a balance sheet is the way forward. So, they have done that and they have been waiting long enough for getting this bank license regulations out.

They applied with a lot of vigour in the last round; somehow they could not get it. They will apply in this round as well. They may take their own time to evaluate and look at what RBI wants out of a pursued broking company and then they should apply. These are the highest probability candidates as per our analysis.

Latha: Which ones?

Haria: The Edelweiss, IIFLs and Motilal Oswal. Motilal Oswal won't but Edelweiss, IIFL would definitely be like the number one, number two for this.

Latha: Just to take what Mr Ravikumar is saying, if you have to compare Ujjivan Financial Services, Equitas Holdings, Bharat Financial Inclusion that is SKS Microfinance - then among them is it advantageous to be a bank, he says not so much?

Haria: Not so much because for them the customer is a strategy. Being nimble footed, being free of lot of regulations and compliances which come out of bank. That has helped them win the customers.

Today having a bank is no advantage for a microfinance company. Let us talk about Bharat Financial itself, they have a tie-up with IndusInd Bank, they have a business correspondent tie-up. So, whoever wants services apart from pure microfinance and other lending services they just need to connect IndusInd Bank with the customer.

Latha: When Equitas and Ujjivan become banks you will call a sell on them?

Haria: Not really. For them - if you look at their commentary, the asset side, they have said we will continue absolutely the way we are as NBFCs. The liability side will help us build a long-term when we become more than Rs 10,000-15,000 crore in size, that is when the banking thing or the liability franchise will start helping them. So, they are in a way planning for future much in advance.

I would tell you, there is a difference between a small finance bank license and a universal banking license. So, a small finance bank is much less restrictive compared to a universal banking license and when you talk about universal banking license it is a largely urban thing; it is hardly a semi-urban, rural thing. So, this distribution part is something which NBFCs are much better at handling compared to banks.

So, I don't think that a lot of these NBFCs who have rural, semi-urban customers will jump to take the license. They are quite happy focussing on their customers and because of whatever technological disruptions we are seeing; I think customer will be a strategy and not a banking license. Maybe 10 years back banking license used to be a very charming thing to have. Today that charm has definitely come off a bit. The charm is for much larger guys.

Sonia: What about IDFC and IDFC Bank. Will this structure be positive for them and do you track these stocks?

Haria: IDFC, they have to go through non-operating holding company structure and the shareholders typically tend to discount when you have a main business in a holding company. So, I think the guidelines which came out yesterday they make a case that if you do not have a lot of non financial businesses you can probably go through without a non-operating holding structure. If that issue for IDFC gets resolved, if RBI gives them a permission to just not have that non-operating holding financial company (NOHFC) structure and IDFC straight away holding IDFC Bank, I think the holding company discount that it trade at that goes away.

However, having said that we cannot run away from the fact that IDFC is struggling as a bank. Its asset strategy as well as liability strategy, it will take a few years before those things firm up and you can see a meaningful uptrend in the return on equity (RoEs).

Anuj: Coming back to the two candidate you said which look mostly likely both Edelweiss and IIFL, the stocks have run up quite a bit but you still see value in these stocks?

Haria: They have been building a very good diversified business I would say, slowly and steadily over the last eight years. Market has broadly ignored them, market still think that they are very linked to our capital markets that when market do well their brokerage and investment banking income will do well and hence they will do well. However, they have gone quite beyond that so far IIFL we just did sum-of-the-parts (SOTP) after the British sovereign fund invested money last week. Our calculations say that there is still some value especially in IIFL.

Edelweiss does a lot of businesses and since we don’t track it, it is difficult to give an SOTP kind of valuation. However, these brokerages will be rediscovered as diversified financials in years to come.

Latha: Current valuations of IndusInd Bank and Bharat Financial Inclusion very steep valuations, will not IndusInd being paying too much in terms of diluting its equity if it is paying via shares?

Haria: IndusInd trades at typically three times and Bharat Financial trades at four times and if it is an all cash deal the IndusInd shareholders would definitely be thinking that okay why are we paying four times book for a distribution network. Because IndusInd has all the strength on liabilities side, SKS has all the strength on the distribution side. So, those questions could come but as per me Bharat Financial is in a much stronger position when it comes to a distribution network versus an IndusInd. So, a bank being interested in microfinance cannot be ruled out.

You look at the transactions which are happening in this space, Manappuram Finance bought one, Muthoot Finance bought one, IDFC bought one. So there are these large companies who want ready distribution networks. They are willing to pay a little bit of price for that.

Latha: Even a 20 percent stake or a 25 percent stake will make sense for IndusInd?

Haria: I think it may start with very small as 5 if at all it starts because 25 percent would be just like acquiring. SKS has a much diversified shareholding, nobody owns more than 6 percent, so getting that stake won’t be very easy.