Even though high profile corporate houses are opting out of the race for a banking licence—latest being the Tatas—L&T Finance Holdings remains positive on the sector. Speaking to CNBC-TV18, president & whole time director N Sivaraman said if there is an opportunity, and the Reserve Bank is favourably disposed, then they will definitely look at acquiring a bank licence.
However, he also adds that there are multiple options available with the NBFC.
Below is a verbatim transcript of the interview on CNBC-TV18
Q: First and important issue that cropped up in the last 24 hours, the Tata’s returning or saying that they don’t want bank license taking away their application. At one point in time bank licences were seen as lucrative now with this withdrawals – it is not just Tatas, M&M didn’t apply, Videocon withdrew, Tatas now dropping out, do you see more drop outs even from the non-banking financial company (NBFC) category?
A: We are clear about the strategic reason for which we are making the application. So we remain positive about it.
Q: Will you look for an acquisition in the banking space or a strategic partner, i.e. some kind of a joint venture (JV)?
A: We have done acquisitions in the past. We have not hesitated to look at a business either for consolidation or for entry and acquisition as a route of doing that. So I do think that even when it comes to a bank if there is an opportunity, and the regulator is favourably disposed, I think that is not something that we will ignore. But is that the only way to do it? I think we have multiple options to execute our bank.
Q: Let me come to your Rs 35,000 crore balance sheet or rather to your profit and loss (P&L). In Q2, the 17 percent rise in gross NPLs was a big concern that most had. Now your total gross NPLs is 2.9 percent of your book. Does it peak here or do you think there is more bad news in store?
A: The growth slowdown and the time it is taking for our constituents to get back into a good cash flow mode, I think that strain is definitely continuing at the moment as you would have also seen from the number of cases which have been referred to this CDR cell. That is not reduced if not increasing definitely.
So the stress in the environment definitely continues. Whatever steps the government has taken on the power sector or on projects ordering or even to some extent some of the payment releases that have happened from some of the government sector entities for them to have a significant impact on the ground, I would believe that it will take some more time.
Our own assessment is that maybe the NPA numbers could rise to some extent in next one-two quarters but from our perspective, the charge to the P&L account has provisions and losses may not increase from the level that we have seen in the past few quarters.
That is our assessment, but as I said, the quarter is still young. We will have to wait and see.
Q: Why do you say provisions will not increase, even if NPLs rise, are you expecting any recoveries this quarter?
A: No, it is just that to the extent that we have NPA, the provisioning cover already exists to some extent and we may have to provide for some new add-ons to the NPA list.
Q: Your lending business margins for Q2 came in at 5.6 percent do you see yourself being able to maintain at these levels this quarter?
A: What we can see is slightly stable to improving margins for the next few quarters. Of course, the liquidity environment has improved from the months of July to September. While there is a marginal spike in the interest cost in the near-term, we are also seeing good liquidity availability consequently, we are able to replace some of the more expensive borrowings that we did in Q2 with a slightly lower cost of borrowings. So all in all the borrowing cost could inch up slightly but we have also been able to improve the yields on the lending book. So, the combination of that is our expectation of margins will remain stable to marginal improving.
Q: What about loan offtake, how will the entire AUM fair especially in those big categories of yours, retail and corporate and infrastructure?
A: We have seen good uptick in the rural segment. We are seeing – since we are a small player in the vehicle financing segment especially the personal vehicle segment. With expansion of our network, we are also seeing our market share and the disbursement pick up happening. So, these two are definitely helping the disbursement momentum. but the construction equipment, commercial vehicle, combination of lower offtake only as original equipment and our own cautious approach to credit has resulted in the reduced the disbursement right through the first half of the current year in fact we are seeing this even from the second half of last year onwards.
The corporate segment we do not see too many new opportunities. We see that the refinancing opportunity in the infrastructure segment for operational projects is something which we can work on moreso with the strength of our NBFC-IDF (Infra Debt Fund) could soon become operational with having received the certificate of registration from RBI. So that could provide us with some catalyst to building some book size in the infrastructure segment.
Q: Another important point, last quarter your return on equities (RoEs) declined both for the retail and the corporate along with the infrastructure segments, how do you expect it to pan out in the quarters going ahead?
A: This has been primarily on account of the elevated levels of provision as compared to the last year. That is a provision, which we can look to see improvement coming up in the next year perhaps.
Q: It is one year since you acquired Fidelity?
A: Yes.
Q: How is the business itself doing, have you all broken even on a combined basis and have the investors at least stopped legging it out?
A: The good piece is that we have been able to achieve operating performance close to breakeven on the back of both improvement in the assets under management, stable fee income and also on account of cost efficiency that we have been able to milk into the entire operation. This is despite maintaining the overall manpower at pretty similar levels as compared to the combined organization existed before the merger. So that is very good.
That is a good traction and we have also moved from position 16 to position 13 as of September end which is encouraging given that the Q2 also is one of the most stressful for the mutual fund industry. What I would say is that the current sentiment in the equity markets while it is good, the retail investors do see there is also an opportunity to withdraw the investment with marginal profits. So this trend up, once the equity markets present a stable picture, I do see the retail investment in the equity schemes could improve in a way.
We are quite optimistic that in the near-term about two-three years timeframe we should start seeing this industry becoming healthier than where it is today and consequently it will also help us gain market share, position and profitability.
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