A reasonably good rabi sowing season is likely to bolster demand and consumption in the drought hit rural India, by the fourth quarter of the current financial year, says YM Deosthalee, Chairman and Managing Director at L&T Finance Holdings.
“Rural demand is cyclical and depends heavily on monsoon. Two consecutive years of bad monsoons had weakened the demand. But we expect the consumption to improve in Q4FY16”, Deosthalee says.
Deosthalee says L&T Finance is currently focusing on lending only for renewable energy and operational projects within the infrastructure space, adding there is likely to be some improvements in the road sector over the next few months.
“Apart from renewable energy and operational projects, we don’t see much credit growth in other sectors within infrastructure. Some contracts have been awarded in the road sector but it will take some time to show improvement”, Deosthalee says.
He expects some competition from banks, particularly the small ones, due to the Reserve Bank of India’s recent guidelines to banks to link their base rate to marginal cost of funding.Below is the transcript of YM Deosthalee’s interview with Ritu Singh on CNBC-TV18.Q: We were talking about droughts in a lot of areas, especially in Maharashtra, Uttar Pradesh (UP). Given that geography-wise, are you seeing stress in these areas and do you believe it is temporary, it could be reversed?A: Yes, we had two consecutive years of bad monsoons. So some parts of the country have been affected. There is drought in some states so the demand for rural products and the consumption in those areas has been affected. It will be there for some months. We expect the situation to improve in the last quarter of the year, so this particular quarter, that is October-December quarter, there is definitely some stress in that. However, last quarter, things should improve and next year should be okay.Q: What are these areas where you are seeing stress specifically and why are you confident of an uptick by the last quarter?A: You mean geographical areas?Q: Yes.A: Some of the states have been affected, Maharashtra for example, Marathwada has been affected. North Karnataka has been affected. Some parts of Madhya Pradesh (MP) have been affected. I think because rural demand is always cyclical and it depends still on the monsoon. So once the demand pickup happens and I think the rabi sowing has been reasonably good as of now. So, that is why we believe that the last quarter things should pick up. So, this is a cycle and the cycle will reverse. It is not that it is a permanent situation.Q: You are a big lender in infrastructure as well and recently the government said the growth will not be 8-8.5 percent, it could be the in the range of 7-7.5 percent. What is your outlook for credit growth? Will that also remain anaemic for a while? When do you expect an uptick there?A: We are a lender in infrastructure space but our lending in the infrastructure area is focused on only two products. So, currently our focus is on renewable energy and operational projects. There is no demand for any other sector and we have also de-focused over the last one and a half year. So, the entire growth in infrastructure today is in the renewable energy space and in addition to that, through the infrastructure debt fund, we are also financing, refinancing other infrastructure projects which are operational. So, the growth is going to come from that. We do not expect that the credit growth or the growth will be there in other areas of infrastructure. It is possible that a few months down the line, there will be some pickup in roads sector. Some contracts have been awarded, but they are still to reach financial closure.So, it will take some time before we actually see pickup in other areas. But, since we have developed extremely good capabilities in the renewable energy area and also refinancing, we will have a very healthy growth in that segment as well.Q: I also want to ask you about the recent guidelines from the Reserve Bank of India (RBI) for banks to link their base rates to marginal cost of funding. As a result of that, their rates will come down significantly. Do you see increasing competition in your segments owing to that?A: Competition is always there. It will be there. There is competition from banks. There will be competition from small banks and I think it is very important for us to make sure that we have competencies in the areas in which we operate. And that is very critical. You need to understand the customer, your costs have to be very optimal, you need to make sure that you are innovative and agile and use technology effectively. So, if you do these things then competition will always be there and it is fun to have competition.Q: But you cannot be an outlier also. So, will you also look at reducing the base rates in line with the industry to perhaps maintain customers?A: We are in business and we have to play the game as it demands.
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