25-50bps cut in cost of funds in next 2-qtrs: Shriram City

Shriram City Union Finance posted a profit after tax (PAT) of 35 percent to Rs 112.5 crore vs Rs 83 crore in a year ago period. Subhasri Sriram, executive director of the company tells CNBC-TV18 that the cost of funds came off, but is yet to reach a comfortable level. Sriram expects a 25 basis point (bps) reduction in cost of funds over two quarters.

Below is an edited transcript of Subhasri Sriram's interview on CNBC-TV18

Q: Can you give details of how exactly you did in terms of margins and asset quality besides the net interest income (NII) and profitability this time around?

A: This quarter was equally good. The last two quarters have also been good run for us. We have been able to maintain a disbursement run rate of about 30 percent upwards. There is not much skewness in the product, we continue to maintain our focus on financing small enterprises and gold continues to be one of our product. We have also done well in two-wheeler financing.

With reference to margins, lending rates have failed on, cost of funds have come off but maybe not entirely affected in this quarter numbers mainly on account of our closure of a public issue debentures of Rs 500 crore which we did during last quarter end and was seen this quarter.

With reference to asset quality, we are well on track and continue to have non-performing loans (NPLs) of less than 0.5 percent for our net NPLs on a diversified retail assets. We have continued to maintain our provisioning at 150 days onwards though the current regulatory requirement is only 180-days provisioning. We have moved to 150 days and continue to maintain that. In terms of provisioning, very aggressive, we have maintained the asset quality. There is no stress on any of the specific asset clauses.

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Q: Can you give more specific numbers? You said half a percent, at the end of Q2 your net NPLs were 0.3, so is there a marginal increase in net NPLs, can you give us the specific net NPL number and the specific gross NPL number?

A: 0.37 was last time, this time it is 0.47. but if I split that and explain that 0.37 net NPL which was there last quarter as on September quarter, we had no requirement for any provisioning on the gold loan book. This time in continuing with our provisioning standards, we have commenced provisioning on the gold loan book also as more from a conservative angle, we have provided on the gold loan book also and 10 percent coverage has been done. So, to some extent the NPLs have gone up to 0.47. But if you exclude the gold loan, it is more of a conservative provisioning; the NPLs have remained at 0.37.

Q: How will your book behave when you go to 90-days? A lot of other non-banking financial companies (NBFCs) like yours who lends to small units have written to the Reserve Bank of India (RBI) saying that you should not go to the 90-day norm for NBFCs, especially those who cater to small loans simply because the cycle behaves very differently at that diversified limit. How will your loan book behave if 90-day becomes the norm and RBI does not listen?

A: If the current coverage ratio of unprovisioning, which is about 77 percent, if I have to rewrite and start providing at 90-days-past-due (DPD) positive, the coverage will drop down to 52 percent. So that explains that we will continue to be fully covered on 90-day DPD also and have 50 percent coverage on the past 90-days as well.

Q: You do expect the cost of funds to decline going forward, what exactly would your trajectory for the net interest margins be in terms of the quarter in specific and the trajectory expected?

A: We continue to maintain margin above 10 percent. The cost of funds on this quarter number comparing to the previous quarter may look about 40 bps more. This is mainly on account of our public issue debentures which we had done in the last quarter ending and closed in October beginning.

As an accounting policy, which at Shriram City Union Finance, we have been following consistently is all brokerage and commission expenses is taken on the time of payment. We do not amortize the expenses to the tenure of the liability. So there has been a small increase in the expenses which is more as one time expenditure on last quarter. Going forward, we should be able to have at least 25-50 bps reduction in the cost of funds in the next two quarters.

Q: Can you give us some guidance on the runrate for the NII because last quarter it was 68 percent on a year-on-year (YoY) basis growth, this quarter it came in at 47 percent, what would you end FY13 with and what would be a quarterly runrate for you?

A: On the income, we should be mainlining 50 percent for this till March quarter. That interest income should be upwards of 50 percent from an year-on-year growth. We should be able to maintain that and maybe in the next two years, we should be able to move 30 percent upwards. I do not think consistently 50 percent is doable as the base is increasing. We should be able to maintain 30 percent upwards.

Q: If your group applies for a banking license, will it be through you?

A: It is a probability. We are one of the companies which the group might consider besides the capital Shriram holding company and the other Shriram Transports but yes, we will also be there.

Q: Did private equity funds reach out to your group, they are taking a lot of interest -- others who want to part take of the banking license but at the holding company level or at your level, is there a private equity interest or a change in shareholder, is some big shareholder coming in?

A: I would not be able to answer for the Shriram Capital but there is no specific request or interest in Shriram City. The stock prices are on account of our company’s performance not necessarily on the banking license.