Capital First reported a stellar second quarter numbers. Non-banking finance company Capital First on Tuesday reported a 36 percent jump in its net profit at Rs 78.3 crore in the quarter ended September, helped by a rise in its net interest income (NII). The retail loan book grew by 32 percent to Rs 21,328 crore from Rs 16,163 crore last year same quarter.
V Vaidyanathan, Executive Chairman, Capital First said at the beginning of the year they had guided for a 25 percent loan book growth but now they are confident of doing 30-35 percent in FY18.
Credit demand is back strongly, he said, adding that for the last year same period their loan book was Rs 18000 crore and this year it stands at Rs 23000 crore, so Rs 26000-27000 crore won’t be difficult to achieve by end of the financial year.
He said they are very glad that the public sector banks after recapitalisation will be back in the lending game because Rs 2.11 lakh crore coming in form of loans will grease the whole economy. So, it is natural that that if GDP is back to 7-8 percent growth then NBFCs will have to grow.
He said their bank is very careful about credit and hence not too many NPA issues but other large banks are also operating NPAs at 1.5-2 percent.
He said currently their Net Interest Margins are around 8.5 percent and expect them to remain stable at these levels going ahead.
Talking about cost to income and the benefits of analytics, he said the cost to income for them in three years has come down from 80 percent to 50 percent.
Analytics is making a big difference for the whole system as such, he said, adding that close to 20 percent of loans are lend on analytics parameters. It's a growing number.
Below is the verbatim transcript of the interview.
Surabhi: The growth number itself at 28 percent, that is a little higher than what most analysts were pencilling in. Where is this growth coming in from? Whom are you primarily lending to and what are the growth engines now?
A: We had guided beginning of the year for a 25 percent growth and we are surprising ourselves that it is coming higher than expected. Now, in fact we are expecting that this will grow to maybe 30-35 percent by the end of this financial year.
Surabhi: So full-year target, 30-35 percent.
A: We targeted 25 but it looks like it is coming to 35 percent. Therefore credit demand is very strongly back. To give you some numbers for example, last year same time, our loan book was Rs 18,000 crore. This year same time in September, we are up to Rs 23,000 crore. So, for us maybe Rs 26,000-27,000 crore is a hop, skip and a jump by end of this financial year.
Surabhi: I am looking at the breakup. Consumer durable loan growth of 64 percent, two-wheeler 40 percent, the micro, small and medium enterprise (MSME) segment about 20-22 percent. The simplest question upfront. A lot of people are wondering whether this can be sustained given that PSU banks will be flushed with more capital, so whether they will get aggressive in some of your segments.
A: Frankly, for a 25 percent growth is not out of the ordinary at all. This in India. In India if we cannot grow at 25 percent, where in the world will we grow? As far as the public sector banks coming back in the game, frankly, we are overjoyed. That day we could not stop feeling excited because if Rs 2 lakh crore more comes into the system in the form of loans or whichever way, that will grease the whole economy and it is inconceivable that the gross domestic product (GDP) will come back to a strong 7-8 percent growth, but non-banking finance companies (NBFCs) will not grow. It has to grow.
Latha: I will approach what normally we do not ask you, NPAs. It was not ever your problem and actually your gross NPAs as a percentage has gone down. But just give us a feel of the sector, SMEs and MSMEs itself. Is it that your due diligence is good, your analytics are working or did the market overestimate the pain because of GST and before that demonetisation?
A: I definitely believe market overestimated the pain because when there is an announcement of demonetisation happens, there is panic and hell breaks loose, people are jammed. It is just people get overly excited one way or the other. Actually there was a temporary issue for maybe 2-3 months. People exchanged their cash, life went on back to normal.
Latha: GST?
A: No, I do not believe we are the only people doing a very good job on NPAs. If you see any large good bank, they are all operating NPAs in the range of 1.5-2 percent. We are about 1.63 percent. Our net NPA is 1 percent. Of course we believe we have very good underwriting standards and very careful about credit.
Latha: Microfinance Institutions (MFI) showed a lot of bad loans at that time, so we do not know where to place reality. Is it that SME and MSME went through pain?
A: It went through pain. It went through a two-month sharp pain, but it just came back because just did not have cash. They did not become unviable. But microfinance companies faced significant trouble, but I think they too will bounce back. You see the kind of numbers MFIs are posting again?
Surabhi: Let us come down to margins and what to expect from here on? This quarter has been pretty good, but given the way yields are moving, cost of money is moving, what is on the horizon now?
A: This is not a game of net interest margins (NIM) based on whether five basis point movement upwards. It does not matter.
Latha: What is your margin?
A: It is about 8 percent or so.
Latha: The calculated NIM they said is 9.8 percent.
A: Yes, depends on where, off-balance sheet, on-balance sheet and all this stuff. But let me say about 8.5 percent. But 8.5 percent on the face of it looks high, but I must caution you and bring your excitement down by saying that a number of businesses we do have high operating costs where ticket size is very low and also relatively credit cost could be relative to the home loans so to say that could be a literally higher. So this is the business where you can anticipate or expect a stable 16-20 percent return on equity and a return on assets of about 2.5 percent. That is to be safely expected for this business. And I think that is a steady state business.
Surabhi: But the margin which is 8.5 percent as of this quarter, how should we expect that number to trend in the second half?
A: We expect this to be stable.
Latha: You said the cost tends to be high in certain loans. But the cost to income ratio generally has come down. So obviously you have pursued an analytics course in some lending. Can we therefore expect more fall in cost to income?
A: Over time, yes.
Latha: How is analytics shaping up?
A: For example, cost to income for us has come down - just in three years - from 80 percent to 50 percent. So it gives you a sense of where the cost to income is headed. Now in terms of analytics is concerned, it is making a big difference, not just for us, for the whole system, certainly we are focused very heavily on that.
Latha: How much of your loan is lent on those parameters?
A: Close to about 20 percent or so and that is a growing number and analytics is creeping into all other parts of the system as well. But as far as we are concerned, now if you were to guide your investors or people who are watching the programme, I would say that a compounded annual growth rate (CAGR) of 40 percent has been the CAGR for Capital First for the last 5-6 years in terms of profits, but I think to expect a 30-35 percent growth for this financial year compounded is certainly on the cards.
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