Expect 15-20% credit growth for NBFCs in next 8-10 years: Rashesh Shah

Anuj: You have created a lot of wealth for your shareholders. I remember I was talking to you last week and I was asking you what justifies this kind of rally and you were telling me that this is just the beginning of move to financial assets and it has long way to go. What kind of numbers do you think companies like yours can generate over the next five or six years if this phase continues?

A: In India currently there are broadly two large parts of the activity in financial services. One is credit which I think will continue to grow at about 13-14 percent at a system level. Obviously the bank credit is growing at only 8 percent or so but the total credit should grow at 13-14 percent a year which should allow NBFCs to grow at least somewhere between 15-20 percent per year. So, I think for the next 8-10 years, we do believe that credit growth of around 15-20 percent for NBFCs is possible.

Along with that, there are also what we call the other business, the franchise businesses which is asset management, wealth management, capital markets which a few NBFCs have and few don’t have. However, the NFBCs that also have this are also now able to capitalise on the larger trend which is there which is household balance sheets are growing, households are investing more and more in financial assets and as interest rates are coming down, they are moving away from bank deposits into mutual funds, insurance, asset management products and things like that.

So, I think this big trends on both credit which is growing at between at least about 15-20 percent and the non-credit franchise businesses which are growing at 25-30 percent a year now.

Sonia: I wanted to flesh out that theme a bit more, the theme of wealth management, because you are one of the top five wealth managers in the country and if you go by your recent track record, your assets under management (AUMs) in wealth management have doubled in FY17 to almost Rs 60,000 crore. What kind of growth do you see purely for the wealth management business over the next two to three years?

A: If you see the household assets, especially high net worth individuals (HNIs), ultra-high net worth individuals (UHNIs), mass affluent segment, the assets are growing at about 15-20 percent a year. Indians have a lot of household savings. Earlier a lot of this savings automatically went into bank deposit or real estate which is now starting to change because interest rates have come down, even real estate is no longer a very automatic attractive asset class. So, I think now a lot of high net worth, mass affluent individuals, and households are wanting advice on where to invest, in mutual funds, in insurance, in bond markets, and others.

So, affluence is going up but the options on how to allocate your portfolio is also going up and a lot of erstwhile individuals who are managing their own portfolio, making investments on their own, are increasingly moving towards having an advisor, having a wealth manager, having a relationship manager who helps you structure your portfolio, allocate your assets, review them, see how the performance is, but also help you on other things like writing a will, estate planning, inheritance management. So, all this is starting to happen with affluence.

We should remember that we are now almost a USD 2.5 trillion gross domestic product (GDP) and household savings every year are close to USD 600 billion. This is what the size of the GDP was about 10-12 years ago. So, household savings is a very large part which now has to be invested and managed.

Anuj: Asset reconstruction companies (ARC) has done well for you. If you could tell is what kind of profit it is generating now and whether you have planned to divest some more stake? You recently did 20 percent divestment.

A: We are currently fairly well capitalised on the ARC. The ARC now has almost Rs 800 crore of equity and we are expecting that this is a business that can generate about 25 percent kind of return on equity (RoE) on a steady state basis. You should understand that an ARC is a specialised form of NBFC, it focuses on one part of credit which is distress credit where you help acquire, aggregate the loans from the banks and then you restructure them, you provide additional capital, but you also work with the management either the old ones or the new management in making that credit viable again to basically fix the companies balance sheets, to help them fix their operations. However, it is essentially a credit business so I think on Rs 800 crore equity we do expect that this is a 20-25 percent RoE kind of a business.