‘Trying out everything is a riskier road for NBFCs’: Vishal Kampani
Its group managing director Vishal Kampani believes that successful NBFCs would have a higher promoter ownership, should grow at a conservative pace, and stick to a monoline model of business.
Is the recent IL&FS crisis a warning sign to both the financial market and NBFCs?
Yes, the IL&FS crisis is a big warning sign. It was considered one of the apex organisations for pushing infra growth in the country. Since 70-80% of financial irregularities are happening in the infra space, I feel the authorities should take note of it. The entire episode around IL&FS underlines the fact that the infra sector must be financed in a very secured way, and it calls for greater scrutiny of financial services players.
It looks like there’s a perception building in the markets that many of them could face trouble?
NBFCs need to grow steadily. Some NFBCs that face problems are the ones which have tried to grow at a fast pace and diversify into non-core areas. Most successful NBFCs have adopted a monoline approach over a long period. More importantly, NBFCs backed by strong and unlevered promoter group and large promoter holdings in the NBFCs have done extremely well, mainly because of their stringent corporate governance.
Take the examples of Bajaj Finance in the consumer lending, Mahindra Finance in rural financing, and HDFC in the housing sector. In the past decade, there are numerous instances of such NBFCs which have done well, and I believe that many of the questions being raised today will only strengthen the long-term corporate governance and operating capabilities of these companies.
However, in the past few years, many NBFCs have been trying to cater to everything, and that in my opinion is a riskier road to success. NBFCs should choose the area of operations carefully, focus on a few core areas of expertise, and have a deeper understanding of the sectors they lend to, thereby helping them have lower NPAs.
How insulated are you from these risks?
We always had a cautious and conservative approach in growing our NBFC business. Our current consolidated gross debt-to-equity ratio is 2.5. Our real estate lending business, which is a JV with Vikram Pandit & Associates, has a Rs 8,500-crore loan book and debt/equity of 2.2.
We have our separate NBFCs for corporate, capital market and retail with a loan book of Rs 7,500 crore and a debt/equity ratio of 4.5. The measure of success for our financing and lending business is the return on asset ratio as it determines the true profitability of the underlining business.
We have a self-imposed cap of four times of the consolidated debt equity levels. In the past decade of our operations, we have consistently delivered best-in-class return on assets.
The RBI has stressed on long-term finance for funding long-term assets rather than relying on short-term debt. Is there a challenge here?
To determine the appropriate borrowing programme for an NBFC, one must look at its asset side. It is imperative that long-term assets are financed by long-term borrowing. At the same time, there are many asset classes — for instance, two-wheeler loans, a few categories of consumer loans, capital market loans, margin trading loans which are short-term in nature.
These assets need to be financed by short-term borrowing. We have a 70/30 mix of long-term and short-term assets and we have financed our long-term assets with long-term borrowing, and short-term assets with short-term borrowing.
What are the challenges for the NBFCs in the current environment?
The most important challenge is transparency. I think investors — both local and global — are excited about the growth opportunities in Indian private financial space. The more transparent and better governance of these NBFCs, easier it will be to access capital for them.
Indian debt capital markets tend to be fragile and, therefore, it’s only the prudent and transparent companies that will enjoy better access to capital in such times.
Is there an opportunity for consolidation among NBFCs?
In the recent past, we have seen consolidation whereby banks have acquired leading NBFCs, and I expect the trend to continue. Well-managed, fast-growing NBFCs offer exciting opportunities for banks. I don’t foresee market consolidation happening among the large NBFCs.
The stock market has more worries now — from rising crude to polls. What’s your view?
Oil prices have shot up; we have elections coming up, and we have at the same time US interest rates going up. So, logically, people would expect outflows from an emerging market like India. At the same time, India has some of the most enterprising companies to invest in, and with the correction in the market, investors will have an opportunity to invest in some of these companies at reasonable valuations.