Tag: bl interview

Gold loans business is not a bed of roses, say Muthoot Finance Chief

Banking & Finance

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Gold loans business is not a bed of roses, opined George Alexander Muthoot, Managing Director, Muthoot Finance Ltd (MFL), referring to a few large non-banking finance companies (NBFCs) taking the plunge in this line of business to diversify their loan book.

In an interaction with BusinessLine, Muthoot, who oversees consolidated assets under management of about ₹61,000 crore (of which about 90 per cent is gold loans), observed that more players getting into the gold loans business means that they see good prospects. He emphasised that this also vindicates MFL’s business model, honed over the last eight decades.

Excerpts:

Many lenders have jumped on the gold loan bandwagon. How are you fortifying your business?

We have a steady business. We have not changed our focus. The gold loans business has good prospects. The market is huge. There is space for everybody. And whoever is focussed will undoubtedly get good business.

All the entities that have entered the gold loans business will face a lot of operational challenges going forward and shift focus. This is what happens usually.

The business is operationally very intensive — taking the gold, its safekeeping, returning it, tackling frauds, etc.

New players are going to experience operational challenges. We have been through business cycles. This business is not a bed of roses.

So, you don’t see competition as a dampener?

We do not look at competition as a business dampener. It will only prompt serious players to intensify their focus on the business. More people getting into this business means they see good prospects. That means what we have been doing all along has been vindicated. The competition will be there. It will only widen the market.

I also feel is that customers who were earlier reluctant to take a gold loan are also interested in this product now. They see it as an alternative borrowing avenue.

Given that the 1st quarter was a washout due to the second Covid-19 wave, will you be able to achieve the 15 per cent year-on-year AUM growth target?

Our standalone AUM is around ₹55,000 crore. We have given a guidance of 15 per cent growth. In the first quarter, we were not able to do much. In the second quarter, we were able to achieve about 5 per cent quarter-on-quarter growth. So, in the third and fourth quarters, we should be able to make up and reach at least 15 per cent growth.

We will continue to grow at a 15 per cent pace over the next three-four years. This is a reasonable rate because the base is also going up.

Three years back, our average loan ticket size was about ₹35,000. Today, it is about ₹60,000. This increase is directly proportional to the gold price and the overall appetite for gold loans

As RBI has whittled down the regulatory arbitrage between banks and NBFCs, will you consider converting into a bank?

In the last three-four years, we have been closely monitored by RBI as we are a Systemically Important Non-Deposit-Taking NBFC. All the regulations applicable to banks are almost applicable to us. There is very little regulatory arbitrage between banks and NBFCs.

But then, what is the advantage of becoming a bank? What is the big advantage in getting low-cost deposits? Going by our rating, we can also raise cheap resources. We may not have the luxury of zero interest rate current accounts and low-interest rate SBI accounts etc. But the differential rates of interest on resources between NBFCs and Banks is actually narrowing.

As on date, we don’t see any advantage (on converting into a bank). But the board has not taken any decision as yet. Overall, in the last several years, the Board has not thought about it.

Given that you have projected your business to grow at 15 per cent yoy, are you planning to augment your capital?

As on September-end 2021, our capital adequacy ratio was at 27.60 per cent…The current level of capital will be adequate to support business growth for three-four years. But accumulated profit (retained earnings) is also there. So, the capital could last longer.

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Our target is to grow every business at twice the industry growth rate, says Rashesh Shah of Edelweiss Financial

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After restructuring the Edelweiss group into ten independent business units, Rashesh Shah is looking to grow these companies at 12 per cent to 15 per cent a year for the next five years. In an interview with BusinessLine, Rashesh Shah, Chairman and Managing Director, Edelweiss Financial Services shared his vision to become a technology-driven, niche player.

Post the two waves of the pandemic, what is your strategy for the company?

Edelweiss has got multiple businesses now. In the last two years, during the pandemic, we have made every company a standalone business. We have spun off the wealth management business, which has its own investor PAG. It made sense to keep the businesses together when they were small five years ago, but they have grown enough to require their own independence. Second, in terms of credit, we have started disbursements from August.

There will be two kinds of NBFCs in India – some that will compete with banks while others, like ours, will partner with banks for co-lending. Going forward, our strategy is to keep 50 per cent of the disbursements on our books, and 50 per cent will be sold down.

Our HFC book is ₹5,000 crore, and SME book is ₹2,000 crore. Of the ₹7,000 crore book, we will originate about ₹3,000 crore a year. About ₹1,500 crore will be on our books, and ₹1,500 crore will be sold down. This will keep us asset-light. We have capital adequacy of over 25 per cent in most of our core credit businesses. For us, this is a much better model, as we don’t take ALM risk, ROE is better, there is higher fee income, and it’s easier to cross-sell. We will be a technology-driven, niche player.

What is your target for your businesses for the next couple of years?

There’s not an overall target because all companies are at different stages of growth and a different size. Our rule of thumb for every business we have is to grow at twice the industry growth rate. Most of our businesses should grow at 12 per cent to 15 per cent a year for the next five years.

Are you looking at more dilution of stake or listing of businesses?

This is one of our intentions in the long term. In a model like ours, one can create value and needs to unlock that value. De-mergers, spin-offs, IPOs are the various ways. We don’t intend to sell any more businesses. What we did in the wealth management business is one way of unlocking value. We sold insurance broking as part of the wealth management business but in partnership with Arthur Gallagher. When we were de-merging the businesses, we had kept it out. It was like a standalone business, but we couldn’t list it. So it was a good idea for Gallagher to buy it.

Is the acquisition of a fintech on the cards to broaden your reach?

We are already partnering with quite a few fintechs. Many of them are doing great work in analytics, customer servicing, and collections. We are also open to acquisitions, but we want to maintain the culture. Partnering is a better option, but we are open to buying stakes. We already have small stakes in a few of them. Fintechs are not disrupting, they are not replacing traditional banks, NBFCs, insurance companies. In India, expansion of the financial services market is needed as many underserved and unserved segments are required. MFIs cater to an unserved segment; they do not replace the banks.

Would you be interested in getting a bank license?

We are in 10 businesses, and maybe our NBFC business can explore converting into a bank. It is one credit opportunity for us. But even without bank, with all these partnerships with the banks and co-lending, we see enough growth opportunities for the next five to 10 years. There are pros and cons to becoming a bank. It’s not that all the new banks are doing very well. They have to build a CASA deposit base, which is a long haul. As an NBFC, we are very small. We are very far away from being a bank. We are growing our asset management and insurance business, for which we want to keep our firepower and bandwidth free. Converting into a bank is not a magic bullet; it is an expensive proposition. We have a very good path on NBFC growth.

How is your ARC doing? Do you see recoveries improving?

All through the pandemic, recoveries have been reasonably good. In the last four years, we have recovered almost ₹25,000 crore from over 140 accounts. IBC is only one of the tools. More than half of our recoveries are outside the IBC. Our ARC is very good at restructuring, and we have about 35 per cent to 40 per cent of the market share. We see that as a steady business. The first ten years of our ARC was corporate credit. Last three years, we have bought a lot of retail assets such as home loans, where ARCs can play a huge role. In fact, in the last two years, we have bought more retail assets than wholesale assets. In the next ten years, we see more opportunities more on the retail side.

What is your view on NARCL? Will it speed up your roadmap for retail?

Currently, NARCL is taking care of accounts that banks have fully written off. It will not change the landscape of the market. NARCL is a positive move as banks will get indirect capitalisation when they sell fully written-off accounts. But NPAs will happen though large corporate NPAs of the past may not be there. Part of these will be retail and part will be wholesale. ARC is a permanent business model. Our ARC aims to be about 50 per cent retail and 50 per cent wholesale. It gives us about ₹250 crore to ₹300 crore of profits after tax.

Is fresh capital infusion required for any of the companies?

We may have to invest a bit in the insurance business – around ₹100 crore or so every year for the next three years. But that is already allocated. All our other businesses are adequately capitalised.

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NARCL may prompt existing ARCs to reorient their business: ARCIL Chief

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The National Asset Reconstruction Company Ltd, (NARCL), which is slated to become the mother of all Asset Reconstruction Companies (ARCs), will prompt existing ARCs to change their business orientation and start focussing on buying the stressed retail and MSME assets, according to Pallav Mohapatra, MD & CEO, Asset Reconstruction Company (India) Ltd (ARCIL).

He emphasised that ARCs have a huge business opportunity to buy stressed assets aggregating about ₹1 lakh crore in the retail and micro, small and medium enterprise (MSME) segments.

Stressed assets with principal outstanding of ₹500 crore and above, aggregating about ₹2 lakh crore, are expected to be transferred by lenders to NARCL.

In an interaction with BusinessLine, Mohapatra, who was MD & CEO of Central Bank of India before taking the reins at ARCIL in March 2021, emphasised that there is enough scope for existing ARCs (28 at the last count) to buy stressed assets below ₹500 crore from Banks.

Excerpts

Will the setting up of NARCL, does not diminish the business prospects of existing ARCs?

NARCL’s mandate is basically to acquire stressed assets where the total exposure of the banking sector is more than ₹500 crore.

But I feel there is enough scope for getting the business (buying stressed assets) below ₹500 crore. As of today, most of the ARCs were playing in the big-ticket corporate stressed assets.

Now I feel they will change their orientation and start focusing on stressed retail and MSME assets where the size will increase in the backdrop of the Covid-19 pandemic. It (increase in size) will not be there in the case of corporates to a reasonably large extent. This is because, to a great extent, things have been sorted out. There will be a few cases but not as many as it used to be earlier. So, if the ARCs equip themselves with infrastructure, technology, and human resources skills to handle the stressed retail and MSME assets, that is going to be a very huge business opportunity for ARCs.

How big will the business opportunity be?

The business opportunity will be sufficiently large. The opportunity will be bigger than the total existing Assets Under Management (estimated at about ₹60,000 crore) of all the ARCs put together. This particular pool (of stressed retail and MSME assets) could be about ₹1 lakh crore.

Given that sale of stressed assets by banks to ARCs has been declining in the last couple of years, will ARCIL change tack?

We want to focus more on resolution and recovery of non-performing assets and earn income after some time rather than focusing on earning income from fees or some other structure.

If you look at the Profit & Loss accounts of ARCs, normally there are three channels of income — management fee income (for managing the acquired assets), interest income (arising from restructuring) and when ARCs can recover more than the face value of the Security Receipts, they get an upside income.

Our focus is to basically increase the proportion of the upside income. This will have beneficial effects — one is there will be a better churning of the capital in ARCs; second, they will also be earning income, with the upside income going straightaway to P&L; and third is it will be good for the economy as such because there will be recovery and resolution.

So, instead of focusing on earning management fees, which will cover our capital investment, we are looking at earning income, as far as possible, by doing resolution and recovery.

Banks want to sell stressed assets on all cash basis but capital could be constraint for ARCs. How do you deal with this situation?

Banks want all-cash deals because of the non-redemption of SRs. If they know that ARCs are going to redeem the SRs as well as give them upside income, why will they not sell their stressed assets for a mix of cash and SRs?

From the capital and availability of funds point of view, ARCIL doesn’t have a problem. Even if there is a funding gap, we always try to get some investor. If we are doing a 100 per cent cash deal with a bank, we try to pay 100 per cent to the bank. But when it comes to our capital deployment, we try to make it 15 per cent or a maximum of 20-25 per cent, and we always get an investor who will put the money. Now, the advantage of this is that since the investor is putting in 75-85 per cent of the money, they will be very keen on resolution of the assets. The investors will not be keen that the ARC is earning the management fees they have to pay for. They will have regular interaction with the ARC because they want a return on their money. And investors are keen to work with those ARCs that have a very fair, open and transparent business model.

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IDBI Bank has transformed into a retail bank: Samuel Joseph, Dy MD

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During the four years that IDBI Bank was under prompt corrective action (PCA), it transformed itself from a predominantly corporate bank to a retail bank. And the Bank, which exited PCA on March 10, 2021, would like to keep it that way, according to Samuel Joseph J, Deputy Managing Director. In an interaction with BusinessLine, he emphasised that it had aggressively accelerated provisioning, over and above the regulatory requirement, in the past to strengthen its balance sheet. So, write back to profits in the next two to three years, whenever the recovery from stressed assets happens, will be about ₹7,500 crore. Excerpts:

Now that your bank is free from the shackles of PCA, how does it plan to grow business?

During the period that we were under PCA, we were consolidating our position. We completely revamped our risk management policies, especially concerning corporate credit. So, everything was ready (for growing business) before we exited PCA. But unfortunately, the exit coincided with lockdown and related economic uncertainty. However, we will be able to expand our book in FY22. We propose to grow our corporate loan book by 8-10 per cent and our retail book by 10-12 per cent.

There is an impression that our Bank is a corporate bank. But if you look at our March 2021 numbers, our corporate to the retail ratio in the overall loan book was 38:62. This is a significant shift from where we were three-four years ago when the ratio was 60:40.

Going forward, we would like to keep the corporate book at about 40-45 per cent and the retail book at about 55-60 per cent.

And even on the liabilities side, we have transformed our liabilities franchise, and today our CASA (current account, savings account) is 50.45 per cent of total deposits. Even within term deposits, our reliance on bulk deposits is less than 15 per cent. Three years back, CASA was at about 37 per cent.

So, we have used the PCA period well to completely transform our business mix and strengthen the balance sheet.

How did you strengthen the balance sheet?

The first thing was recognition of non-performing assets (NPAs). We made aggressive provisioning for the NPAs and took the hit upfront on our Profit & Loss (P&L) account. So, today, our provision coverage ratio is at 96.9 per cent. The huge losses in 2019-20 were all because of aggressive accelerated provisioning. This was not required as per the regulatory norms, which give banks a gliding scale (for provisioning). Going by this, 96.9 per cent provisioning is not required at all. But we made accelerated provisioning to absorb the pain upfront. So, though the Gross Non-Performing Assets (NPA) ratio is slightly elevated at 22.37 per cent, the net NPA ratio is only 1.97 per cent as of March-end 2021.

We have not aggressively written off NPAs in the past because of the uncertainty relating to future profitability. But now that we have made five quarters of profit, we are fairly certain. Of course, we will wait for the Covid uncertainty to clear up, promoter change and all that and then we should be able to bring down GNPA by writing off 100 per cent provided for accounts.

How much provision write-back can you get from recoveries?

Our Gross NPAs are at about ₹36,000 crore. Technically written off (TWO) accounts already in our book aggregate to about ₹43,000 crore. So, both put together is about ₹79,000 crore. And this is about 97 per cent provided for….On average, let us say, we recover about 15 per cent. So, on ₹79,000 crore, we will be able to recover about ₹11,850 crore. Now, let us take a more conservative estimate — say, we recover only about ₹10,000 crore. Our net NPAs are only ₹2,500 crore because of aggressive provisioning. So, provision write-back to profits in the next two to three years, whenever the recovery happens, will be about ₹7,500 crore. The future (profit) potential of this aggressive past provisioning will at least be ₹7,000 crore to ₹7,500 crore going forward in the next two to three years.

Our Capital to Risk-weighted Assets Ratio (CRAR) is 15.59 per cent. So, from now on, we will be able to recoup our capital and increase CRAR much further. So, this is what we have done — on the P&L part, we have absorbed the pain upfront, and we have strengthened our balance sheet to recoup our capital through recovery and write-back to profits in the next two to three years.

Did you zero in on the stressed assets you will transfer to the National Asset Reconstruction Company Ltd?

We have identified the stressed assets for the transfer. The criteria for the transfer is that they should have been 100 per cent provided for, not be categorised as fraud, and it should not be very close to a resolution or recovery. Using these filters, we have identified the assets. We have a list of 11 accounts aggregating about ₹12,000 crore to be transferred to NARCL.

The immediate visual impact of this transfer on our balance sheet will be by way of a reduction in our Gross NPA ratio. Out of this ₹12,000 crore, some of the accounts may even be TWO accounts. The impact of TWO accounts is already reflected in our books. So, if out of ₹12,000 crore, Gross NPAs and TWO accounts amount to ₹6,000 crore each, then the GNPA could come down about 3.50 per cent.

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May look at raising capital on economic recovery, credit offtake: Yes Bank chief

Banking & Finance

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Optimistic about economic prospects despite the second wave of Covid-19, Prashant Kumar, Managing Director and CEO, Yes Bank, said the bank’s elevated stressed asset pool should be seen as an opportunity to add to the capital post-recovery. In an interview with BusinessLine, he also said the bank may look at capital raise if the economy does well and indicated interest in Citi’s Indian consumer banking operations. Edited excerpts:

Does the bank have any plans to raise capital this fiscal?

As of now, I don’t see any fund requirement. But if there is a lot of improvement in the economy and credit growth occurs, there may be some need. Since all approvals are in place and depending on the situation, we will take a call. We had taken an overarching approval of ₹10,000 crore, but the requirement will not be so much.

How is your credit card business doing? Are you interested in opportunities like Citi’s consumer banking business?

The credit card business is doing very well. We are not very aggressive and cautious in expanding and are being selective in terms of customer acquisition. As a result, our book has increased by 40 per cent, and the spend has increased by 36 per cent.

Citi is running a profit. We will see the opportunity and cost. Their business offers a good potential, not only credit card but wealth and retail as well. Once they come out with the exact EoI, we will examine it.

Did you apply for a license for a new umbrella entity for retail payments?

We did not apply for the NUE. We were interested if we could bring out our expertise in innovation. If one has a significant stake, then you can influence the strategy. We do not want to be a minority partner.

What is the status of the proposal of an asset reconstruction company?

We had applied to RBI, and we wanted an ARC where we would have a controlling stake. The RBI is not comfortable giving a controlling stake to a bank as it would be a moral hazard. Since they have set up a committee to look at the ARC framework, we will wait for the report and then approach the RBI based on the proposal.

Are the elevated stressed assets a concern for the bank?

A stressed asset is an opportunity. No other bank would have a pool of stressed assets of almost ₹45,000 crore, which you can recover and add to your capital. Once we have made the adequate provisions of almost 80 per cent and even the ₹17,000 crore book, which we have technically written off, which means 100 per cent provision. Any recovery would directly add to our profits.

How will the earnings be this fiscal with the accelerated provisioning already made?

There will be no need to make further provision in the existing book as it is adequately provided. There may be some slippage, which will be taken care of by the recovery. For Covid, no more provisioning is required. We have not made any provisions for the second wave as our SMA 1, and SMA 2 book has come down and since we have accelerated provisioning on the existing book.

What is your outlook on the economy given the Covid surge? Will it further impact the bank’s book?

Sectors that have been impacted by Covid first wave are affected by the second wave also. Those accounts have already been recognised as NPAs. This time, things are much better as this time there is not a complete lockdown but restrictions. Economic activities, trading, taking place. Once we come down from the peak and focus on vaccination, the overall improvement would happen much faster. There is a concern as many people have been infected. It has an impact but the first quarter is a lazy quarter for banks. If we can cross the hurdle in the next 15 to 20 days, the effect would be lower.

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Bond market will stabilise once there is visibility on RBI’s intervention, says Rajeev Radhakrishnan of SBI MF

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The bond market is in a turmoil due to the large borrowing program announced by the Centre. A war of nerves is currently on between the bond market and the RBI on where the yields should be. In this interaction with BusinessLine, Rajeev Radhakrishnan – CIO – Fixed Income, SBI Mutual Fund, shares his views on the current situation,

What is your view on the bond market’s ability to absorb the increased supply of government paper due to the government’s large borrowing program in FY21 and FY22?

The absorption capacity of the market is severely impacted. The market did not expect further Rs 80,000 crore borrowing this year. The Rs 9.7 lakh crore net market borrowing next year is also much higher than what most of us expected. The bigger disappointment is the RBI not announcing specific market intervention programs, given that the borrowing numbers are enormous. So far, the RBI has been reactive, doing passive yield curve control with specific actions implicitly targeting the 10y benchmark. Given that there is an enormous borrowing program that has to be conducted in a non-disruptive manner combined with the market’s reduced absorption capacity, there should be more forceful upfront intervention. This, unfortunately, has not happened. That is getting reflected in the bond yields.

The gradually recovering economic landscape also requires that financing conditions remain under control and the sovereign rates remain anchored.

RBI is sending the signal that it does not want yields to rise, will it be able to control the yields, what are the tools at its disposal?

The capital flows are very strong needing forex intervention that leads to excess liquidity in the system and constrains RBI’s ability to intervene in the bond market. I expected Market Stabilization Scheme issuances to be announced in the Budget and I am quite surprised that it was not done. From October, November 2020, we have had large capital flows, amounting to more than $10 billion. It’s clear that these flows will continue due to external events and benign global risk-free rates, thereby ensuring that large capital flows may have to be considered as a near term base case assumption. The MSS tool was created to sterilize rupee liquidity arising out of Fx interventions and that is unfortunately not being provided for.

Right now, the market does not have visibility on RBI’s open market operations schedule and that will be manifested in auction bids. Once the market gets that visibility that the RBI will do a certain quantity of intervention, either through operation twist or OMO, the tug of war between market and RBI on yields can cease.

What are your views on where bond yields are headed in FY22?

Given that we have a higher supply schedule than expected, and we have RBI intervention that is uncertain, there is fear that there will be gradual inching up of yields. Already the 5.90 per cent level that RBI was defending for a while has been pushed up to 6.10 per cent.

There will be RBI intervention at a higher level, but the risk remains that yields will drift higher gradually.

What do you think about the move to allow retail participants into G-Secs directly through retail direct? Will this work?

It is a perfect idea to allow retail investors in government debt and RBI has been trying to do this for a while. But it may not have an immediate impact in enabling a new source of demand for Government securities. If the government had provided some tax break in the Budget maybe even as a one-off measure for retail investors, it might have worked immediately. However, as a long term measure, this is positive and provides retail investors with direct access to a credit risk-free product.

Despite the higher rates in India than in the US and Europe, FPIs are not really showing appetite for Indian debt; they net sold $14 billion of Indian debt in 2020. What’s the reason?

The FPI outflows in calendar 2020 should be seen in the context of a weaker economic growth outlook which could have led to concerns surrounding India’s debt dynamics, its impact on currency markets, an elevated CPI reducing real returns and any potential rating migration concerns. However, foreign portfolio investors have received decent dollar returns on Indian debt as the rupee has been quite stable during the pandemic.

One issue with the Indian debt market is that FPIs find the access rules are quite restraining. Two, in the current context, foreign investors face the same issue as domestic investors in that they do not know the RBI’s intention on OMOs and the potential mark to market on holdings. And third, we are not in the global bond indices, which can attract foreign flows. Fourth, people are buying Indian bonds denominated in dollars raised by Indian companies on overseas exchanges. There are a lot of dollar issuances happening this year too.

I will not be surprised with FPI inflows into debt resume this year, since these flows are influenced by the previous year’s experience concerning currency movement and bond returns.

What is the best strategy for investors in debt mutual funds?

Opportunities for capital gains are likely to be limited because the RBI is likely to stay reactive with respect to market intervention. A recovering economy should also lead to a gradual unwinding of crisis-era liquidity and monetary conditions. Accordingly, investors should get used to much moderate return on debt funds compared to the last couple of years. Debt fund portfolio strategy would be oriented around protecting capital with a directionally lower duration strategy than what we held earlier. And portfolios with flexibility in the mandate like dynamic bond strategy could be attractive subject to individual risk preferences for a medium-term horizon.

For investments with a short term time horizon, products such as ultra-short-term category may remain appropriate.

Do you think policy rates have bottomed?

Definitely. I think rates will remain on hold for a while. But liquidity will normalize first, sometime during this year. Maybe next year the policy rates will begin to normalize. The policy normalization would be a function of confidence in a self-sustaining recovery in economic growth.

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