In the wake of the recent problems that hit non-banking financial companies and housing-finance companies, RAKESH SINGH, chief executive officer at Aditya Birla Finance, tells Advait Rao Palepu interest rates are likely to rise. Edited excerpts:
What is the state of affairs for NBFCs, given the increased cost of borrowing in a higher interest rate cycle?
The past couple of months have been quite volatile, from the point of view of NBFCs and HFCs. A lot of questions have been raised after the IL&FS (default) event, especially on fund raising ability and how their asset-liability management (ALM) is balanced. The cost of funds was going up because of global and Indian macros, higher crude oil prices and rupee depreciation, which in turn had an impact on the cost of liquidity.
Things have improved and it does not look like interest rates will go up further. A slowdown in NBFC/HFC lending will have an impact on the wider economy. We should not waste a crisis but learn from it, strengthen our processes to be better prepared the next time around. There is a need to re-look at the entire industry and focus on liabilities as much as we focus on assets. We need to think about having far more balanced ALMs.
Over the past month, commercial paper (CP) issuance, despite higher yields, by financial companies has continued to remain robust, while some NBFCs/HFCs are making pre-payments. Banks are continuing to lend to NBFCs as much as before and are willing to buy their loan portfolios. How do you view the liquidity situation in this light?
For the past couple of years, we had a benign liquidity situation. Post demonetisation, a lot of money came into the banking sector and mutual funds. Credit demand came from HFCs and NBFCs but post the IL&FS event, liquidity got squeezed.
The liquidity situation is much better than what it was, especially on the CP side. However, long-term liabilities are still a challenge. What I believe will happen is that liquidity will flow to the better managed and better governed NBFCs. I see consolidation happening with the top eight to 10 players. There will be differentiation in the market between good, well-managed companies and the average ones.
Any changes in your lending practices to corporates?
In our structured finance business, in addition to looking at companies’ finances, we are trying to take a more holistic approach. We’re trying to capture the cash flows of the company and of the promoter as an individual; we look at his/her dividend income or net worth through securities or real estate investments. We have invested in pro-active risk management solutions, with strict loan monitoring practices and a central risk monitoring team. If there is any news in a company to which we have lent, positive or negative, it will be immediately reported and acted upon. Further, given the environment and macro indicators, we do stress-testing on our portfolios regularly, to be better prepared.
Loan disbursals this quarter have slowed as NBFCs and HFCs are looking to strengthen their cash inflow and liquidity positions. How was the past quarter for you?
Everyone wanted to take stock of the situation and conserve liquidity and capital. There were players which slowed on disbursements but the larger ones continued with their lending. We continued with disbursement to retail (individuals) and small and medium enterprise (SME) customers. Our growth in the consumer, retail and SME segment is at a very healthy rate of 44 per cent, year on year. As most NBFCs and HFCs are going to be focused on the retail and SME segment, liquidity needs to improve for the sector. Else, it will have an impact on consumption and the overall economy.
What is the outlook on lending to corporates and SMEs, given that both banks and NBFCs have said they will target better quality customers?
Our emphasis in terms of lending is on the cash flows and repayment capabilities of a customer. And, we do not get into greenfield (erecting from scratch) projects where the risks are high. Instead, we look at projects where there are established cash flows and revenues. Depending on the needs of our SME customers, we provide term loans and working capital loans.
Our gross non-performing assets, also reported in the public domain, are at less than one per cent (of advances), reflecting our prudent practice in terms of loan underwriting, compliance and governance. Clearly, our focus is to look at both the companies’ working capital needs and the type of investments they want to make in assets like plant and machinery.