Diversified financial services model is very similar to a bank model: Rashesh Shah

Shah says DFS model can succeed despite the presence of banks

Edelweiss Financial Services, which was one of the 25 applicants for a new banking licence last year, is aiming to compete with banks through its diversified financial services (DFS) model.
 

“Diversified financial services model is very similar to a bank model. In this also, we are seeing enough growth. If you do the same model in a bank structure, it is easier from a cost and efforts point of view. In a non-bank structure, it is a bit harder,” said Rashesh Shah, chairman and CEO of the Edelweiss Group. 

According to Shah, diversified financial services structure should ideally be a bank structure. But he believes that it can be done even without a bank structure.

Last year, the Reserve Bank of India (RBI) had granted banking licences to IDFC and Bandhan.

“We have tried to build a DFS model. We are hoping that the way we talk about all NBFCs, we will also talk about DFSs as another category of financial companies,” said Shah. 

Shah, who holds 28% stake in Edelweiss, believes that there is a lot of scope to cater through the DFS model despite the presence of banks. 

“Competition is not a big challenge because the growth is so much. Leaving aside the government banks, there are only 7-8 private sector banks of that scale. I think a country like India needs about 40 banks for the size and scale that we have. There is a lot of demand for financial services. Even outside banks there are not more than 8-10 financial services companies,” he said.

At the end of the current financial year, Shah expects Edelweiss Financial Services' balance sheet to be around Rs 25,000 crore. It currently stands at an approximate Rs 23,000 crore. Out of this, about Rs 11,000 crore is the credit business, which includes corporate, retail, housing finance and commodity financing put together. 

“By our estimates the credit demand is close to $200 billion a year in India. But the actual credit that is getting supplied is close $140-150 billion by banks and NBFCs put together. There is already a gap. The problem is not the demand. The problem is how do you cater to that demand in a cost effective way so that you are profitable. Here, a diversified model helps to bring down the cost because you can cross sell and have the common client,” said Shah.

The five business groups of Edelweiss are credit, commodities, financial markets, asset management and life insurance. Currently, 50% of the balance sheet is credit and going forward 75-80% of the balance sheet will become credit oriented, says Shah. 

“As we are growing our credit business, a stronger balance sheet having diversified sources of funding will become a big advantage,” said Shah.

Edelweiss Financial Services' life insurance business was started in 2011. “Life insurance takes 7-8 years to break-even. By FY18 we expect to break even,” Shah said. Edelweiss has tied-up with Catholic Syrian Bank as its bancassurance partner. 

Its average assets under management (AUM) in the mutual funds business stood at Rs 580 crore in the third quarter (September-December) of the current fiscal. 

“We want to get to Rs 1,000 crore AUM in mutual funds as fast as possible. That is generally considered a good stepping stone in mutual funds business. But we do not have a clear target as in by when do we plan to achieve it as it depends on the markets as well as environment. The focus area will be equity oriented mutual fund,” explains Shah.

Shah is also open to acquisitions in various areas provided they are at a reasonable price. Besides that it shall also depend upon quality of the management team, customers and strength of the business model.