Lending rates almost peaked, reduction to follow over next 1 year: Bhutada

Bhatuda says that as far as passing of the reduction of rates to customers is concerned, the same will follow the interest rate movement across the industry

Poonawalla Fincorp posted robust credit growth in the third quarter of 2023-24 (FY24). Abhay Bhutada, managing director of the consumer banking company, tells Abhijit Lele in an email interview that the interest rate cycle is at a turning point with prospects for reduction in lending rates over next one-year period. Edited excerpts:

What has contributed to high growth in loans and interest margins in the October-December quarter?
 

Our assets under management (AUM) grew 58 per cent year-on-year (Y-o-Y) to Rs 21,946 crore as on December 31. The growth has come from the gain in market share of existing products and introduction of new products.

On an incremental disbursement basis, we have 4-5 per cent overall market share in pre-owned car, business loans, and loan against property products, and much larger if we were to look at only at the top 100 locations where we operate. This is a significant number and aligned to our philosophy of going deep in markets, rather than spreading ourselves thin.

What is the guidance on loan growth and interest margins for FY24 and FY25? Are these margins sustainable, given the increase in cost of funds? Is there a rethink on medium-term targets?
 

Going forward, we are confident of achieving our stated guidance of 35-40 per cent Y-oY growth in AUM. Our net interest margins (NIMs) stood at 11.02 per cent, which is a tad higher than the guidance of 10 per cent in steady state. We focus on a better credit risk segment through credit-tested high-bureau score customers where the risk-based pricing needs to commensurate with the same. Our play is not to be driven only by spreads but by the risk-adjusted returns that get reflected in return on assets numbers.

Do you expect a reduction in lending rates for customers in the coming few months?
 

We have observed tight liquidity and hardening of rates over the past few quarters. Even in this kind of a market, we have been able to optimise our cost of borrowing through an effective liability management strategy. Our cost of borrowing stood at 7.99 per cent for the quarter ended December 2023.

As we look at the interest rate cycle, our view is that we are almost at the peak of interest rates cycles and the stabilisation of interest rates followed by reduction is going to happen over the next year. As far as passing of the reduction of rates to customers is concerned, the same will follow the interest rate movement across the industry.

The RBI has flagged the sharp rise in the unsecured loan book of non-banking finance companies (NBFCs). What is the company’s strategy in this backdrop?

We think the RBI has shown caution around irresponsible unsecured lending and, specifically, in certain ticket sizes so as to drive rational and prudent practices. In this backdrop, the risk weights on these asset classes were increased. We have a very well diversified product base and don’t have any large concentrations.

We have a healthy portfolio mix where secured constitutes 52 per cent of our assets. In a steady state, we would like to maintain a right balance of 50-50 for secured and unsecured. Also within the unsecured side, we have a good balance of MSME unsecured, which means consumer unsecured loans do not form the largest component of our book. To clarify, we do not operate in less than Rs 5,000 loan segments.

What is the stance on deepening penetration in the country through digital and physical infrastructure?
 

We are focused on the top 100 markets and increasing our market share in these markets as they provide a huge opportunity for us to grow and achieve stated guidance of 35-40 per cent AUM growth. Our strategy is to go for deeper penetration rather than spread wide and thin at this scale. This will help us gain market share across product lines as these markets contribute 70 per cent of the overall credit in the country. By going deep, we further improve on our operational efficiencies across distribution, operations, and collections.