RBI must seriously consider deposit licences for NBFCs: Ajay Piramal

"By the end of September, we will have approximately Rs 6000 crore of cash in the balancesheet, which is much more than the LCR requirements"

Piramal Enterprises (PEL) recently announced a buyback of 14 million shares worth Rs 1,750 crore. The buyback price is Rs 1,250 per share, representing a 16 per cent premium to the market price on the date of the announcement. AJAY PIRAMAL, chairman of Piramal Group, discusses a range of topics, from the rationale behind the buyback to the group’s banking aspirations, in an exclusive interview with Manojit Saha for the Business Standard Banking Show. Edited excerpts:

What was the reason for the share buyback?
 

We had invested in Shriram Group, and a portion of that investment was monetised at the end of June, yielding Rs 4,820 crore. This brings our networth in PEL to Rs 31,000 crore.

Our debt-to-equity ratio stands at only 1.2. Consequently, we are over-equitised from the perspective of a financial services company. Moreover, in terms of networth among private non-banking financial services company (NBFC), we rank as the third largest. Even if we were to double our book within the next four years, we would still possess ample equity.

We also wanted to reward our shareholders. The stock has taken a beating in recent years, so we aimed to give back to our shareholders. Importantly, this buyback is designed to reward minority shareholders, as promoters are not participating.

I wish to emphasise regarding promoters that during recent rights issues — after 2018 and during the pandemic — we raised money through rights issues, with promoters investing in them. However, they are not partaking in this buyback. Therefore, in a way, we have retained around Rs 3,500 crore in terms of equity in the company.

How does the cash position of PEL change after the buyback?
 

With tax, the outflow will be about Rs 2,100 crore. By the end of September, our balance sheet will reflect approximately Rs 6,000 crore in cash, well exceeding liquidity coverage ratio requirements.

Your vision for PEL is to become a world-class retail lending NBFC, doubling the loan book in four years. How do you plan to achieve medium-term scalability? Are acquisitions a possibility?
 

The projected doubling of our loan book is organic. We will consider acquisitions when strategic and value-aligned opportunities arise. Our track record entails acquisitions, and we will continue seeking advantageous openings.

We are a blend of technology and people. Specifically for retail, our strategy emphasises high-touch, high-tech approaches.

In financial services, asset management and general insurance are the missing pieces. Do you plan to enter these sectors, possibly through an inorganic route?
 

Regarding general insurance, we participated in the bid for Reliance Capital during the Insolvency and Bankruptcy Code process. However, our bid was lower than others. As suitable opportunities arise that align with our strategy, we will explore them. As for asset management, it’s not part of our current plans.

With your focus on organic growth and potential acquisitions, what areas are of interest for acquisitions? Microfinance, gold loans, etc?
 

Our primary focus for acquisitions lies within the retail lending domain. Whether it’s microfinance or a gold loan opportunity, we will consider it if fits into our overarching strategy.

Our investments encompass field force and technology. Our current high-touch model involves about 13,500 field personnel.

Your group had plans to enter the banking space. The Reserve Bank of India (RBI) norms do not allow any entity with over 40 per cent revenue from a non-financial activity to be eligible for commercial banking. Are you eligible for a banking licence?

I know PEL is eligible on this criterion because our total income now is only from financial services.

Do you see PEL venturing into the banking space in the future?
 

As for entering the banking sector, that’s subject to RBI considerations. We are focusing on compliance and controls, going beyond the requirements set for upper-layer NBFCs.

The RBI is asking NBFCs to reduce dependence on bank finance. One of the reasons cited for HDFC getting merged into HDFC Bank is that the regulatory arbitrage between banks and NBFCs is narrowing.
 

Regulatory arbitrage is reduced on a daily basis by the RBI. The statement indicates excessive reliance by NBFCs on banks. I urge the RBI to explore ways to diversify NBFC funding sources beyond banks.

NBFCs serve vital roles in underserved areas. Deposit-taking licences are essential, and the RBI should seriously evaluate this. The RBI’s stance has also become more conservative  after incidents involving Dewan Housing Finance and Punjab & Maharashtra Co-operative Bank.

How does the HDFC-HDFC Bank merger prove beneficial to NBFCs?
 

With this merger, banks’ lending limits to NBFCs previously tied to HDFC Ltd will be freed up. Consequently, NBFCs stand to receive a portion of that funding. Additionally, the merger could open up new opportunities for NBFCs in wholesale lending, where HDFC Ltd had a strong presence.