L&T Finance to trim bank borrowing to whittle spike in cost of funds

Leading non-banking player L&T Finance expects its cost of funds to marginally rise by 12-14 basis points due to the recent RBI action related to unsecured credit, and also plans to reduce borrowings from banks.

L&T Finance has said it will cut its borrowings from banks and instead increase its loans from the markets through instruments such as NCDs in response to the Reserve Bank's hiking of the risk weightage on unsecured consumer loans.

"To contain the impact of this on margins, the company will increase its borrowings from markets through debt securities (NCDs), Commercial Papers (CPs) and even external commercial borrowings, L&T Finance Managing Director and Chief Executive Dinanath Dubhashi said.

Further, it will reduce borrowing from banks, which is around 33 per cent of its total loans, Dubhashi said on the sidelines of the national banking summit Fibac here.

"We see the cost of funds rising 12-14 bps following the RBI action and to tide over the impact of the same on margins, we will be gradually diversifying our market borrowings and reduce the reliance on banks," Dubhashi, who retire in January, said on Wednesday.

But he was quick to add that while the marginal spike in the cost of funds will be over the next one year, the impact on Net Interest Margins (NIM) will be lower as the increase will be selectively passed on to unsecured consumer lending borrowers.

"We'll bring down our bank borrowings only gradually as our relationships with banks are long-term and not fair weather friends that today we move out of banks and tomorrow again we come back to them," Dubhashi said.

Its unsecured consumer loans account for about Rs 6,500 crore, or 8 per cent of the total loan portfolio, Dubhashi said, adding that all of this is above the Rs 50,000 ticket size. Retail loan book rose 33 per cent to Rs 69,417 crore from Rs 52,040 crore in the September quarter.

Currently, bank borrowing accounts for 32-33 per cent of the funding profile and its NIM stood at 12.1 per cent in the July-September period, he said.

The company's capital adequacy ratio stood at a comfortable 25.16 per cent, of which Tier-1 capital was 22.99 per cent, ensuring it does not need to raise equity capital for another 4-5 years, he said.

Credit bureaus and some lenders have flagged increasing delinquencies in small-ticket unsecured loans, especially those below Rs 50,000.

According to a recent Cibil report, gross Non-Performing Assets (NPAs) in such loans are around 8.5 per cent, while the same on those above Rs 50,000 are about 2.6 per cent.

Citing reports, Dubhashi said the overall unsecured loans are around Rs 11 lakh crore, of which loans below Rs 50,000 are only about Rs 24,000 crore.

In the September quarter, the company reported a 46 per cent rise in net income to Rs 595 crore, as it achieved highest-ever quarterly retail disbursements of Rs 13,499 crore, a growth of 32 per cent on-year.

Its retail portfolio mix stands at 88 per cent of the total loan book, even as it continued to reduce the wholesale book by 76 percent on-year or by Rs 28,740 crore.