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Though L&T Finance Holdings could not bag a banking licence in April 2014, it is keeping its banking dreams alive. To grow its retail lending book, the firm has stepped up lending to the small and medium enterprises (SME) sector. The Chairman and managing director Y M Deosthalee tells Neelasri Barman and Abhijit Lele the firm is geared to manage economic cycles more efficiently. Edited excerpts.
Do you see things changing for the better?
It’s a bit premature to comment about a turnaround, given the complexity of issues. But there is an undercurrent of sincerity and urgency from the new government, to signal and demonstrate change through concrete action.
Necessary steps in the nature of regulatory modifications have been initiated. In addition, the government is following a collaborative and unified approach of consulting sectoral players, experts and other stakeholders for ideas to ensure holistic decision-making and development.
Will FY16 be better for your company?
It will be better, but not substantially. It will be adequate from a directional point of view, new investments and a corporate perspective.
Thus, from a 5.3 per cent kind of GDP growth, it is not going to go to eight per cent in a short time frame. The government is working towards bringing sustainable long-term development.
We will see some change in 2016. Fortunately for us, L&T Financial Services, business is a diversified entity, not concentrated in niche areas. We have a balanced portfolio of consumer financing, equipment financing, corporate financing and infrastructure financing. This mix enables us to manage economic cycles more efficiently. We believe we have demonstrated this well even during the downturn. Going forward, if the economy improves, it is only going to be better for us. In the past couple of years, we have consciously reduced our exposure in certain areas such as construction equipment and commercial vehicles.
If these specific sectors look up, we might venture again.
Are you seeing any uptick in construction equipment and commercial vehicles?
The past few months have seen some uptick. December 2014 had been an exceptionally good month for commercial vehicles.
However, we cannot comment if that is a trend. We have grown in areas such as two-wheelers and cars, done well in housing and renewable energy for infrastructure finance.
Thus, having built capabilities across sectors, it is possible for us to make a choice and re-calibrate ourselves from time to time.
This should enable us to grow in a sustainable manner over a long period.
The company had planned to enter health insurance through a joint venture with Swiss Re, but that did not take off. Are you still interested in having a stand-alone health insurance company?
It is not a question of being a stand-alone health insurance company. We are already in health insurance, a very important growth area.
Further, it offers us considerable opportunities, given the increased insurance awareness and under-penetration in that sector.
Regarding partnerships, we would expect a credible partner focused on health insurance. Structuring through a joint venture or otherwise is not critical.
However, given our existing presence in general insurance, holding two general insurance licences is not a possibility, unless legislative changes are brought about facilitating establishment of a separate health insurance category.
Are you exploring any partnership for L&T General Insurance, since the earlier proposal for a merger with Future Generali was called off?
We are open to exploring partnerships. However, we have expectations in terms of partners’ credibility and governance standards. It has to be a meeting of minds of both the companies.
The objective has to be clear as to why they want to enter India.
We would thus, expect our proposed partner to be an international player which can enrich us with inputs in the areas of technology and underwriting expertise.
Disbursements in the wholesale business have tapered down in the FY12-FY14 period while in the retail and mid-market business, it remained flat in this period. When do you see growth returning?
We have changed the complexion of disbursements. Our book has displayed consistent growth, which is very important.
The areas that we wanted to focus on have grown vis-à-vis de-growth (decline) recorded in areas that we had not sought to focus. We believe if conditions improve, there will be growth in disbursements reflecting positively in the overall asset book of the retail and wholesale business.
What type of banking proposition are you interested in?
We are aspirational for a banking proposition and the way we have built our existing businesses provides us with that natural progression. We have deep presence in many states of India, particularly in the rural markets through financing agricultural equipment and the microfinance business. These would be our growth areas in the years to come. We have not thought of a business correspondent model at the moment. However, if somebody approaches us, we will evaluate it.
How much have you raised in FY15 so far?
We have predominantly raised Tier-II capital in proportion with the growth in business using private placement of bonds as the instrument. Our cost of raising funds, too, has been coming down in the past few months with a significant shift in the mix between bank funding and bond market. Therefore, if we consider the overall borrowing for the company, around 45 per cent are from banks and rest from the market. A few months ago, it was the reverse.
Recently, the Reserve Bank of India changed guidelines in the infrastructure finance space to help struggling projects. Now, new lenders can enter these areas. Is L&T Infrastructure Finance looking at these projects?
This is a new phenomenon and proposals are being examined. We might participate since we are lending through the consortium mechanism.
Your assets under management (AUM) in mutual funds business has crossed Rs 20,000 crore. Which is the next milestone?
Our first milestone is to be among the top 10 as far as equity AUM is concerned. We are almost there now with the growth in equity AUMs over the past few months. We had looked at the Fidelity Mutual Fund transaction because of the firm’s decent equity portfolio. Our ultimate goal is to be among the top five mutual funds in the next five years.
Are you open to more acquisitions in this space?
Our entire focus is on equity AUM. However, there are very few asset management companies in the medium range that have significant AUMs. The other important aspect is integration wherein matching of culture is very important. Fortunately for us, we have been able to integrate all our acquisitions successfully.
In one year, we made three acquisitions and all of them have been integrated. These include Fidelity Mutual Fund, Family Credit and a housing finance company. All these businesses are people-oriented. Integrating these businesses was a challenge, which was accomplished.
Will the new norms increase the bill for provisioning and limit the room for passing on the benefits of reduction in cost of funds to customers?
Provisioning does not imply asset quality deterioration. Customers will have to be oriented to get adjusted to this new normal. We have started focusing on collection on lower buckets such as 60-90 days and 90-120 days. We believe that over the next three years, we’ll be able to adjust to the situation.
Are you looking at any new areas of business?
We have a comprehensive portfolio. However, we’ll continue to grow in areas such as microfinance, two-wheelers, tractor financing, renewable energy and housing. We also would like to have a meaningful presence in SME lending and have initiated some steps in this direction. The SME business under the retail platform is currently undertaking efforts to strengthen the supply chain portfolio. The current focus is on the engineering sector where the concentration of SMEs is quite high.
You had big plans for private equity in infrastructure. The segment has seen a sluggish growth reflecting problems plaguing the sector. With the change of guard and policy initiatives, will the group now resume its plans?
The interest in India was lukewarm particularly in the infrastructure sector. We are in the process of deploying Rs 550 crore, which we had raised last year. The original plan was to raise a much larger quantum. If the situation improves, we can go back to the market again. Since we know the borrowers well, we can also explore the possibilities of having an equity stake.
The corporates, which have borrowed heavily would not form part of our prospective investment list. We generally infuse equity in smaller projects where our contribution is Rs 50-100 crore.
