Large capital market players such as Reliance Capital, Edelweiss, India Infoline, Religare and India Bulls have diversified and are now lending to retail, small and large companies to stabilise earning and offset profitability pressures.
The loan books of these broking firms are expected to grow 24 per cent and cross the Rs 31,000-crore mark by March 2013, according to Crisil.
In 2011-12, profits from lending are expected to exceed those from the capital market business. The lending book is projected to grow at a compounded annual growth rate of 30 per cent over the next two years. In tandem, the profit contribution from the lending business may triple to more than 60 per cent in 2012-13, from 20 per cent in 2009-10.
In an analysis of nine financial groups comprising 34 large capital market players, Crisil said the profit from fee-based businesses may be lower in the next couple of years, compared to the levels seen in 2008-09.
These financial groups initially diversified into capital market-related, fee-based activities like distribution and wealth management, loan against shares, margin financing and promoter funding (capital market lending). However, later, these shifted to retail lending businesses like gold loans, home loans and loans against property. A need to mitigate the effect of weak equity trading and a slowdown in investment banking prompted the diversification. Some of these companies also extend credit to companies and small and medium enterprises.
Their aggregate lending book (capital market lending and retail and other lending) increased to Rs 18,600 crore as on March 31 from Rs 3,700 two years ago. Retail lending also rose to 52 per cent of advances in 2011 from 32 per cent in 2009.
The income composition of these entities has also changed gradually. Earlier, a substantial portion of revenues was linked to broking and investment banking. The sustained downturn in these led to a decline in their proportions. With growth in the lending book, its share in overall profits is also expected to increase. The profit from the lending business was 26 per cent in 2010-11, up from eight per cent in 2007-08. This may increase to 62 per cent by March 31, 2013. As a result, the proportion of income linked to the vagaries of the capital markets would be relatively lower, adding stability to the earnings profile of these entities, Crisil said.
