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For many brokerage firms, business models are changing, as credit now comprises a major part of the business. Rashesh Shah, chairman and chief executive of the Edelweiss group, talks to Clifford Alvares about the changing profile of broking. Edited excerpts:
Edelweiss started as a brokerage business. But now, it is more about financing. What led to the shift in strategy?
Through the years, we have seen in any business category, especially in the financial segment, there might be volatility. Capital markets have seen brokerage rates fall. Diversification might lead to stability; also, it is counter-cyclical. When other segments fare well, they provide resources for the segments that go through a rough patch. Segments can go through a cycle in that sense.
Are you seeing any stress or a slowdown in the credit business?
Credit is a large market and is growing 18-20 per cent a year. We have been growing about 25 per cent a year for the last few years; now, it accounts for about 65 per cent of our pre-tax profits. Credit is a more sustainable business. Our NPAs (non-performing assets) are fairly low, as we are careful with credit quality. The way the economy is going, there will be some NPAs, albeit small ones. Our loan book stands at about Rs 8,000 crore and we are growing comfortably. It is a big part of our financial services business.
What are the margins in this business?
Our NIMs (net interest margins) stand at an average of five per cent. In our retail business, we have something called a small-ticket housing loan, through which we are able to get 13.5-14 per cent interest on small-ticket loans. We have a small and medium enterprises secured business against property, which is doing well and the spread is good. There remain empty spaces available in the economy.
Brokerage rates are falling and mid-sized brokerages are consolidating businesses. How do you see the asset side of the business growing?
We were one of the early ones; we acquired some small brokerages. For the first time, we are seeing an increase in brokerage rates. For us, brokerage is a good segment. Investment banking is not doing so well, as the economy is going through a rough patch. Our asset management business is well placed, as we have about Rs 3,500 crore of assets under management.
But investors seem to be sceptical about the business model.
We have re-engineered the business model and there’s more credit now. We are getting into segments such as insurance. But as we do this, profitability takes a hit. Investors look at profitability and sustainability. A lot of businesses are only two-three-years old. Whenever there’s re-engineering, it takes three-four years for investors to regain their confidence.
The insurance segment has seen a lot of change. How has it impacted your business?
We have completed about two years. We had entered the space when the segment was already restructured. We are keeping our costs low, as the segment is growing slowly. We are still building the base; for us, it’s a 10-15-year business. Our total capital base is about Rs 600 crore, but we have spent only Rs 140-150 crore. We have capitalised well, but we are not spending. We have a good base and our premium collection is about Rs 100 crore. We are planning to increase that to about Rs 1,000 crore a year.
How do view the Reserve Bank of India (RBI)’s new policy on early detection and resolution of stress assets?
RBI is addressing the bad loan issue well. Overall, the central bank should encourage banks to sell these assets, as there has to be a market. This will introduce efficiency in resolving the issue. Banks should be able to call for an auction process and sell the assets about to turn bad. If RBI says banks can sell the loans, there will be a lot more assets to buy. For us, asset resolution is a fairly big focus area. Early warnings signs are good. If one takes too long, the ability to revive an asset is reduced.
Edelweiss started as a brokerage business. But now, it is more about financing. What led to the shift in strategy?
Through the years, we have seen in any business category, especially in the financial segment, there might be volatility. Capital markets have seen brokerage rates fall. Diversification might lead to stability; also, it is counter-cyclical. When other segments fare well, they provide resources for the segments that go through a rough patch. Segments can go through a cycle in that sense.
Are you seeing any stress or a slowdown in the credit business?
Credit is a large market and is growing 18-20 per cent a year. We have been growing about 25 per cent a year for the last few years; now, it accounts for about 65 per cent of our pre-tax profits. Credit is a more sustainable business. Our NPAs (non-performing assets) are fairly low, as we are careful with credit quality. The way the economy is going, there will be some NPAs, albeit small ones. Our loan book stands at about Rs 8,000 crore and we are growing comfortably. It is a big part of our financial services business.
What are the margins in this business?
Our NIMs (net interest margins) stand at an average of five per cent. In our retail business, we have something called a small-ticket housing loan, through which we are able to get 13.5-14 per cent interest on small-ticket loans. We have a small and medium enterprises secured business against property, which is doing well and the spread is good. There remain empty spaces available in the economy.
Brokerage rates are falling and mid-sized brokerages are consolidating businesses. How do you see the asset side of the business growing?
We were one of the early ones; we acquired some small brokerages. For the first time, we are seeing an increase in brokerage rates. For us, brokerage is a good segment. Investment banking is not doing so well, as the economy is going through a rough patch. Our asset management business is well placed, as we have about Rs 3,500 crore of assets under management.
But investors seem to be sceptical about the business model.
We have re-engineered the business model and there’s more credit now. We are getting into segments such as insurance. But as we do this, profitability takes a hit. Investors look at profitability and sustainability. A lot of businesses are only two-three-years old. Whenever there’s re-engineering, it takes three-four years for investors to regain their confidence.
The insurance segment has seen a lot of change. How has it impacted your business?
We have completed about two years. We had entered the space when the segment was already restructured. We are keeping our costs low, as the segment is growing slowly. We are still building the base; for us, it’s a 10-15-year business. Our total capital base is about Rs 600 crore, but we have spent only Rs 140-150 crore. We have capitalised well, but we are not spending. We have a good base and our premium collection is about Rs 100 crore. We are planning to increase that to about Rs 1,000 crore a year.
How do view the Reserve Bank of India (RBI)’s new policy on early detection and resolution of stress assets?
RBI is addressing the bad loan issue well. Overall, the central bank should encourage banks to sell these assets, as there has to be a market. This will introduce efficiency in resolving the issue. Banks should be able to call for an auction process and sell the assets about to turn bad. If RBI says banks can sell the loans, there will be a lot more assets to buy. For us, asset resolution is a fairly big focus area. Early warnings signs are good. If one takes too long, the ability to revive an asset is reduced.
