Repco Home Finance to look at low-cost funding

Housing finance firm Repco Home Finance Ltd (RHFL), promoted by Chennai-based Repco Bank, is planning to explore access to low-cost funds to maintain its capital adequacy ratio and strengthen its balance sheet. The housing finance company, which focuses on tier II and tier III cities, also has future strategy to strengthen its presence in the four southern states it is present in and expand operations to the other states, said company officials.

At present, almost 45 per cent of the funding is low-cost refinancing from National Housing Bank (NHB), which is primarily for the prime sector lending mainly in the rural housing sector, while around 44 per cent of the funding is from around 10 banks and the rest 11 per cent is from the promoter firm, Repco Bank, which is a repatriates' co-operative finance and development bank under the Union government.

"We would like to access other types of low cost funds," said R Varadarajan, managing director, RHFL. The options like non-convertible debentures (NCDs) and external commercial borrowings (ECBs) available with the company. While the low-cost funding from NHB for the tier II, III housing sector, which is at 7.5-8 per cent, the plans are to diversify the resources of funding to reduce the cost of borrowing in other housing finance sectors where the interest is higher, he added.

The red herring prospectus of the company says, it intends to explore the option of raising funds through rated debt instruments.

"We would like to diversify our sources of funding and tap into alternative sources such as fixed deposits, multi-lateral agencies and rated long term and short term listed debt instruments.

We believe this will enable us to reduce the risk of lender concentration and optimise our funding costs, which in turn enables us to maintain our NIM (net interest margin)," it said.

According to an IPO note from Angel Broking, the funding that RHFL gets from banks largely qualifies as priority sector lending (PSL) for the banks (loans by banks to NBFCs, which are on-lent as home loans less than Rs 10 lakh qualify as PSL).

"This makes it attractive for banks to lend to RHFL at a reasonable cost (about 100bps above base rate), as against alternatives such as parking funds under RIDF at extremely low yields, to meet their PSL targets. Relatively low-cost NHB and bank funding enables it to maintain healthy margins and return ratios (NIMs at 3.8 per cent and RoE at 22.2 per cent in 1HFY2013, calculated on an annualised basis)," says the report.

The company is also keen on maintaining low operating cost by focusing on tier II, III cities where the costs are lesser, sourcing the customer directly through loan camps avaoiding middlemen and a centralised sanction method.

The company is engaged in financing to retail home loans and loans against property. As of December 31, 2012, it had 73 branches and 19 satellite centres located in Tamil Nadu, Karnataka, Andhra Pradesh, Kerala, Maharashtra, Odisha, West Bengal, Gujarat and the Union Territory of Puducherry. Around 77 of its branches and satellite centres were located in tier II and tier III cities and at the peripheries of tier I cities, based on the company's belief that they are underserved by the larger Home Finance Companies and Banks.

In December 2007, the company raised Rs Rs 75.94 crore by way of an issue of equity shares and CCPs to Carlyle, an affiliate of the global alternative asset manager Carlyle Group. With this, Carlyle had 49.9 per cent stake in the company, which later it diluted by transferrin 26.2 per cent of the total equity shares to Creador 1 LLC, WCP Holdings III and some other entities. Carlyle currently holds around 23.75 per cent stake in the company, according to the reports.

Almost 52.71 per cent of the company's loan portfolio is of non-salaried borrowers as at September 30, 2012, while the gross NPA and net NPA as at September 30, 2012 was 2.12 per cent and 1.60 per cent respectively compared to 1.76 per cent 1.38 per cent respectively as at September 30, 2011. The company says that its risk management systems and processes have resulted in maintaining good asset quality.

The company has opened an IPO on Wednesday, for issuance of 15,720,262 equity shares of face value of Rs 10 each for cash at a price band fixed from Rs 165 to Rs 172 per equity shares, at an issue size of Rs 259.3 to Rs 270.3 crore.