Rural markets are large but will be built over a long period: N Sivaraman

Interview with President & whole-time director, L&T Finance Holdings

L&T Finance Holdings, the financial services arm of Larsen & Toubro, the $14-billion engineering and construction conglomerate, has seen rapid growth in the past five years, with its loan-book size growing to Rs 34,337 crore. The non-banking financial company (NBFC) is keen to convert to a bank and is one of the 26 that have applied to the Reserve Bank of India (RBI) for licences. N Sivaraman, president and whole-time director, spoke to Abhineet Kumar about the prevailing challenges for the company and its preparedness for a banking foray. Edited excerpts:

RBI’s recent measures to check the  rupee ‘s depreciation have impacted the cost of borrowing for NBFCs. How are they impacting your margins?

Our margins have remained stable or have been improving over the past four quarters. In the current quarter, RBI measures have created a level of volatility in shorter-range interest rates and marginal impact on the longer-term rates. This is going to have some impact on the margin. RBI has said this is a temporary measure but it is more than three weeks now. People were expecting this to be rolled back in three weeks. It really creates a skew. The yield curve has become inverted once again and the credit curve has become inverted. Government securities are quoting a far higher price than even corporate bonds of similar tenures. This is curious. The level of excess holding with banks is getting liquidated to generate funds for lending and other needs.

It has become a curious situation which has its own risk. In the way you plan financing, in the way you make your investments in the short term... all these are creating chaos in the system. This needs to be corrected. So, the consistent improvement we have had over the past four to five quarters may be a little difficult to achieve in this quarter and it might remain flat.

In your view what are the advantages that L&T Finance Holdings has over other applicants for the banking license?

I do not really want to contrast with others. Each one has got their respective merit. For us, starting with the share holding, it is very much diversified at the parent company level. We have loan books spread over various segments, so it would help to start with fair product mix and good customer mix from day one.

Some large NBFCs (Mahindra Finance) decided not to apply for banking license citing regulatory requirements of mandatory 23% statutory liquidity ratio (SLR) and 4% cash reserve ratio (CRR) since inception. What could be the possible challenges for you to convert the NBFC into a bank?

There are challenges for which we will have to make some investments. There will be some investments that we need to make in building the network, some of the existing branches may not be fit to be used as bank because of their location. There will also be investments in technology platform for meeting the guidelines for a banking license and also to reach customers more efficiently. If I have a Rs 35,000 crore loan book by the time the bank is ready, then these investments will not be such a big distraction.

Second piece of the guidelines in the regards is to meet the requirement of priority sector lending. As an NBFC we are by choice in priority sector. Today we see priority sector more as an opportunity than as a burden. If you take the weaker section loan it is an opportunity, so is agriculture sector. Last piece is around CRR and SLR. We have an existing balance sheet and existing liabilities. To meet with CRR and SLR obligations on our existing liability base means to generate new set of liabilities to meet with the CRR and SLR obligations.

If I look at the current situation of the cost of deposit versus the yield available on the CRR & SLR there is a negative carry. It could rise anywhere between 40 to 50 basis points or 60 to 70 basis points. It is going to impact our way but it is not going to be very dramatic. Our view is that it is a very useful investment that we need to make.  

What challenges do you see in terms of meeting the financial inclusion guidelines of the RBI?

We have a micro finance business. We finance farmers, small commercial vehicle owners. That will help fulfill the financial inclusion goals. So it will be our objective to take the financial inclusion forward by expanding the geography we cover and also the products that we are able to offer. In addition to bank accounts we will also offer credit products and investment products. This is a broad plan that we have for meeting and enhancing the level of financial inclusion.

There are microfinance companies that have applied for bank licences. What advantages can an NBFC like you offer in meeting RBI’s financial-inclusion guidelines?

Existing microfinance companies will have an advantage. But a bank is not about a single-product window. A bank is about a variety of products and a variety of customers to manage risks very well. And financial inclusion is not the only business. It is not about lending to the weaker section alone. It has to be seen in an overall sense.

RBI says you should open at least 25 per cent of your branches in unbanked areas. This we can do. They also appreciate that I cannot, overnight, build 30 per cent of my balance sheet from financial inclusion. Rural markets are large but are going to be built over a long period, not in the first three, five or 10 years. I can build a Rs 10,000-crore loan book with 100 borrowers of Rs 100 crore each. With Rs 10,000 each per borrower to reach a Rs 1,000 crore loan book, I have to get one million borrowers. You have to imagine the scale and what one needs to do. It has to be built painstakingly and has to be sustainable..