There Is A Dearth Of Good Quality Borrowers
G.C Garg, managing director, speaks to Urmik Chhaya and Ravi Anantha-narayanan on the recent developments in the sector and his plans for the future.
Q: So far, how has the performance of Lloyds Finance in this year been?
A: Well, considering the industry performance as a whole, among the top 40 companies, we are among the six companies to have recorded positive growth. The main reason why we have not been hurt by the market is that we have not invested heavily in the stock market and in bought-out deals. Our investment in shares is only Rs 5 crore, and moreover we follow very conservative accounting policies.
Q: With a recession on the cards, how is this likely to affect your operations?
A: If the issue is only of recession, we can cope with it. After all, the amount of funds that we deal in is relatively small. The more taxing problem is to find good quality lenders. The biggest lesson we learnt in 1995-96 was from the liquidity crunch faced by corporates, which led to overdues.
Our default rate for corporates is less than 2 per cent and for individuals it is less than 0.5 per cent. This year is also a continuing saga of what happened last year. What is important is to get good borrowers. We do not get triple-A clients who go to banks where cheaper funds are available. The rest come to us. Also, we may not possess the resources to meet their entire requirements.
Earlier, when we were into 100 per cent (depreciation) assets leasing, I was getting better yields as the cost of funds was only 8 per cent and had clients like Shanti Gears, ABB, Glaxo etc. This business has come down. Since fresh investment by corporates is not there, the demand for asset financing has declined. We have a problem of finding good borrowers.
As far as Lloyds Finance is concerned, we have no paucity of funds. The issue got us Rs 190 crore and my fixed deposits inflow is good. Today, uncertainty over avenues to deploy the funds may even force us from raising more funds. Our principle for lending is very simple, all our loans should be repaid on time. The prudential accounting norms are creating more problems, as earlier some companies managed their overdues for centuries. Today, if a loan is 2 instalments late, one has to provide for it.
Q: What are your views on the new takeover code?
A: The new code addresses most of the earlier problems and should see companies which have an inefficient management but sound businesses come under the microscope. These companies will make ideal targets, and we also have plans of entering the M&A business in a big way. There still exists the problem of financing takeovers as banks do not provide lines of credit. We will be setting aside a portion of our funds for this purpose.
Q: What trend do you foresee in deposit rates?
A: Some companies have announced very high interest rates on their fixed deposit schemes. It will be difficult for these companies to sustain their quality of lending at these rates to protect their spreads. We have not decided on the fresh rates and will only do so after the announcement of the credit policy. The idea is to avoid increasing rates at first and subsequently lower them, as this will go down well with depositors.
Q: What are your expectations from the credit policy?
A: The main problem that the industry faces today is the very high cost of credit which needs to be brought down. On one hand, inflation rates are around 5 per cent while real interest rates are at around 14-15 per cent. I would expect that CRR requirements should be slashed by a minimum of 2 per cent, releasing about Rs 10,000 crore into the system.
Q: Do you see the debt markets sustaining the present boom?
A: People are talking about a booming debt market, but without liquidity in the form of an active secondary market it remains to be seen how long this will last. The Government allowed the foreign investors to invest 100 per cent in the debt market, and pat came their reply to develop a secondary market first. The response to the DFIs issues was encouraging, but the response to the recent mega-corporate issues has not been that encouraging.
Q: Mutual Funds have lost the confidence of the investors...
A: The change of events have led to some investments of these mutual funds becoming dud. Some of the large mutual funds committed blunders picking shares like Reliance at a price of around Rs 400. These funds are also handicapped by the inefficient post-trade systems delaying registration and payment. Also, there are a fewer number of instruments than those available abroad like endowments, hedge transactions etc.
Q: Would the depository solve some of these problems?
A: It is a good idea that should have been implemented fifty years ago and only now has the act been passed. The only problem is that of multiple depositories as there should only be a central
depository. Even in developed countries,
experiments with multiple depositories have failed.
The other question is, in India, how many investors will make use of depositories? When operating in the bond markets in Singapore for the SBI, I never saw a single certificate. There were two depositories which we used to deal with. The charge was just US $ 500 per year and I would get a quarterly certificate indicating my positions in various companies.
Q: Will the passing on of the mantle of the vetting of issues to merchant bankers help?
A: SEBI is just trying to pass on its responsibility to the merchant bankers. Issuers, merchant bankers and the broking community should be disciplined to bring only credible issues into the market. There should be a penalty imposed on defaulting underwriters defaulters which is not done. Disclosures have become a mockery. One of the NBFCs was forced by SEBI to mention the incident of price rigging in its previous issue and subsequently the issue was oversubscribed by 14 times.
More importantly, accountability should be clear and the investor should be properly educated.
Why should financial analysts in the media not be registered or licensed, lending credibility to their analyses and prevent misuse? At the same time, they should be given access to complete information.
Q: Do you see the need for companies to come out with quarterly results with quantitative information and consolidation of balance sheets.
A: Absolutely. Today, 99 per cent of the balance sheets are cooked up. Exceptions are those of MNCs and their Indian subsidiaries. Why cannot the inventory be valued by the auditors themselves or loans given maturity-wise etc. Several measures need to be taken to make these reports more transparent.
Q: Coming to the future, what are your plans?
A: We will continue in our existing areas, the lone exception being the entry into operating leases. We have realised that the quality of assets in the case of leasing has gone down after the changes in tax laws and after the industry has discovered the financing of fake assets. With infrastructure being a thrust sector, we are thinking of setting up a power plant on a BOT or BOOT basis and port facilities too.
We are at present, looking at two or three proposals, and if these materialise these will result in an asset creation of about Rs 250 to Rs 300 crore which will take care of the depreciation for couple of years, and after running these for 6-7 years we will transfer them.
After the experience with corporate borrowers and their liquidity problems, we are increasing our exposure to individuals. Hence, in car finance, against Rs 210 crore disbursements last year we are planning to do about Rs 500 crore this year. The other diversification is insurance, but we plan to get into only general insurance. We expect to put our growing retail network to the best use.