Rakesh Singh, Chief Executive Officer at Aditya Birla Finance tells Advait Rao Palepu that if the liquidity situation does not improve in the next half of this fiscal, there will be an impact on consumption demand as non-banking finance companies (NBFCs) in the past few years have shifted their focus heavily on to the retail segment. More importantly, with housing finance companies and NBFCs facing higher costs of funding and risk-management issues, consolidation and differentiation between the good and average companies is inevitable.
What is the state of affairs for NBFCs today, given the increased cost of borrowings in a higher interest rate cycle?
The last couple of months have been quite volatile from the NBFCs and HFCs point of view. Post the IL&FS event, a lot of questions have been raised especially on fund raising ability and how their asset-liabilities management (ALM) is balanced. The cost of funds was going up due to global and Indian macros, higher crude oil prices and rupee depreciation, which in turn had an impact on the cost of liquidity. Things have improved and it does not look like interest rates will go up going forward. A slowdown in NBFC/HFC lending will have an impact on the wider economy. In my view, we should not waste the crisis by not learning from it. We should strengthen our internal processes, liabilities and ALM so that we are better prepared next time. There is a need to re-look at the entire industry and focus on liabilities as much as we focus on assets. We need to think about having far more balanced ALMs.
Over the last one month, Commercial Paper (CPs) issuance, despite higher yields, by financial companies has continued to remain robust, while some NBFCs/HFCs are making pre-payments. Banks are continuing to lend to NBFCs as much as before and are willing to buy loan portfolios for NBFCs.
How you view the liquidity situation in light of CPs issuances continuing to be robust with many players making pre-payments, while securitisation is being encouraged?
For the last couple of years we had a benign liquidity situation. Post demonetisation a lot of money came into the banking sector and mutual fund industry and credit demand came from HFCs and NBFCs, but post the IL&FS event liquidity got squeezed. The liquidity situation is much better than what it was especially on the CP side, but long-term liabilities are still a challenge. What I believe will happen is that liquidity will flow to better managed and better-governed NBFCs. I see consolidation happening with the top 8-10 players. There will be differentiation in market between good, well-managed companies and the average ones.
Have you made any changes in your lending practices to corporates?
In our structured finance business, in addition to looking at the companies’ finances, we are trying to take a more holistic approach by trying to capture the cash flows of the company and of the promoter as an individual; we look at his/her dividend income or net-worth through securities or real-estate investments. We have invested in pro-active risk management solutions, with strict loan monitoring practices and a central risk monitoring team, where if there is any news in a company to which we have lent, positive or negative, it will be immediately reported and acted upon. Further, given the environment and macro indicators, we do stress-testing on our portfolios regularly so that we are better prepared.
Loan disbursals this quarter have slowed down as NBFCs and HFCs are looking to beef up their cash inflows and liquidity positions. How was the past quarter for ABFL?
Everyone wanted to take stock of the situation and conserve liquidity and capital. There were players who slowed down on their disbursements but the larger players have continued with their lending. We continued with disbursements to the retail and Small-Medium-Enterprise (SME) customers. Our growth in the consumer, retail and SME is at a very healthy rate of 44 per cent year on year. As most of NBFCs and HFCs are focused on the retail and SME segment, going forward, liquidity needs to improve for the sector otherwise it will have an impact on consumption and overall economy.
What is the outlook on lending to corporates and SME companies going forward, given that both banks and NBFCs have said they will target better quality customers?
Our emphasis in terms of lending is on the cash flows and the repayment capabilities of the customer and we do not get into Greenfield projects where the risks are high. Instead, we look at projects where there are established cash flows and revenues. Depending on the needs of our SME customers, we provide term loans and working capital loans. Our Gross Non-Performing Assets, also reported in public domain, are at less than 1 per cent, reflecting our prudent practices in terms of loan underwriting, compliance and governance. Clearly, our focus is to look at both the companies’ working capital needs and the kind of investments they want to make in assets like plant and machinery.