Open to acquisition to build capabilities: Piramal Finance MD & CEO

Jairam Sridharan says urban and semi-urban markets will drive H2 growth as the lender takes a measured approach to wholesale lending

Piramal Finance is banking on urban and semi-urban markets to drive lending growth in the second half of FY27, while taking a measured approach to wholesale lending amid intensifying competition from banks. In an interview on the phone with Aathira Varier and Subrata Panda, Jairam Sridharan, managing director and chief executive officer, discusses the growth outlook, funding strategy and plans to build new businesses. Edited excerpts:

 

Retail disbursements were up 38 per cent in the second quarter (Q2). What is the outlook for the second half? 

 

The festival season last year was exceptionally strong, probably the strongest in at least a decade. Developments around goods and services tax also provided a significant boost. We do not have the same factors this year. Therefore, I expect the festival season to be somewhat muted. There will still be a seasonal increase, but I do not expect the same level of boost we saw last year. Overall, however, the disbursement trajectory remains strong.

 

Will the urban segment drive growth in the second half (H2)?

 

Urban and semi-urban markets are probably where more growth is taking place. The monsoon has not been as good. We cannot necessarily expect rural areas to deliver significant growth at this stage, and it would be unhealthy to expect that. So, urban and semi-urban markets are likely to drive growth at present.

 

You were looking to get into microfinance. Is there some inorganic opportunity on the table currently?

 

We are open to inorganic opportunities in some of these businesses, but we do not necessarily need them. Our organic growth is strong at over 25 per cent. We, therefore, do not need acquisitions simply to drive growth. However, from a capability-building standpoint, we are happy to consider inorganic opportunities. We evaluate many such deals when they come to the market, but nothing has clicked so far.

 

Are there any other products or segments you are looking to add to your portfolio?

 

We will continue to build our gold loan and rural businesses, which still have a long way to go. We are also evaluating other businesses, particularly education loans and tractor finance. We are thinking about it and making early investments. Building a business is a two- to three-year process. It takes time and commitment.

 

Banks are flush with funds. Do you see any benefit in your cost of funds or an increase in lending from banks?

 

We borrowed almost exclusively from banks during the quarter. We did not tap the capital markets or international borrowing markets; we went to banks because liquidity was available. Our incremental cost of borrowing is around 8.40 per cent, as against a cost of around 8.80 per cent for our existing borrowings. Essentially, we are able to borrow at 40 basis points (bps) lower than our existing cost, with almost all of this borrowing coming from banks.

 

How long do you expect this to continue, given that interest rates have increased by 25 bps? 

 

The rate environment has started changing, and the increase will gradually feed into lending rates. We have not seen that impact yet, but it will come over time. Our major advantage is that we received a credit-rating upgrade about six months ago. As a result, our incremental borrowing costs are 40-45 bps lower than the borrowing we are closing. We are constantly repaying old debt and raising new debt. The debt we are repaying is significantly more expensive than our current borrowing because of the rating upgrade. The gap is substantial — almost 70 bps between the rate at which we are repaying and the one at which we are borrowing today. Therefore, even if market interest rates rise, we should continue to benefit from lower borrowing costs because we are replacing higher-cost debt.

 

Are you planning to tap the domestic debt-capital market or international capital markets in H2?

 

We want to tap the domestic debt-capital market. However, we have not been able to do much over the past six to seven months because the pricing has been unfavourable. We recently completed a small domestic-debt issuance and hope to raise more funds in Q3. However, this market has not been conducive to borrowing in the past six months. Banks and development financial institutions will remain our key funding sources for now.

 

What will be the impact of the insurance regulator’s proposed distribution overhaul on Piramal Finance? 

 

Like every other market participant, we are giving our views directly to the regulator in the discussion paper. From an impact standpoint, this is a fairly material issue. On a gross basis, the impact on us would be 18-24 bps of return on equity. However, we have a structural advantage compared with most other non-banking financial companies (NBFCs): We own 50 per cent in life-insurance company Pramerica Life. The insurance we distribute is underwritten by our subsidiary. This means that if we lose some distribution fees, the economics of the underlying insurance company improves. Since we own 50 per cent in that company, part of the value shifts comes back to us through the consolidation of results. Effectively, we have a natural hedge because we are both a distributor and a part-owner of the insurance manufacturer. If value shifts from the distributor to the manufacturer, approximately 50 per cent of that value shift comes back to us through consolidation.

 

What is your strategy for the wholesale lending business? 

 

We want wholesale lending to account for around 15 per cent of our overall portfolio. This time, it has fallen slightly below that level and accounts for 13-14 per cent. We want to focus on real estate and mid-market corporate clients. Both segments are doing well and growing. Real estate has performed well from an asset-quality perspective. This is not the best time to grow these segments fast because we want to build our businesses. Banks are also growing in this segment strongly. Last quarter banks grew corporate credit quite fast, which makes competition more significant for NBFCs. We will, therefore, take a measured approach. You cannot grow every segment at all times; you have to operate where the market offers opportunities. Banks are very focused on this segment, so we will play second fiddle for a while. Our opportunity will come at some point.