One or two NBFCs may sink: Romesh Sobti, IndusInd Bank

IndusInd Bank CEO Romesh Sobti said the liquidity crisis that has gripped nonbanking finance companies (NBFC) is not a systemic issue, according to the regulators. He told Saloni Shukla and MC Govardhana Rangan in an interview that one or two of them may go under. “It’s a free market. Why should anybody come out to help them?” he said. He added that the liquidity squeeze has shown the key role NBFCs had been playing in driving consumption demand. “If they are not as active as they used to be, then who will fill the gap?” he said. Under Sobti, IndusInd Bank grew to become one of the country’s best-performing lenders. But the exposure to Infrastructure Leasing & Financial Services (IL&FS) and asset-quality issues have made investors nervous. He said IndusInd has been proactive in handling the fallout. Edited excerpts:IndusInd Bank rose from being a private-sector lender of little interest to one that was almost on par with HDFC Bank in the eyes of investors. But in the last few quarters there have been concerns over asset quality. What went wrong?It’s the overhang of just that one particular account (IL&FS). We were the only bank making provisions when no one else was talking about it. The expectation level was so high we were asked why didn’t we provide in one go? We accumulated and then provided for the entire exposure. Then rumours started surfacing over exposure to multiple troubled companies. The fact is every time one raises a question, you can’t go to the exchanges and start clarifying that we don’t have exposure, that’s not how you run a bank.‘Monitoring Realty Projects after Funding’We increased our disclosures, no one has opened their books like we have done. I am telling you my rating profile — SMA (Special Mention Account), I am giving you gross NPAs (nonperforming assets) product wise.There was also a rise in your real estate financing last quarter and there are concerns over that because of the meltdown in the sector right now?Real estate is not the dirty word... some companies in the sector may have problems. There are realtors who don’t borrow but I want to lend to them. It’s not shutters down in any sector. Our model of financing is very granular. We finance projects and not holding companies. Our total book is Rs 6,500 crore-7,000 crore, we have 80 projects. I monitor these projects, what is the construction stage and the money comes to my escrow.The NBFC crisis started last year — what’s the earliest all this will get resolved?The big shadow was cast by IL&FS and it spread across the industry, post which a realisation dawned that how were these guys funding themselves. When growth was good at 20-30%, these guys got good valuations, suddenly everybody woke to the ALM (asset-liability mismatch) issue, which brought in a risk aversion.But there is an obvious flaw in funding...When you start competing irrationally on price to get market share and show growth, you are sacrificing asset-liability mismatches. Look at loan against property — we used to grow at 20%, but our growth fell to 10%... We withdrew from that market. Not because we were seeing any delinquency but because the riskreward relationship was skewed. When valuations are linked to growth, you want growth at any cost. In the process, how do you make the margin — you borrow short and lend long... More than a bit of that happened in this crisis.We have seen a slowdown, even a sort of contagion.The regulators have indicated more than once that they don’t see a systemic issue. The fear was that the liquidity issue would turn into a solvency issue — that doesn’t seem to have happened. One or two companies will go belly up, it’s a free market. Why should anybody come out to help them? Help can only come in the form of good portfolio purchases. What do you do when you don’t have money? You stop lending, that has led to a slowdown in the sector. If you stop lending and the borrower is still paying, you become solvent... That is what NBFCs are doing to preserve liquidity.But will this add to the slowdown in the economy?The liquidity issue has brought to fore the role NBFCs play — that they have a larger role than we all thought and a lot of that goes towards consumption demand. For example, air conditioner sales have fallen — who is funding them? Not banks, they never did white goods financing, banks were never good at it. NBFCs play a very big role in fuelling growth and consumption, which is being recognised now. So, if they are not as active as they used to be, then who will fill the gap? Banks may pick up the slack but they can’t fill the whole funding gap. Some budget proposals will bring relief but perhaps more needs to be done.Are you seeing a shift of the NBFC market share toward banks?Yes, there is a clear shift. We grew vehicle financing by almost 24%. There were a few loyal customers who were wooed away by pricing. For example, a customer took his first truck and fifth truck from me. Some NBFC gave him a 75 basis point differential on pricing and he asked us to match the pricing... We can’t do that. He goes away but then he comes back. In the upturn, 35-40 players finance commercial vehicle but in the downturns only 8-10 remain.Do you see an asset-quality impact on retail loans due to job losses?We don’t have the maturity in our customer profile to be able to do those instant loans. If you do analytics of your customer who has been around for 15 years and you feel can be given a loan… we don’t have such a mature savings book. I don’t have a 20-year track record with anybody. All of them came in the last four-five years. Our unsecured book has been kept around the 3% (of the total loan book) mark, so we don’t worry about that. The first casualty will be the consumption loan. If it is an asset-linked loan, the casualty rates are smaller. A customer doesn’t want to lose his car or home, but a clean personal loan is fine… he can delay it.How do you see IndusInd -Bharat Financial Inclusion erger improving your coverage in rural India?The merger with Bharat Financial really moves the needle for us. For years, we struggled with the question what business model should we use for rural India. We could see the impact of Jan Dhan, Aadhaar and mobile, we could see the impact of electrification, roads, sanitation... We could see customers have the saving potential but accessing that was a problem for us. We now have access to 1.5 lakh villages — almost one-sixth of villages in India. We cover 350 districts, 1,800 branches with 9 million customers... Suddenly, we now have infrastructure to build a rural model. We want to capture the borrowers’ savings, we have a run rate of 50,000 savings bank accounts a day. At the rate we are going, we will cover all of them by September.

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