• Tue. Feb 27th, 2024

Housing Finance Bank

Housing Finance Bank, The Real Thing

Why big business is hankering after the licence to lend

The company is now known as Godrej Finance Ltd, and it will drive the cupboards-to-consumer products group’s financial services ambitions, as the NBFC arm of Godrej Capital.

Gautam Adani’s Adani Capital Pvt. Ltd received its NBFC licence in 2017. It caters to micro, small and medium enterprises by offering business loans, farm sector finance, commercial vehicle loans, and supply chain finance. Another group firm, Adani Housing Pvt Ltd, got a mortgage lending licence in June 2018 and primarily caters to the affordable housing segment, offering home loans and loans against property. As of September, Adani Capital and Adani Housing had combined assets under management of 3,248 crore.

Mukesh Ambani’s proposed Jio Financial Services plans to leverage the technology capability of the group and focus on “digital delivery of financial products”. In October, Ambani’s flagship Reliance Industries announced the demerger of its financial services business and said Reliance Strategic Investments, its wholly-owned subsidiary, will be spun off before listing as Jio Financial Services Ltd. It has appointed former ICICI veteran K.V. Kamath as the non-executive chairman of the unit.

Enthused by the pace at which Indian consumers are devouring credit, these moves by Godrej, Adani and Reliance epitomise the aggressive push by large business houses to muscle their way into the non-banking financial services market and embark on a digital lending journey. Under current regulatory norms, it is impossible for a business house to set up a bank. Finding no way to enter that building, they went to the building next door and found the door open. And now, these Indian conglomerates are busy setting up NBFCs. Those that already have an NBFC licence, such as L&T (L&T Finance Holdings Ltd) and Aditya Birla (Aditya Birla Finance Ltd), are looking to scale up.

“Getting a banking licence is not easy. You need a track record,” Gaurav Gupta, the man tasked with building the financial services business of the Adani group, told a group of students attending an afternoon webinar on finance in July 2020.

Manish Shah, chief executive of Godrej Capital, said that over the last few years, both from the regulatory aspect and from the liabilities side, things have changed and entry into non-bank lending is no longer seen as a challenge. “There are things you can do as a non-bank that you cannot do as a bank,” said Shah. “The advantages that conglomerates have is the embedded customers that a brand needs. From a customer perspective, brands that they have known and can trust are more important today than ever before.”

Why now?

Analysts and sectoral experts Mint spoke to said conglomerates entering financial services want to cash in on the retail lending boom. High adoption of digitization in the Indian financial system has benefited these newcomers, who do not have to go to far-flung places to set up branches in order to convince people to borrow. They are also banking on brand recall to be able to garner more customers.

While the recent pace of vertigo-inducing growth in bank loans does not seem to be sustainable, retail credit has more fuel in the tank. A look at data on loans to individuals shows how banks have gone all out to onboard more and more retail borrowers. Between December 2020 and 2022, they disbursed 10.9 trillion in such loans (net, after adjusting for repayments by existing customers), as against 4.7 trillion to industries over the same period.

“As corporates grow larger, they would want to diversify their presence and the financial sector presents a very good opportunity, if they are not already in that space,” said Krishnan Sitaraman, senior director and deputy chief ratings officer, Crisil Ratings.

Since financial inclusion is still below the desired level, Krishnan believes entering the financial services arena would allow these businesses to tap the opportunity and enable customers in multiple segments to get better access to formal sources of finance. “In some instances, the financial services offerings may also complement their products on the manufacturing or trading side,” said Krishnan.

Some argue that financial services offer not just an opportunity to diversify but to future-proof the business and expand at a time when other avenues have little to offer. “Many of their other businesses are almost at a saturation point. There is some amount of capacity building that is going to take place. But then, financial services are not like manufacturing companies—it is capacity through services,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP.

Technology is also playing a key role in this shift. Traditionally, banks were reliant on their branch network to grow not just their deposits, but also their loan book. While a brick-and-mortar presence is still seen as an avenue to garner customer trust, it is no longer indispensable.

The entire financial services landscape is changing ,thanks to technology, and new players are finding it easier to get their business up and running.

“People can see there is money to be made out here,” said Santanu Chakrabarti, India analyst, banking, financial services and insurance, BNP Paribas. It is not surprising that people with deep pockets and the ability to deploy capital are coming to financial services, he added.

Not a huge challenge

Setting up a financial services business is not a challenge for these large business houses, given their access to capital and the availability of an employable workforce.“You also have a huge balance sheet and if the conglomerate has a good governance track record and shows the ability to repay, it can raise money for financial services, including market borrowings and bank funding,” said Parekh.

Take Adani Capital, for instance. According to its annual report, the total non-performing asset ratio of Adani Capital stood at 1.49% on 31 March. This was highest in the small business loans it acquired from Essel Finance in 2020, where the NPA ratio was 9.12%. As one would imagine, it has the backing of the conglomerate. In the January-March period last year, financial services holding company Adani Finserve infused 150 crore.

“Our mission, our objective in Adani Capital, is that we want to support micro and small entrepreneurs in the country. A micro and small entrepreneur typically would be anyone where loans we give would not be more than 25-50 lakh. In fact, the average ticket size of the loan we give is 5 lakh,” Adani Capital’s Gupta said at the webinar cited above.

In the first six months of 2021-22, Adani Capital and Adani Housing reported a consolidated profit after tax of 39 crore, up from 2 crore the previous fiscal year, according to Crisil Ratings. Adani Capital’s total borrowings stood at 1,902 crore in 2021-22, as against 983 crore in the previous fiscal.

A spokesperson for the Adani group did not respond to a request seeking comments from Gupta.

The change in lenders’ attitude towards non-bank financiers has contributed to the attraction. Lenders have been considerably more optimistic about the NBFC sector after turning cautious post the IL&FS Ltd meltdown in late 2018. The Government of India, through the ministry of corporate affairs, took management control of IL&FS and appointed a new Board to control defaults.

Banks can partner with NBFCs to jointly offer credit, provided the non-banks take at least 20% of the overall exposure. India’s largest bank, State Bank of India, has already tied up with Adani Capital for what its chairman Dinesh Khara described as an opportunity to “connect with the underserved farming segment of the country”. Bank loans to NBFCs grew 36% y-o-y in December 2022 to 13.2 trillion.

Godrej Capital has two subsidiaries: NBFC Godrej Finance and mortgage lender Godrej Housing Finance. While Godrej Finance wants to target smaller businesses, Godrej Housing has started out by funding buyers of apartments built by the group’s real estate arm.

According to its 2021-22 annual report, the group believes that the NBFC sector has given decent returns and the business will grow at a steady rate. During the year, Godrej Capital posted a net loss of 63 crore, on the back of 55 crore in total income. The group has committed capital of 2,700 crore to the financial services business.

Eye on Ambani

Analysts are now keenly watching for the entry of Jio Financial Services and believe it will shake up the space. Macquarie Capital said in a report that once operational, Jio Financial could be the fifth largest financial services company in India by net worth.

Although he was tight-lipped about what he plans to build, chairman Kamath is optimistic. “I thought this was a great platform to work with and build on the digital future for financial services for the country. That is how I got into this. I must hasten to add that it will be in a non-executive role and the days of executive roles are behind (me),” he said at Mint’s Annual Banking Conclave on 12 January. Pressed for details, Kamath said that the entire digital opportunity will be leveraged by the company for financial services.

Out of bounds

While it watches over their newfound enthusiasm for non-banking services, the Reserve Bank of India (RBI) has steadfastly refused to open the banking door to large corporate houses. The central bank has sat on a proposal by an internal committee to allow business houses into banking, and analysts do not see its stance changing anytime soon.

The RBI’s concern is that if conglomerates with interests in other industries get banking licences, they would be able to raise deposits and deploy them in group businesses, putting depositors at risk. In fact, after the RBI committee’s proposals were revealed in November 2020, former governor Raghuram Rajan and former deputy governor Viral Acharya, in a scathing post on LinkedIn, said such a move would be disastrous. “Industrial houses need financing, and they can get it easily, with no questions asked, if they have an in-house bank. The history of such connected lending is invariably disastrous—how can the bank make good loans when it is owned by the borrower?” wrote Rajan and Acharya.

Some analysts believe giving NBFC licences to corporates is a much safer bet than allowing them to set up banks. Related-party lending, one of the issues flagged by Rajan and Acharya, seems less likely in the case of a non-bank lender.

But the chances of an NBFC lending to a group corporate entity are slim because it would increase the NBFC’s cost of funds, making it counterproductive, said an expert. “Since the RBI is not giving any more NBFC licences allowing deposits to be accepted, they (NBFCs) will have to either rely on bank funding or the debt markets, or both. This would still be higher than the cost of funds for a bank, which has access to low-cost deposits,” the expert said.

Besides, large corporate entities would anyway get better terms from a bank. Also, a loan cannot be priced below the benchmark rate and any such attempt would be discovered in an RBI audit.

Tightrope walk

Despite deep pockets, strong brand proposition and leveraging of technology, analysts are not entirely sold on the promise of conglomerates having a smooth ride in their quest to conquer small business and retail customer loans.

“The incumbents (such as Bajaj Finance, Mahindra Finance and the Shriram Group) have built their lending and more importantly, their recovery practices over several years. They will not just give in to competition from a new set of players,” said an analyst, who did not wish to be named.

Other analysts note that existing NBFCs have access to capital as well, having proven their mettle through years of performance, along with brands that have stood the test of time and sectoral crises. Moreover, technology can only take you so far, they say; without strong internal practices, it would not take long for stress to show. While the new players have a safety net of sorts below, they still have to make the tightrope walk.

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