Liquidity at the right price is becoming difficult now
The gloomy economic scene coupled with high inflation plays spoilsport in the booming NBFC sector.
By Chandra Ranganathan & NS Ramnath, TNN |
| Atul Pande, Chola DBS Finance MD |
Cholamandalam Investment & Finance (CIFCL) tapped the joint venture route to build scale in its operations. In 2005, it got together with DBS Bank of Singapore and formed Chola DBS Finance. Apart from its vehicle and personal financing segments, areas such as wealth advisory services and home equity would drive its growth. However, Chola DBS Finance MD Atul Pande seemed to be worried about raising funds, but remained non-committal whether Chola DBS would ever be a bank, which would let it raise funds at lower cost. Excerpts from the interview:
The economic condition now is very different from last year with talks of a slowdown even as the prices are rising. What does it mean for lenders and Chola DBS in particular? What is your take on the economic scene? Are you worried?
If you looked at the consumer finance growth in India, it has been upwards of 25% for many years now, largely driven by people coming into the lending environment. From a systemic basis, the growth will continue with more and more people joining the credit chain. From an economic point of view, some segments that we lend may start getting stressed. At this point of time, given our portfolio performance, we do not see that stress coming in.
We are a diversified lender, right from used-vehicle loans to high end personal loans. Virtually, in all our categories, we are seeing good performance. But we are watching the lower end very carefully, which is highly dependent on the economic environment. You expect that there might be some amount of correction there, but we are not seeing anything now. However, in this environment raising money is becoming more difficult. The onward cost of credit has also become higher in the last three or four months. For the NBFC sector, liquidity at the right price is not as easy as it was earlier. More constraints on the supply side, but deployment side things are looking okay now.
You mentioned that certain segments might start getting stressed. Can you elaborate?
You also mentioned supply-side constraints for NBFCs. What does this mean for NBFCs?
On the supply-side, borrowing is more expensive because of global parameters and general risk aversion in the credit markets. The NBFCs will have to look at getting better capitalised and start looking at a wider bouquet to raise funds. Not just bank funds, but also issuance of NCDs, securitization and sale of assets as a significant tool to fuel growth.
Chola DBS has been expanding its product portfolio over years and its quite diversified now. Is being a financial supermarket the way to go for finance companies looking at scale? Or will companies benefit from a niche focus? Where do you place Chola DBS?
What will be the growth drivers in the next couple of years?
At this point of time, do you see any major gap in your portfolio? Any market segment that you haven���t
addressed?
One of the gaps we are filling is two-wheeler financing through a relationship with Honda Motors. Another area is home finance business. It is a key part of the customer���s asset portfolio. In the long-term, if one is serious about retail financing, one has to get a home finance product. We may also look at a card-based product in conjunction with our partners. Eventually, the destination of any credit product ends in a credit/cash card product. Eventually, if one wants to be positioned as a retail finance company, one has to have a card-based product. So there is a certain amount of credit that will always rest in the customer���s wallet as plastic.
How easy is it to get people, especially when there are so many players entering the field?
HR is challenging. The industry is going through upwards of 20% attrition. We manage our high-value talent very well. We have had virtually no senior management loss in the last three years.
At junior management level, we try to pay for performance and look at higher variable compensation parameters. We hired more than 1,000 in the last two years and see no significant issues in terms of hiring new employees. However, one has to plan for churn in the business and all our plans are built around that.
Now, with a possible economic slow down, is there a chance of NBFCs being saddled with too many people ?
I don���t think anyone is so over-staffed. There might be some individual cases in certain categories, but, the sector is more efficient than what it was two or three years ago. We, for example, have more than doubled our revenues last year. In terms of employee productivity, it has gone up. Actually improved.
The economic condition now is very different from last year with talks of a slowdown even as the prices are rising. What does it mean for lenders and Chola DBS in particular? What is your take on the economic scene? Are you worried?
If you looked at the consumer finance growth in India, it has been upwards of 25% for many years now, largely driven by people coming into the lending environment. From a systemic basis, the growth will continue with more and more people joining the credit chain. From an economic point of view, some segments that we lend may start getting stressed. At this point of time, given our portfolio performance, we do not see that stress coming in.
We are a diversified lender, right from used-vehicle loans to high end personal loans. Virtually, in all our categories, we are seeing good performance. But we are watching the lower end very carefully, which is highly dependent on the economic environment. You expect that there might be some amount of correction there, but we are not seeing anything now. However, in this environment raising money is becoming more difficult. The onward cost of credit has also become higher in the last three or four months. For the NBFC sector, liquidity at the right price is not as easy as it was earlier. More constraints on the supply side, but deployment side things are looking okay now.
You mentioned that certain segments might start getting stressed. Can you elaborate?
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The tertiary segment will start feeling the impact. Most of the primary borrowers, for example, in the truck financing business, the large truck operators would have trucks of their own and also have a smaller number of operators attached to them. As their business model starts coming under stress, the smaller operators attached may start feeling the stress. We are watching those portfolios carefully. Though, as I said earlier, right now we do not see signs of deterioration. Similarly, in the personal lending business, the small ticket segment may be demonstrating stress in some markets in India.You also mentioned supply-side constraints for NBFCs. What does this mean for NBFCs?
On the supply-side, borrowing is more expensive because of global parameters and general risk aversion in the credit markets. The NBFCs will have to look at getting better capitalised and start looking at a wider bouquet to raise funds. Not just bank funds, but also issuance of NCDs, securitization and sale of assets as a significant tool to fuel growth.
Chola DBS has been expanding its product portfolio over years and its quite diversified now. Is being a financial supermarket the way to go for finance companies looking at scale? Or will companies benefit from a niche focus? Where do you place Chola DBS?
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In our case, we want to be a diversified retail financial services company, which means we want to lend products to a large variety of customers. Added to our offerings on vehicle finance side, we have offerings in consumer and corporate side. Through our subsidiaries ��� which is the broking, AMC and the distribution services business ��� we also give wealth advisory, broking and insurance services to our customers. We therefore are able to service the customers on both the asset and the liability side. That���s how we would like to grow.What will be the growth drivers in the next couple of years?
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It will be across segments. If you looked at our performance for the last two years, personal finance business has grown very rapidly. In vehicle finance segment, the used-truck business has grown rapidly. We also launched home equity business, which is now national. These three will grow. In the wealth management section, we are seeing a lot of growth, especially in the retail and broking advisory where we are currently servicing upwards of 50,000 customers and expect that to become larger.At this point of time, do you see any major gap in your portfolio? Any market segment that you haven���t
addressed?
One of the gaps we are filling is two-wheeler financing through a relationship with Honda Motors. Another area is home finance business. It is a key part of the customer���s asset portfolio. In the long-term, if one is serious about retail financing, one has to get a home finance product. We may also look at a card-based product in conjunction with our partners. Eventually, the destination of any credit product ends in a credit/cash card product. Eventually, if one wants to be positioned as a retail finance company, one has to have a card-based product. So there is a certain amount of credit that will always rest in the customer���s wallet as plastic.
How easy is it to get people, especially when there are so many players entering the field?
HR is challenging. The industry is going through upwards of 20% attrition. We manage our high-value talent very well. We have had virtually no senior management loss in the last three years.
At junior management level, we try to pay for performance and look at higher variable compensation parameters. We hired more than 1,000 in the last two years and see no significant issues in terms of hiring new employees. However, one has to plan for churn in the business and all our plans are built around that.
Now, with a possible economic slow down, is there a chance of NBFCs being saddled with too many people ?
I don���t think anyone is so over-staffed. There might be some individual cases in certain categories, but, the sector is more efficient than what it was two or three years ago. We, for example, have more than doubled our revenues last year. In terms of employee productivity, it has gone up. Actually improved.
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