‘We're already geared to meet proposed norms'

With more stringent regulations around the corner for non-banking finance companies (NBFC), Business Line caught up with Mr Kavi Arora , MD and CEO, Religare Finvest to get to know what his views on the sector are. He has a positive outlook, saying there is a substantial opportunity for businesses that are focussing on financing SMEs.

Excerpts from the interview:

Can you give us some background on Religare Finvest?

Religare Finvest is a non-deposit taking NBFC. Our business has been operational since 2006. Initially it was largely providing loans against shares. In 2008, we began financing small and medium enterprises (SMEs) with one simple fundamental: that we would give loans to the self-employed who have a proven business model and financial track record, so that they deploy the loan in their business. We stayed away from consumer loans.

So, growth capital to the SMEs is where our focus is. This is where you can form a distinguished/differentiated business model, given the limitations as a NBFC and the crowded nature of the retail and corporate credit segments.

As of March-end the loan book size is Rs 14,000 crore. We plan to grow at over 20 per cent annually in the next 2-3 years. We have built a rock-solid platform and distribution capabilities. We are in 39 cities, and do business at 50 locations. These locations cover 85-90 per cent of the addressable SME population in India. As we acquire more assets in the next two to three years, we will improve our operating leverage and the return on assets will improve as a consequence.

How big is the SME lending opportunity given that many financial institutions plan to grow their SME book?

Sky is the limit! Let us construct the size. Assocham, in a study in 2009-10, revealed that SMEs contribute 17 per cent of GDP. By 2012-13, this will go up to 22 per cent of GDP and to 25 per cent plus by 2017. And that too, on a growing base. This means an annual growth rate of 16 per cent in five years. That implies a possible asset creation of $480 billion over these five years.

Even if we reduce the estimate by 20-25 per cent, there is a substantial opportunity for businesses focussing on financing these SMEs. There is enough and more for everyone.

What recommendations of the Usha Thorat Committee will be implemented, in your opinion?

Higher capital requirement for NBFCs (12 per cent tier-1 capital) will surely be implemented. Recognition of non-performing loans after 90-day due, instead of 180 days, may also be implemented. Directionally, the RBI is saying that NBFCs should be more prudent in the way risk capital is being provided. While we would like the RBI to govern us more we would also like to be given a level playing field. The RBI shouldn't worry that credit to NBFCs is going up.

Second, banks get tax benefits for creating NPA provisions; this isn't available to NBFC. NBFCs should also be given tax deduction on the provisions.

Third, if there is accelerated collection legal machinery in the form of the SARFAESI Act for banks, why should it not be available to NBFCs? These are the points we raised at the committee meeting.

How are you geared up to meet the recommendations of the RBI?

We have already moved to 90-day recognition for NPAs as what the regulator says will likely be implemented. Our whole business model is built on 13 per cent tier 1 and 3-3.5 per cent tier 2 capital. Therefore, we will not have an issue on the capital-raising front.

The RBI came out with a mandate of 0.25 per cent provision on standard assets only last April. We have been providing for standard assets ever since we started the business in 2008. We have provided more than 0.5 per cent.

Can we assume that the return ratios will come down from the levels currently enjoyed by NBFCs?

Capital ratio requirements limit the amount of leverage a firm has, and there is a direct impact on return on equity (RoE). You cannot just go and increase the return on assets (ROA) in the same proportion to take care of a fall in leverage and still make RoE. Fundamentally, RoEs of 23-24 per cent in NBFCs are a thing of past. With steady annuity incomes, a 17-18 per cent RoE will be available for an NBFC.

What is the expectation from the Nair Committee on priority sector lending (PSL) norms?

If you are lending to the priority sector and if there is a development agenda, then the institutions you are lending to cannot work on 11-12 per cent margins. Where is the priority sector? That is why the Nair Committee has suggested a cap of 6 per cent on margins. So the assets that are acquired will acquire PSL status if this is within 6 per cent margin of that company.

The guidelines also throw light on what assets can be funded by banks through the NBFC route which qualify for PSL. The RBI is indicating that the banks have to do PSL directly.

In the current form, the Nair Committee recommendations will be negative for NBFCs. PSL financing through the NBFC route should be capped at 5 per cent of banks net deposits and it says you have to reduce one per cent every year for the next five years to reach the cap. Banks are currently doing about 10-11 per cent to NBFCs through this route. That will mean there will be limited PSL assets any NBFC will be able to do.

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