‘Banks should be able to price their loans freely’

TT Srinivasaraghavan, Managing Director of Sundaram Finance, discusses interest rates, the incipient recovery in goods movement and the missing piece in financial inclusion in an interview with BusinessLine .

How have RBI’s rate cuts of 75 basis points impacted NBFCs and other sectors? Have funding costs fallen?

RBI’s repo rates have been reduced by 75 basis points in the recent past. But the reduction in banks’ lending rates has been much lower at 30-40 basis points. I think a really big bottleneck to a fall in interest rates across the economy is the operation of the base rate mechanism for banks. Today, if you take stock of bank lending rates, the differential between the lowest and highest base rates is just 30-40 basis points.

If the base rate mechanism was not in place, banks would have the freedom to lend at differential rates based on the credit rating of their borrowers. That system would adjust the pricing of their loans to risk, which does not happen today.

It is a dichotomy that while inflation has halved in the last year or so and is now at a record low of 5 per cent, interest rates should decline only by 30-40 basis points. I think the base rate is a barrier to both lowering of interest rates and off-take of credit.

Economic data shows a recovery, and sales of medium and heavy commercial vehicles (M&HCVs) support this view. But why are light commercial vehicles not following suit?

I think two reasons have contributed to this and both relate to the base effect.

The peak year for M&HCVs was 2011-12 when sales were around 3.5 lakh units. In the two years following that, sales suffered a precipitous fall and dropped to around 2 lakh units in 2013-14. But they climbed back to 2.3 lakh units in 2014-15. That is a recovery, but the numbers are very much helped by a base effect.

As regards the LCV segment, the drop is much steeper in the small CVs – the sub-one tonne segment. It was this segment that was growing in high double digits and also fuelled the growth numbers in the boom years.

In the slowdown, this segment has been worst hit – sales have dropped from 3.61 lakh units to 3 lakh units and no recovery is evident yet. This segment of CV demand relies heavily on rural short-haul transportation and rural spending has been seriously affected. If the rural economy does not improve and if there is a monsoon deficit, then the LCV sector could be impacted further.

Which are the sectors where freight movement is looking up?

On the one hand, there has been demand for consumer durables while on the other, increased activity at the ports is driving demand in some areas. Tenders for oil tankers from the oil companies in some markets and increased demand for tippers in others have been some of the other developments that are helping drive the freight movement.

Once the mining sector opens up, it could potentially offer large opportunities especially in the eastern and western belt and that could add to big numbers. Many of the policy initiatives seem to be coming through and the economic numbers generally seem to be trending upwards. In the next 3-4 months, we could start to see an actual manifestation of these macro indicators and conversion into actual numbers on the ground.

How do you think the GST regime will affect the CVs sector?

I see times improving substantially, if sales tax check posts between states are done away with. Currently, there is an enormous amount of idling at these points, pushing up diesel costs. The operating viability for transport operators could improve considerably if this happens. But the flip side to this is that if the productivity goes up and the operators are able to do more trips than earlier with the same trucks, utilisation rates go up. Then they could require fewer trucks. So we have to see how this plays out.

The Sundaram Finance group has recently bought out its partner in the general insurance business. Is the sector seeing interest from foreign players after it has been opened up to FDI?

No, actually I would say the sector hasn’t seen any material interest from foreign players after this move.

What are the major challenges the insurance sector faces today?

I think the problem continues to be with pricing in the motor vehicle insurance segment. This is the largest part of general insurance.

After de-tariffing came into play, for one, the regulator is still in control of the premiums for third party liability covers. The other problem is the steep discounts in the de-tariffed areas which makes the business a loss-making one for most insurers. This has not allowed the industry to thrive based on correctly pricing risk, especially given that 50 per cent of the general insurance industry is motor insurance.

Clearly, pricing has not evolved in the insurance space. If the pricing is not risk based, the motor segment is always likely to drag profitability.

What is your view on the government’s new inclusion initiatives such as the Jan Dhan Yojana?

The ‘Direct Benefit Transfer’ is a very good initiative, especially if middle men are cut out of the delivery mechanism. The whole idea of financial inclusion needs support and it is important to ensure that it reaches those who really need it.

But I also feel that apart from financial inclusion to individuals, there is a large mass of small businesses out there, who deserve to be touched by inclusion. They need access to credit at better rates and cannot necessarily be backed by credit ratings. I am hopeful the MUDRA bank can facilitate lending to these small businesses, by offering a refinance avenue to NBFCs who are in this area of lending. With MUDRA bank framework coming up, my hope is that this can become a nodal agency for NBFCs to finance SMEs, similar to what the NHB has done for housing finance companies.

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