“I can't agree that there is huge profiteering that is going on in this business”

Arguing forcefully for a more nuanced regulation of NBFCs based on their relative merits, Mr T.T. Srinivasaraghavan, Managing Director, Sundaram Finance, talks to Business Line about the slowdown in commercial vehicle sales, the likelihood of further rate increases and how NBFCs have delivered on financial inclusion long before it became a buzzword.

Edited excerpts:

Recent June numbers show automobile sales to be slowing. Do you think the slowdown in commercial vehicles (CVs) sales this year will be as bad as in 2008-09?

A comparison between 2008-09 and now is perhaps not on all fours for the simple reason that the earlier slowdown was driven by larger macroeconomic factors, including the global meltdown.

This time around it is not that.

This industry is a cyclical one. We have seen over 30 per cent growth two years running — 2009-10 and 2010-11.

So I would see this more as a natural cyclical slowdown, rather than as a systemic fall.

This slowdown is probably not likely to be as severe as the last one.

Of course, the externalities this time also are that the economy itself has slowed down.

We are talking about manufacturing sector dropping and GDP growth at 7 per cent or so rather than 8 per cent.

The CV industry is right at the heart of all of this.

Vehicle prices have gone up significantly. Diesel prices, tyre prices and component prices too have gone up.

Interest rates have gone up. If you look at it from a transport operator's point of view, he has got nothing at all to cheer about.

This is a market which is driven as much by economics as by sentiment.

Economics are bad, sentiment is also bad and the resultant effect is the slowdown.

I would not hit the panic button and alarm bells at this time. We have seen these cycles in the past and this cycle will play out too.

Apart from this, perhaps we are finally seeing a change within the CVs space.

Ten years ago, people used to be talk about how the hub and spoke model would take off.

That is now actually starting to play out.

For the first time, production of light CVs has overtaken medium and heavy CVs in terms of units. From the industry side, the thinking is that over the next five years perhaps, the ratio of LCVs to medium and heavy CVs will become 2:1.

Are interest rates likely to peak out soon?

I don't know if I will stick out my neck out on that. I think we might still see at least one increase, given the way inflation is panning out.

In the past, it was almost accepted that if there was a great monsoon, it will have a salutary impact on the prices. In the last year, that has been belied.

You had a great monsoon and yet the food inflation went through the roof.

If last year's trend plays out this year (and this is assuming you will have a normal monsoon) food inflation may stay put or worsen.

And if inflation can't come down, I can't see how interest rates will. I am not particularly sanguine on interest rates easing off very soon.

In recent times, regulators seem to be attempting to trim the net interest margins of NBFCs. What is your view on this?

You are right.

There have been a slew of regulatory actions over the last 6-9 months.

Some of them are driven by concerns about regulatory arbitrage.

The argument is, NBFCs for most part are like banks, but they don't have the rigour in regulation that banks are subject to.

There is also the concern that banks are getting around this by setting up NBFCs and then indirectly doing the things which banks cannot do.

But there are several NBFCs which are not bank promoted.

These NBFCs were neither formed nor do they exist for regulatory arbitrage.

These are well tested business models.

I would submit that if you look at the NIMs of NBFCs 15 years ago and today, they have come down dramatically.

If you look at it in the context of financial inclusion too, the organised NBFCs have actually reduced costs for the end transport operator.

Because of scale and greater expertise going into the business, tightening of processes and dramatic improvement in efficiencies, the end user has benefited.

I can't completely agree that there is huge profiteering that is going on in this business.

The difference is largely because our models are less capital intensive than the banks, and we are more fleet-footed and, therefore, we are able to manage these higher margins.

We also take greater risks because of the kind of customer segments that we finance are definitely from a bank perspective, riskier segments.

But we are able to take these risks because our understanding is superior, or collection mechanisms are superior or our relationships with customers are far stronger.

Because of these things, we manage our risks better and our delinquencies are better.

It is unfair to simply say that banks have a certain NIM and NBFCs have a certain higher NIM and, therefore, this should be narrowed.

The second part is that we are not being included in the larger canvas when people talk about financial inclusion.

Yet, the history of NBFCs goes back to financial inclusion.

When we started financing the road transport sector, nobody would touch it other than the unorganised money lenders.

We were the ones who first ventured into that segment.

These people had nothing but their integrity and their willingness to work hard.

They couldn't produce a piece of paper and we still lent to those people.

And today, the results are there for all to see.

The worry also seems to be arising from the banks' own exposure to the NBFCs. If you look at the credit data, bank lending to the NBFCs has increased sharply.

If you drill that down, a large portion of this has gone to Government-owned entities such as PFC, IDFC and REC, where project financing needs are huge. If you look at statistics in isolation they are scary.

Once you segregate this, what the retail NBFCs have got from the banking system is not alarming at all.

Also, we were coming off the financial crisis when credit had dipped to an artificially low level.

We are not anti-regulation.

The rest of the financial sector is getting into a tighter regulatory framework and yes, we do deal in public money.

So if regulator wants to have greater accountability, discipline – that is perfectly fine. But if you put too many fetters, that becomes self defeating.

To be fair, the RBI also recognises this, but because the NBFC industry is a heterogeneous group, they have a problem of where to draw the line.

The contemporary example is priority sector lending. When we talk to the RBI, their concern is they are not able to control the end use – indirect lending.

People borrow in the name of priority sector but use it elsewhere.

Now, if we had a set of process guidelines, rules, due diligence, documentary evidence and external independent audits to make sure that end use conditions have not been violated - we are quite happy to submit to all of that.

We would like to say that there should be calibrated and specifically targeted regulation on matters of regulatory concern.

How are your subsidiaries doing? Especially the distribution business?

The distribution business is doing very well.

Today, Sundaram Finance's lending branches are at 225 whereas distribution branches are at over 300.

In terms of delivery, we have done well.

We have understood the dynamics of this business. In terms of last mile delivery and conclusion, we are really well poised.

In home loans, we find demand for affordable housing is booming.

Our target segments fit neatly into that – especially in tier-2, tier-3.

We see potential for growth in that segment at least for the next 10 years.

The basis on which we do that business similar to what we do in Sundaram Finance – our own credit appraisal, our own technical and legal appraisal , our own recovery – and sure enough they have the lowest non performing assets in the entire industry.

The asset management business is going through the travails of the market, but we have not seen any dilution in the assets or in the customer base.

We have, I think, a disproportionately large number of folios for our size because we are retail– we have about 2.2 million folios. Once the market gets back into growth mode, the rebound will happen.

The insurance business is the unfortunate part.

Take any parameter – underwriting quality, claims experience, investments, cost to income ratio - everything has performed exceedingly well.

We had a profit after tax of Rs 60 crore and then we had to absorb the losses from the third party motor pool – which turned it into a loss – which is a real tragedy.

Overall, the topline has grown impressively – by 30 per cent last year. Claims have come down significantly.

But at the end of the day, when you declare a loss, then nobody is impressed by these other qualitative attributes.

That's a challenge.

But otherwise, all our subsidiaries and joint ventures have done reasonably well and are all nicely poised to catch the next wave of growth – whenever it happens.

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