Slowdown: Srei not chasing growth, but focused on preserving profitability

The current piecemeal approach to solve India’s financial sector problem is not working well. The financial services sector is the life blood of the economy. If the blood does not flow to some parts of the body, that part gets affected. Similarly, if there are problems in the financial services sector, then the country’s economic growth gets restricted. Hence, we need to ensure that there is flow of funds from banks to NBFCs and from NBFCs to all sectors of the economy. There is an immediate need to offer funding support to the economy.

We need to review some of our existing regulations and bring back the lost confidence. For instance, globally, whether it is in the US or in the Europe, banks are not told by their regulators to make provisions based on default timeline of one day, 60 days, 90 days or 180 days. Financing is both an art and a science. Hence, provisions should not be based on formula only and lenders should be allowed to assess the value of the assets/securities and future cash flows before making provisions. Likewise, globally banks are not allowed to disclose the names of their defaulters. It is like if someone has cold, we will put that person directly on a ventilator. We need to nurture businesses. Unfortunately, we have got into a vicious cycle where we make more and more provisions and, as a result, there is a continuous need for capital.

There is an immediate and urgent need to create a development financial institution. That institution, with a strong capability and management team, should be encouraged to give long-term (for 20-25 years) funding support to the economy. Almost all the countries in the world have one such government-owned institution. There is no doubt India also needs such an institution. There are a few institutions such as IIFCL, IFCI, PFC, etc which could be merged and made into a strong institution. We have made representations to the government and we hope that there is some action on this front.

The economic slowdown has impacted the NBFC sector and has also made us very cautious. Fortunately, we were able to assess this situation and decided to reduce our infrastructure financing portfolio. This has helped us in preserving our profitability despite a challenging environment. Our focus will continue to be on equipment financing, where we expect good growth, going forward, because from a medium- to long-term perspective, the India growth story is still intact.

Equipment financing has been our core business, something which we have been focusing on since we started our operations in 1989. We have now expanded our equipment solutions to technology and healthcare equipment, apart from construction and mining equipment. Since we had taken a strategic decision to reduce our infrastructure financing portfolio, the overall growth in our AUM has been slow. Srei’s consolidated AUM was ₹46,500 crore at the end of September 2019 compared with ₹50,892 crore at the end of September 2018. In this environment, our focus has been on preserving profitability and we have not been chasing growth.

As mentioned, we have been reducing our infrastructure financing portfolio and we will not be keen to take fresh exposures on infrastructure projects. However, we continue to stay bullish on our equipment financing business and this announcement enhances the prospect of that business further.

Our core focus has been on how we can do more with efficient use of capital and by using technology as an enabler. The strength that we have is our understanding of the equipment finance business and the ecosystem that we have built over the years. So, we would look to use that knowledge to innovate and grow. For instance, we have now partnered with some of the leading banks to offer equipment finance through co-lending programmes. This has substantially reduced our capital requirement and has made us more efficient. We have also used transformational technologies and introduced appropriate risk mitigation engines which have not only helped us weather the crisis but also ensured that we emerge out of it stronger.

The last amendment has improved the situation and released liquidity to a certain extent. But more relaxation in the partial guarantee scheme is required to release liquidity for growth.

We are cautiously optimistic about the future and expect 2020 to be a better year than 2019. Industry analysts estimated that the sale of construction equipment decreased by almost 25 per cent between September 2018 and September, 2019. But we have started seeing a gradual improvement in demand from November 2019 led by the infrastructure sector — particularly road, irrigation and mining.

Today, India does not have that much of capital which was there in the mid-90s. Before the reform process started the situation was somewhat similar with the economy growing at 3-4 per cent. When India opened up its economy and the government started spending on infrastructure, capital started flowing in. The infrastructure development coupled with the opening up of the economy brought us good growth over the last 20-25 years. Once more we need to boost government expenditure so that there will be capital formation and revival of economic growth. The Indian economy has become a lot more complex in the last 30 years and we are currently going through a phase of challenges. Government expenditure will be the key driver which will result in capital formation and that will bring in investments and revive India’s economic growth.

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