Clear-thinking and long-term oriented, Mr Y.M. Deosthalee who is the architect of L&T Finance Holdings, talks about why the infrastructure giant chose not to take the route charted by its competitors in the NBFC space. Excerpts from an interview:
Most NBFCs have a niche - truck financing, gold loans, microfinance and so on. But L&T Finance has everything in its portfolio. What is your positioning?
We believe that for a financial entity, sustainable growth can come only from a diversified portfolio. Niche businesses have limitations, unless it is a business like housing finance. We have seen how construction equipment financing has been impacted by mining related problems. In microfinance, we saw how regulatory uncertainty impacted operations. L&T Finance has done a balancing act. We have demonstrated a 40-50 per cent growth over five years through diversification.
How are you achieving this diversification?
The first aspect is that in lending business you have to manage three different cycles — the rural cycle, corporate cycle and infrastructure. We are present in all three of them. We offer farm equipment funding to a large semi-urban and rural client base. In retail lending, we focussed on income-generating assets such as housing. Our corporate clientele is not the same as that for banks, but we have a good client list.
The second type of diversification is having a fee-based portfolio too. When you have a large retail customer base, you should be able to leverage it for savings, investment and insurance products. That is why we acquired stakes in City Union Bank and Federal Bank.
Why are you optimistic about the mutual fund business?
If you ignore what is happening today and take a long-term view, the mutual fund business has excellent prospects. Eventually, even in India retail savings will be routed into mutual funds.
Therefore, the question really is, is the Fidelity buyout complementary to us? It is, on every front. L&T Mutual fund managed debt assets, we needed a presence in equity. Fidelity offers this. L&T Mutual had a good distribution through Independent Financial Advisors, they have tie-ups with the large banks. The combined assets take us into a different league. Scale is important in mutual funds. Till you reach a critical mass, you cannot make an impact. But with scale, this is a very steady business. It requires low capital, and produces substantial returns.
On infrastructure finance, there is much worry about the capex cycle not taking off. Is that a function of interest rates alone or is there some other problem?
No, there are two aspects to this. Yes, interest rates need to be more friendly. But in some sectors such as power, there are structural problems that need to be resolved. We believe that this should be substantially resolved over the next one year. Telecom too will come back once the 2G auction problem is resolved. Then, there are some segments such as roads, where activity is healthy. There is also a good opportunity in renewable energy where we have built a portfolio of good quality assets in solar, wind power.