Tuesday, April 20

NBFC slump is a crisis of confidence, says Ajay Piramal

Few bet their personal wealth on financial services like the way Piramal Enterprises chairman Ajay Piramal has done. The industry is in the grip of fear over valuations and funding. In an interview with ET, he shares his views on how it may be time to turn irrational exuberance into sanity. Edited excerpts:

You had said that a time will come to separate men from boys in the non banking financial services industry. Has the time come?

On August 30, we had a half-day session on financial services where we had more than 300 investors, fund managers and analysts participate. What I had said was, ‘I fear if one NBFC fails, the whole sector will be painted with the same brush.’ That has happened now. First of all, IL&FS is not an NBFC. If you look at the total loan exposure, the NBFC is Rs 20,000 crore where balance Rs 80,000 crore is in infrastructure, in power, roads, waste management and other places. The NBFC is not an issue and we need to distinguish that in the market. It is much more than an NBFC.

But the market has just done that – painting everyone with the same brush. How do you see this unfolding?

Some of them will not get enough funds to grow, so they will whittle down over time. For some, there could be consolidation. We as promoters hold significant 51% equity in the company. I believe it is important that promoters have enough skin in the game.

Our risk systems and processes — we keep investing and improving them. We have had a good growth. Our books are good. If any NBFC meets our criteria, knowing the quality of book, understanding the promoters and at reasonable valuation, we may see. We will jump in easily.

Stock prices have corrected recently. Are they attractive enough?

We have been very careful with acquisitions in the NBFC space because valuations were very high. Unless and until we know the quality of book… Governance is very important in NBFCs. Promoters should have significant stake in the business and what is their track record? Our bigger focus is on organic growth. Financial services is such a people-oriented business, we need the same culture of people. Otherwise it is two different sets of culture.

How bad is the situation compared to the 2008 crisis?

In 2008, there was no liquidity in the market. Today there is no liquidity crisis. It is more a crisis of confidence. That is different from not having money to lend.

You had looked at IL&FS in the past. Do you believe about the charges being made about its books?

I don’t want to talk about one company. We look at many companies. We have non-disclosure agreements with the companies that we look into. In the financial space, the only company we have invested in is the Shriram Group. We were comfortable with what we saw, with the promoters and with the business.

Was the current collapse waiting to happen?

I have been saying this for 6-8 months. I expected it because of the way people have been lending and the quality of underwriting. IL&FS is not because an NBFC has failed, it is because the whole investment in infrastructure has not been realised. Their investment in other sectors are not giving them return.

Will there be a contagion?

Everybody will be more cautious. It will definitely separate men from boys. NBFCs are very critical to Indian economy. The small-scale and medium-scale sectors are funded by NBFCs. They form 50% of the output in the country.

Banking sector is only a fraction of this amount to them. The boom of ‘Housing for All’ is not possible with just bank loans. NBFCs are an important part of the ecosystem. Many have sprung up in the past.

Do you see further correction in valuations?

It has corrected to a large extent. Once it settles down, you will see the prices going up a bit generally. When there is panic, people just dump and when there is greed, it just goes up.

RBI has come up with measures. Is it good enough?

It is not a question of liquidity as it is about confidence. In the whole banking system, there is a fear that if for some reason the loan goes bad, there would be doubts. There is so much fear in public and private sector banks that they would rather sit on cash than lend. It is not a question of liquidity.

It is a question of getting confidence in the banking system that they can lend. There could be some mistakes. You cannot assume everything will be right. You have to give confidence that if proper underwriting is done, you will not be pulled up.

What can RBI do to restore confidence among lenders?

RBI needs to convince the senior management of banks and bring it down to the branch level. People have misused the system in the past. I think public sector banks need to have greater private participation of people who have skin in the game. That is a much more long-term solution. It has to come. You cannot have the financial system crippled because of lack of decision making and lack of quality people.

Would you buy a public sector bank?

Today, we cannot. Today we can buy 5% and with RBI’s approval go up to 10%. That is not enough. It is not enough return on your time. If it opens up, greater participation of private sector is allowed in banking, we may look at it.

Is the current growth rate of 50% sustainable? Real estate is large part of your financial services. People are worried about stress…

We don’t set target for growth. We will grow sensibly. We will see that the risk is managed well, we get the right return on the equity. The book continues to grow. The share of real estate as a percentage is coming down and diversification is increasing. 40% of the business is real estate. We have a good record. Our gross NPA is 0.4%. We provide for 1.8% because of our conservatism. We started with real estate and gone beyond real estate. From larger corporate loans, we have gone to small and medium scale corporate loans. We are doing housing finance, so we have a very diversified book

Piramal Enterprises with Shriram Capital. What is the progress there?

This is not the right time to talk about merger. NBFC is growing well. When you merge, it is two different cultures. You may spend one-two years sorting people issues, which would be the best years for NBFCs.

There was talk about merging Shriram City Union and Shriram Transport Finance. Is it happening?

At an appropriate time, they will make a call. Many alternatives keep floating around.

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