L&T Finance open to divesting wholesale book if valuations are right
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
Sudipta Roy, CEO of L&T Finance, also shared the outlook for the current financial year in a chat with CNBC-TV18.
Sudipta Roy, CEO of L&T Finance, says the company will consider divesting its wholesale book if it gets the right valuation.
“We will not go and take a haircut just because we want to get it off the balance sheet,” Roy said in a chat with CNBC-TV18.
Below is the verbatim transcript of the interview.
Q: Will you be able to completely pare down the wholesale book and is the sale of the wholesale book an option that you are examining?
A: When we started the Lakshya journey, our wholesale book was over ₹38,000 crore. At the end of last quarter, we got it down to ₹5,500 crore and we told in our analyst call that at the end of April, we are at ₹4,400 crore. So, see the book which is left on the book is largely a standard asset book and we are in no hurry to pare it down. So, we will not go and take a haircut just because we want to get it off the balance sheet. As in when we get good valuation, we will consider divestment. But if we don’t get good valuation, if there are no takers, we’ll run them down at the normal course of sort of amortization.
Q: Since the focus very much squarely is on the retail side of the business, just give us a sense of what are the engines of growth you see, and with this home loan product that you’ve launched, give us a sense of how you expect this particular vertical to grow for L&T Finance?
A: If you look at our positioning, and we are very uniquely positioned as a sort of non-banking financial services company, because we are 50% urban and 50% rural. Very few NBFCs have equal strengths in rural as well as an urban. If you see our sort of strengths in the rural area, we are one of the market leaders in microfinance, and join lending group loans. And then we are one of the market leaders in tractor finance. So these are two of our large businesses. So we will grow those businesses and those businesses have been doing quite well. The farm business, especially the tractor business was sluggish last year, primarily because of bad rains. But because good rains have been projected this year, we expect that business to have a good uptake post maybe August.
Q: What kind of growth rates are you looking at for FY25?
A: For FY25 – we have said that overall, our growth rate targets are 25% as part of Lakshya guidance. So we expect that we will hit those numbers going forward. We expect to do better, but our guidance is that we will hit those numbers of 25% plus.
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Q: While within retail personal loans is a very small part of the book, you told us it’s about ₹5,500 crore, but still given the concerns that the regulator has highlighted with respect to the growth of that business, you said you’re going to take it slow, but just set out for us what your sort of targets for that particular segment is if it’s going to come down from these levels will you go very slow and growing it?
A: We have slowed down personal loans growth in the last two quarters. If you see, our average run rate was ₹1,300 crore a quarter, we slowed it down from ₹1,300 crore to about ₹850 crore and then last quarter we have done about ₹results boar950 crore. This is a consumption category. This is a segment in which there is demand in the market. This segment gives reasonable RoAs and I do believe that if you run a sensible credit risk programme, there is money to be made at acceptable risk costs. So, given the fact that we as a company have this part of a second pillar is that we will build a very strong credit framework, we will continue to grow this business, like all other lines of business, but we will continue to grow this business in a risk calibrated fashion. And at acceptable growth rates. We will not be growing this business at breakneck speeds – at acceptable growth rates.
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Q: A quick word on your cost of borrowing as well since the implementation of the higher risk weights for bank lending to NBFCs, even though your rating is fairly decent at this moment, how’s the cost of borrowing panned out and with the RBI rates where they are, how do you expect it to be?
A: If you see our cost of borrowing, it went up by one basis points between Q3 and Q4 – from 7.81 it went to 7.82. So that has been one of our strengths last year, whereas our cost of borrowing has been very stable. But given the RW increase, and given that now, we are all sort of resigned to the fact that rates are longer – that the current rate regime will be longer, we expect our rates to go up by anywhere between 30 bps and 35 bps over the next financial year, from that current levels. So current levels we are at about 7.81-7.82, so more or less, we know we can expect a rate sort of to go up to anywhere between 8.1 and 8.15. that is what we are looking at.
Q: Even on the margins, you expect some pressure to continue?
A: One of the things that you have to note that we had a large wholesale book as a wholesale book was average yield of about 10.5-11%. And our retail is an average yield of 15.5-15%. So as our wholesale book pares off, you have retail book replacing it. So anyway, your margin sort of distribution within the book changes. And the retail book is obviously at a very low level of Rs 4,400 crore, our net interest margins (NIMs) are about 11.25%, we expect a small margin of movement but the fact is that I think we are at the top end of the NIM expansion cycle.
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But obviously, we are working on many areas, for example, fees is an area in which we are trying to improve. For example, we have recently got a corporate Insurance Agency licence. Previously, we could do insurance attachment only at the point of sale, as a trade sheet attachment. Now we can sell more sophisticated insurance products through the cycle. So we’re looking at expanding our fee lines as well. So overall NIMs and fees – every organisation tries to take the NIMs and fees higher. So that objective will continue. And what we’re doing is that we obviously see maybe a 30-35 basis points increase in our cost of funds over the next 12 months. We will try to at least neutralize that.
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