Have NBFCs lost their relevance?

When we look back a few years, NBFCs were performing extremely well and it was fashionable to be in this business. Today, very few of these players survive. But it would be wrong to say that NBFCs have lost their relevance altogether. They have the advantage of being closer to the market and they continue to do well in their niche areas. In Japan, where a number of banks have failed and the whole economy is in turmoil, consumer finance companies are doing extremely well. If an NBFC is enterprising enough and is able to offer innovativeproducts, there is no reason why it cannot do good business in India. Consider for instance, Birla Global Finance. We have always been cautious in car-finance and have withdrawn from truck finance. But we have launched a new product that offers high networth individuals finance for primary issues. There is a great demand for the product and we have been doing good business.

The car-finance market has been seeing a lot of activity. Why do you not see it as a good business opportunity?

With banks having entered the car-finance market in a big way, there is intense competition in the business. This has driven down the spreads, thus exposing the financiers to a much higher level of risk. As it is, our laws leave much to be desired and it is very difficult to recover dues in case a client defaults. Market information on credit quality of individuals is also unorganised. Even if we are able to generate higher volumes of business, just a handful of defaulters could make our operations unviable. Besides,the falling prices of second-hand cars poses a further problem. Earlier, you could rest assured that if the client defaulted, you could sell the car and recover your dues. This is no more the case. In such a scenario, the wiser financiers would do well to retreat strategically and reduce their exposure to this business. We are cautious and will become more active when the new enthusiasm of banks and financial institutions in retail finance reduces.Mutual funds is one growth area that your company has identified. Yet the business does not appear to be yielding good dividends.

Why?

Our asset management company has been doing extremely well. We manage assets in excess of Rs 1,600 crore and a 1-per cent asset management fee translates into revenues of about Rs 16 crore. The company is in a position to pay dividends but we have not been insisting as we feel that the business is still growing. The scope for the growth of the industry can be gauged by the fact that while the banking system controls overRs 700,000 crore, the mutual fund industry (including UTI) manages a mere Rs 70,000 crore. If we assume that India will follow a similar trend as developed markets like the US, the mutual fund industry should be able to control an asset base equal to that of the banking system.

Do you foresee a situation where mutual funds will be preferred over savings and short-term bank deposits?

Mutual fund units and deposit schemes offered by banks serve entirely different kinds of investment needs. People who need assured returns will continue to invest in bank deposits, however attractive a mutual fund scheme may be. Strictly speaking, mutual funds cannot offer assured returns though there are UTI schemes that do so. Bulk of the investments in mutual funds is currently in assured return schemes which shows that the average retail investor still prefers to invest in avenues that promise assured returns. Besides, mutual funds still do not offer chequing facilities and the flexibility that savings accounts dowith the convenience of a friendly neighbourhood bank. The demand for mutual fund schemes from the high networth segment is increasing and once pension funds and insurance come in, inflows into mutual funds will see a phenomenal rise. Yet, bank deposits would also continue to do well in the near future. In fact, there is a lot of synergy between banks and mutual funds in product servicing and marketing.

What, broadly, is your business plan for Birla Global Finance?

Birla Global Finance's business strategy would revolve around the needs of high net worth individuals. In terms of numbers, this group constitutes over 200 million people and the company is currently focussing on acquiring clients. We would like to be in a position to serve all the finance-related needs of our existing and targeted clients. This does not mean that we will expand into every finance-related activity. Strategic relationships with other players are being built in order to ensure that we are able to take care of all ourclients' needs. We are currently in talks with a foreign bank to devise a product that our clients would love.

Are you planning a foray into banking, as well?

We do not have any firm plans to enter the banking business. But we are currently examining whether or not it makes sense for us to set up a bank. There are indications that the government will finally allow large business houses such as ours to get into the banking business. We feel that to be successful in the business one needs to have large financial resources and an established reputation. We have both these and we feel we would be able to do well in the business. Though we have begun exploring the alternative routes to enter the business, nothing concrete has yet emerged.

How does making Birla Global Finance a holding company fit into your business strategy?

At the group level we have been trying to give each of our businesses a strategic focus. We had to ensure that a financial services company was not owned by an aluminiumor cement manufacturer. Therefore, the stake of group companies in Birla Global Finance was transferred to a holding company. Even internally, a holding company structure has been put in place.

This means that each of our activities is conducted by a separate company which in turn is held by Birla Global Finance. The advantage of such a structure is that partnerships can be entered into with companies specialising in each of these activities. At the same time, fresh funds can be raised from strategic investors by allotting them equity in Birla Global Finance. While the company is able to raise funds for its various activities, the investor is able to own a part of every activity that the company has an interest in.