The Godrej Group’s Rs 5,000-crore investment in financial services could be among the largest it has made in a group company, Pirojsha Godrej, chairman of Godrej Capital, and Manish Shah, MD & CEO of Godrej Housing Finance, told Shritama Bose. The group is entering the lending space on the assumption that a banking licence is not an option at this stage, and arriving late has its own advantages, they said. Edited excerpts:
Regulations for banks and NBFCs are converging. What does it mean for a player like you?
MS: It’s a large move to formalisation. Saying that arbitrage or any unintended benefit because they chose not to regulate it is gone, is actually quite welcome. I don’t think the big opportunity was that there is this great arbitrage as a non-bank that allows you to compete against banks. I think the opportunity very much remains that you’ve got segments and markets that aren’t served well enough. You’ve got a clear opportunity to get in there. One thing it does, at least for people like us, is that it’s getting harder and harder for groups without strong balance sheets. The ability to bring in long-term patient capital is a challenge that’s getting much more real. What you were allowed to get away with while you were still small, as we go through our first set of inspections, it’s quite welcome that we are governed as if we are large already or are going to be large soon. They have come up with clear scale-based regulation and you know what to expect when you reach your next milestone.
Will you eventually look at a banking licence?
PG: No, I don’t think so. First of all, let’s see how the regulatory environment around that proceeds. Right now, I don’t think that’s even an option. While there is some convergence that perhaps is to banks’ advantage, we think that an NBFC’s advantages are considerable as well. We’ve gone into this business assuming a banking licence is not an option. If at any stage it becomes an option, obviously we would evaluate the pros and cons then. We are quite confident that in its current format, this is a huge opportunity for the group, which is why we’ve intended to go there. We are quite late in this industry, but that provides its own advantages as you can see what works and what doesn’t. The market is big and it is growing enough that we feel it’s not going to be hard for us to scale. Taking the right steps in terms of risk is much more important for us, because scale in this industry with our brand and the opportunities do not seem too challenging.
Would you also consider an insurance or mutual fund play within Godrej Capital?
PG: Not at the moment, but we’ll keep our eyes and ears open. As we establish initial success, we could venture into segments of other financial services. But, we quite intentionally didn’t want to do it in a way where we start five-six different products all across the country, and the ability of any business to do it well then really deteriorates. We’ll have a strong focus on first establishing ourselves in each of these sub-verticals, and then expanding it makes a little bit more sense. Godrej Capital is our financial services entity and as we enter new products and business lines, we may have different operating entities. The group probably has never invested as much as Rs 5,000 crore in a business. It has allowed businesses to self-fund their growth. We see it (financial services) as a very meaningful part of the Godrej Group’s scale five or 10 years from now.
Will you look to raise retail deposits at some point?
PG: We’ll study what the regulations allow. We did that in the past in various group companies. So we’d be open to that, but access to competitive-cost capital is one of the key advantages the group has had for all its companies and is certainly one of the things that gives us confidence to be competitive in this sector.
You’re looking at cash flow-based lending to SMEs. Would that eventually mean – CV or equipment finance as well?
MS: There are segments where we want to go in. That could take more than one form of plain simple term finance or maybe going into invoice discounting, supply chain finance and make it work in a given ecosystem. Right now, we’ve clubbed it under this one big umbrella, called cash flow-based unsecured, but it could have many shoots. One of the benefits of coming in at this time is that we will definitely be ready when an OCEN (Open Credit Enablement Network) comes in, and we’d love to partner with various LSPs (loan service providers) and plug into those networks.