In an interview with FE’s Mithun Dasgupta, Kanoria points out the company's focus is more on preserving profitability than on growth in the current environment.
Srei Infrastructure Finance has successfully been able to ring-fence its business against a challenging operating environment in the NBFC sector as it has re-engineered business model and entered into co-lending partnerships with banks, says chairman Hemant Kanoria. In an interview with FE’s Mithun Dasgupta, Kanoria points out the company’s focus is more on preserving profitability than on growth in the current environment. Excerpts:
How deep has been the crisis in the NBFC sector following the IL&FS episode?
The IL&FS episode was tragic. However, I would not classify IL&FS as an NBFC. IL&FS’ business model was quite different; the company borrowed money and invested in the equity of various infrastructure projects. It could continue for more than three decades as it had the support of the large financial institutions and sovereign funds. But fundamentally it is not wise to borrow money and invest it in the equity of companies and projects that are not liquid. It was probably being done to promote infrastructure sector and attract investors into the sector. Only one of the IL&FS group companies, IL&FS Financial Services (IFIN), was an NBFC which was in the business of borrowing and lending. But IFIN’s balance sheet was not big enough to cause a crisis of this magnitude. Hence, the issue was with the business model of IL&FS and it was not particularly an NBFC crisis.
But NBFCs were affected by the IL&FS episode, isn’t it?
It is very difficult for a commoner to differentiate between various NBFCs. Unfortunately, everyone got painted with the same brush. The main business of an NBFC is to borrow and lend but if a company is borrowing to invest then that is not really an NBFC business. Since the issues surrounding the IL&FS episode could not be addressed appropriately, the crisis became deeper. Therefore, today there is an uncertainty in the environment and no one knows how to resolve it. A few steps have been taken, like the partial guarantee scheme, but they are still under implementation. While the government has the intent to find solutions, but unfortunately issues still remain unresolved. The IL&FS episode did create negativity about NBFCs in the minds of investors. But we have been able to ring-fence ourselves to a large extent because of our 30 years of experience. The re-engineering of our business model also helped.
How did Srei manage to ring-fence its business against the challenging environment?
When the IL&FS episode happened (in September, 2018), everyone in the industry was devastated and waited for the government to step in and find a solution to the problem. However, after first three months, experienced players like us realised that there may not be an immediate resolution. Each NBFC then had to re-strategise and re-engineer their business models in order to survive and grow. Fortunately for us, about five years ago, we had taken a decision to reduce our infrastructure project finance portfolio gradually and we have been consistently doing so year after year, since then. Post IL&FS episode, we decided to accelerate this process and focused on growing our equipment financing book. Since we were reducing our project finance portfolio and we also decided to have all the loan portfolios under one company (transferring Srei Infrastructure’s lending business into its wholly-owned subsidiary Srei Equipment Finance by way of slump exchange), so as to improve our efficiency and reduce our costs. Furthermore, to increase our equipment finance portfolio, we have entered into co-lending partnerships with banks. It has helped us in reducing the risks on our balance sheet. These steps are helping us to stay profitable despite the uncertain environment.
Do you plan to raise funds this fiscal?
We will definitely augment our capital at an appropriate time when the market is more favourable to NBFCs. At this juncture and following the slump exchange we are quite comfortable on our capital requirements.
How has been your margin since the cost of borrowing for NBFCs has been increasing?
Our margin has been stable because every time there is a change in our borrowing rate, we are able to pass it on to our customers. The net interest margin (of Srei Equipment Finance) is generally in the range of 4.5-5%, and we expect it to stay at around same level or improve a little going forward.
What kind of growth do you expect in your assets under management (AUMs) in the current financial year?
Our focus is more on preserving profitability than growth in the current environment. At the end of last financial year, the consolidated AUM of Srei was Rs 47,070 crore and we don’t expect any significant change in the current financial year.
How has been the quality of your assets? Do you expect any significant change in it going forward?
Our asset quality has been showing signs of improvement. But due to change in accounting norms we have made higher provisions. At Srei, we lend against equipment or assets. Hence, even if our customers have some cash flow mismatches due to certain unavoidable circumstances, it does not mean that the loan has gone bad. But as per the current provisioning norms, we have to make the necessary provisions, which we have done. But since our loans are secured, therefore ultimately we do not take a big haircuts.