Indiabulls: Topping The Trade

What is the strategy behind separating housing finance business and other businesses; how the growth has been? Has the strategy paid off?

Let me put it in perspective, we had Indiabulls Financial Services, which was the flagship company. It was an integrated finance company spread across all segments, vehicle financing, corporate financing, loan against shares and SME financing. And we had a 100% owned housing finance, a subsidiary of Indiabulls Financial Services.

 In 2009, we decided that, any incremental business lending will be totally on secured basis. We totally exited unsecured business lending and loan against shares. Most viable security is of housing assets, thus our lending is now totally mortgage based to everybody including businesses, individuals, professionals etc. All growth was happening from mortgage based lending and thus home loan became our primary segment.

However, housing finance company was short of capital and had already reached a plateau and we were stuck, we needed infusion of capital and reserve bank had restrictions on how much capital can be infused. One cannot take much exposure to a single company group by way of capital or loan.

 Since it was a subsidiary and not the parent company, it was not feasible to raise funds even through the financial system. All these factors were giving a lot of synergies to merge and that’s why we thought of merging the two entities.

Since our main focus by then was mortgage based lending, whether it is lending to housing finance, construction finance or retail space lending, therefore it made perfect sense to reverse merge i.e. merging Indiabulls finance with Indiabulls housing company instead of merging the housing finance company to the Indiabulls finance. So, that was the rationale and a housing fi nance company is always better entity than a NBFC. Housing finance is a NBFC but it’s an institution.

Right now if we look at the loan book how much is housing and how much are others?

Initially a lot of emphasis was on commercial vehicle segment, but in the last couple of years the sector was hit because of industrial slowdown, ban on mining etc. So we slowed our lending in that sector and now it’s a very minuscule portion close to about Rs 1900 crore against loan book of Rs 41000 crore. Home loan would be Rs 20000 crore with an average ticket size of around `25 lacs. Another segment would be loan against property (retail) of `11000 crore. We have some portfolio to SME, MSME, and also a bit of corporate lending. This is roughly how the mix is.

How much focused are we on MSME?

When we were lending to the trucking segment, we were particularly focusing on single truck operators and not on those who had a fleet of trucks, those would be largely categorised as a MSME. Coming to

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the loan against property segment if somebody has a property and needs a loan for his business, we lend based on what is the size of operation and cash flows.

Coming to the geographical aspect Tier I cities are getting saturated do you feel that next leg of growth will come from Tier II and Tier III cities?

Yes, I do, particularly for the housing segment that is the next frontier which needs to be tapped. I won’t say tier I is saturated, but the tier II cities show additional potential for growth

 How much penetration do we have in those cities?

Let me confess that right now the focus was tier I largely, but now tier II is beginning to become quite important in our scheme of things. We are ramping up our operations fairly in tier I and tier II, however, tier III will take some time though we do sense potential opportunities in these cities too. At the moment bulk of growth for Mumbai is going to come from Panvel, beyond Mira Road, Bhayander etc.

Do you feel that the major growth drivers will be these cities and you can sustain the same growth that you sustained in last two years?

I don’t see any problem in the next few years. Both topline and bottomline will continue to grow by 20-22%. Now with the economy opening up, there is debottlenecking in the system. Infra sector is gathering pace and housing in particular with the real estate sector. Our exposure is totally safe. This is by far the best sector from lending perspective. Real estate may have gone through hard times but from lending perspective, it is one sector which gives you complete comfort.

How has Indiabulls managed the asset quality?

Our processes including collection, recovery, credit and due diligence etc, all are fantastic. We do not compromise on that. Secondly, our lending is very conservative in the sense that we don’t do As we grew in size and scale and home loan became a major focus of our overall business, we have slightly compromised in terms of our spreads. But still our spreads are quite healthy. Our overall lending spread is little more than three per cent. Going forward, there could be a slight squeeze in that, but three per cent spread is going to be there. Earlier it used to be around 4.5 per cent, but as the book grows, you have to compete with the best, particularly in the home loan segment. The way RBI has mentioned that inflation is one factor which is their focus and interest rates may not come down on an immediate basis. How much will that be affecting Indiabulls in particular and other companies also? That at is a larger macro-economic issue and we have to live with it. I personally don’t see inflation coming down in another year or two till the price hike bottlenecks are addressed and they are not going to be addressed overnight. These are very structural and fundamental issues which need to be addressed in the economy and that will take time. So, as a result of it inflation is certainly not going to come down which could give comfort to the central bank to reduce rate. We are prepared to live with that. We are not saying that we will not be impacted if there is no interest rate cut or if interest rate is further raised. To that extent our lending and borrowing cost will also be impacted. Not all of it we are able to pass on to the customer. Although most of our portfolio is on the fl oating rate basis, we do price our asset book quickly. But the ideal situation would be of the rates to come down because that will be an opportunity for us. Any capital raising plans for the company? Capital is being raised as and when required. Th ere has been good capital infusion over the last one year through exercise of warrants by promoters and key management personnel. Th ere is some accrual by way of retained earnings also. Also we give good dividend payout to shareholders. We are close to 18% in capital adequacy right now. It will come down as the book grows. asset based lending, it is cash flow based. We have a system of finding out as to what is the trade turnover etc. Banks won’t lend to that segment. In fact, we provide great service also and it is a sweet spot for us. Th is is also the section which is largely unbanked. Today, in terms of financial infusion, they are unable to grow their business. If they have to grow their business, they need money. Banks are not willing to lend. So that has been our core strength. We have our own tie-ups, we need to know what is the actual cash-fl ow regardless of what the bank statement says. So, NPA is a function of all these factors.

Coming to the borrowing part, how much is the bank borrowing?

If you say bank borrowing for a loan book size of roughly `41000 crore, our bank borrowing is close to `25000 crore because you have to leverage. But now our reliance on short term borrowing is going down as bonds have become a very acceptable currency in the market. Th ese bonds get very good returns and all institutional markets and wholesale markets have loved our bonds.

How is it profiled: 1-5 years or less than one year or more than five years?

 We are trying to move away from the short term borrowing consciously. That is a lesson we learnt in 2008. We were depending a great deal on the commercial paper. Though, we did not suffer, we saw the bloodshed in market. Now, commercial paper serves just as an adjunct liquidity tool. It is not a primary source of fund raising. It is not even the secondary source of fund raising but it is there. You have opportunities sometimes so there is a short term gap, and only to address that we take recourse to short term which can be three months to one year, otherwise it is largely minimum three years. If you see the average tenure of our loans, even our home loans, it would be roughly 5 years.

 We have been maintaining good interest margins since last 2-3 years. Looking at the way you are shift ing to bonds etc, do you feel that margins will improve or sustain for next few years?

As we grew in size and scale and home loan became a major focus of our overall business, we have slightly compromised in terms of our spreads. But still our spreads are quite healthy. Our overall lending spread is little more than three per cent. Going forward, there could be a slight squeeze in that, but three per cent spread is going to be there. Earlier it used to be around 4.5 per cent, but as the book grows, you have to compete with the best, particularly in the home loan segment.

The way RBI has mentioned that infl ation is one factor which is their focus and interest rates may not come down on an immediate basis. How much will that be aff ecting Indiabulls in particular and other companies also?

That is a larger macro-economic issue and we have to live with it. I personally don’t see infl ation coming down in another year or two till the price hike bottlenecks are addressed and they are not going to be addressed overnight. Th ese are very structural and fundamental issues which need to be addressed in the economy and that will take time. So, as a result of it infl ation is certainly not going to come down which could give comfort to the central bank to reduce rate. We are prepared to live with that. We are not saying that we will not be impacted if there is no interest rate cut or if interest rate is further raised. To that extent our lending and borrowing cost will also be impacted. Not all of it we are able to pass on to the customer. Although most of our portfolio is on the fl oating rate basis, we do price our asset book quickly. But the ideal situation would be of the rates to come down because that will be an opportunity for us.

Any capital raising plans for the company?

Capital is being raised as and when required. Th ere has been good capital infusion over the last one year through exercise of warrants by promoters and key management personnel. Th ere is some accrual by way of retained earnings also. Also we give good dividend payout to shareholders. We are close to 18% in capital adequacy right now. It will come down as the book grows.