Mumbai: At a time lending to firms has slowed, Reliance Capital Ltd is set to enter the business to plug the “only missing link” in its portfolio, chief executive Sam Ghosh said.
He said the new unit will start lending only around July and will till then focus on preliminary appraisals. “Even then, we will not start aggressively. Our focus will be to try and grow conservatively,” Ghosh told Mint.
“Lending to corporates was the only missing link in our portfolio,” he said. “Our focus will be servicing the financing needs of small and medium enterprises (SMEs) that are more attracted to a player who can come to their doorstep.”
Expanding portfolio: A file photo of Reliance Capital chief executive Sam Ghosh. He said the new unit will start lending only around July.Rob Elliott / AFP
He, however, declined to specify sectors the venture would lend to, except saying it would steer clear of “high-risk sectors”.
Rajiv Ranjan, who was earlier chief operating officer of SBI Factors and Commercial Services Pvt. Ltd, will lead the new venture. “Large corporates have the option to go to banks and borrow at comparatively low interest rates, which will be difficult for us to offer,” he said. “We are targeting the mid-corporates amongst SMEs with a turnover range from Rs50 crore to as high as Rs700 crore.”
This move by the Anil Ambani-controlled financial services firm drew mixed reactions. One analyst said though the new business was a logical extension of the company’s services, doing it at a time when its consumer finance business was struggling was a cause for concern.
“They are de-growing (regressing) in the consumer finance business they are in. So the focus should be on resource generation rather than lending (in a new line of business),” the analyst at a Mumbai-based local brokerage said on condition of anonymity. He has an “accumulate” rating on Reliance Capital’s stock.
“RCap’s consumer finance portfolio has grown at a rapid pace (130% year-on-year) despite a 6% reduction quarter-on-quarter (q-o-q) in the loan book. Gross NPLs (non-performing loans) in the portfolio have increased to 1.9% of loans (an increase of 89% q-o-q). While coverage levels are reasonable (62%) and management has stopped incremental lending, the pace of incremental delinquencies are a concern,” Manish Chowdhary and Aditya Narain, analysts with Citigroup Global Markets Inc. wrote in a 20 January report, with a “sell” rating on the firm.
Reliance Capital has resumed lending in this segment but offtake remains subdued, Ghosh said. Loans to firms will be in the Rs20-25 crore range and Reliance Capital’s mark-up will be about 4% over the rate at which it borrows the money. “The overall business environment had changed. Even now, although the liquidity is back in the system, the rates (at which RCap will borrow) are hovering around 11%,” he added.
Reliance Capital has subsidiaries that offer life and general insurance, brokerage services, retail lending for buying vehicles, homes and other assets, besides being the largest asset management company in India. While all these—except consumer finance—are wholly owned arms with separate financials, corporate lending will be off the Reliance Capital’s book, at least initially.
The analyst with the Mumbai brokerage said the company would likely get borrowers rejected by banks, and who could be “subprime with a greater risk of becoming NPAs (non-performing assets)” or “non-subprime borrowers at very competitive rates”, thereby reducing the earnings’ spread of the business.
Reliance Capital’s shares ended 4.3% lower at Rs380.75 on the Bombay Stock Exchange on Tuesday. when the key Sensex index fell 2.91%. On Friday, Ambani’s AAA Enterprises Pvt. Ltd, which is a promoter firm of Reliance Capital, had disclosed that it had pledged nearly 10 million shares, a 4.03% stake, of the firm.