Indiabulls, which started life as an online brokerage, has diversified at a furious pace to become one of the fastest growing non-banking financial companies (NBFCs) in the country. As a group, it has moved into areas ranging from infrastructure and power to retail and real estate—areas which require vast capital and have even longer lead times. As the global money markets continue to teeter on news of write-downs and India roils under high inflation, Gagan Banga, chief executive, Indiabulls Financial Services Ltd, the NBF arm, talks about his loans business and the group’s ambitions. Edited excerpts:
How is business, especially the capital markets side of it in this kind of a bearish market?
As a group this year, we expect to make somewhere around Rs1,200 crore of profits and the capital markets business will contribute to about Rs230-240 crore.
So, 20-25% is capital markets and we are not too worried about the markets, but if the overall sentiment goes bad, it affects the other businesses also. I am not too worried about day to day volatility. I think this is here to stay.
How long do you think this volatility will last?
At one level we are operating in isolation, where we are possibly the only country in the world which is seriously considering an interest rate hike. But because of the way that equity markets operate and because we are interested in liquidity coming from global markets, we do get affected by what is happening there.
Gagan Banga, chief executive, Indiabulls Financial Services Ltd (Photo by: Sanjay Sharma)
So, volatility will exist because there will be domestic pressures, which will operate in isolation to international pressures. Because of the overall worry that...this inflation is going to set us back on growth, that overhang will continue. We will be more volatile than most markets because of the fact that we have these two very independent situations. Volatility will be around for the next many months.
Does it affect your plans to raise money?
We are going to raise money. We are going to raise $1 billion (Rs4,000 crore) as?debt?for?sure.
And how are you going to raise it in this kind of a market?
Because we had taken a lot of options in terms of enabling provisions from shareholders in terms of that, we can either do a debt issuance or an equity issuance or a quasi-equity issuance. This is something we have been working on not from today, but for the last three months since the lending business achieved reasonable size and scale; we are looking at raising long-term debt from the domestic market.
And the objective there is that we will do two-four rounds depending on how the first couple of rounds do for raising money, which is three- to five-year money. The sum total will add up to Rs4,000 crore. But we are also, in parallel, raising a lot of bank debt in the next 12 months.
This is not a very significant amount when you look at the fact that in the balance sheet as of December-end it was Rs8,800 crore, as of March-end just the assets under management will be a little over Rs10,500 crore. So, these are numbers that we are currently closing. And next year’s disbursements will take the asset book to over Rs20,000 crore.
We are currently at a run rate of Rs1,000 crore a month; that’s what we have been doing for the last five months. So, even if we just go by that, we do a Rs12,000 crore additional number, we have Rs11,000 crore of assets and then there will be some loans which will come back. Our idea is that we should grow loan disbursements by 40%.
It’s not a good time to raise money through debt. The rates are going to be pretty steep?
We get pretty good rates and rates will jump on the basis of whatever way that interest rates are going to move…25 basis points is what I am expecting the interest rates to harden by. If you understand our business, we are operating at a yield of about 18-19% and when we are operating at 18-19%, my three-year money comes to me at sub-11%, which is the benchmark money I have to keep.
So, I am not worried about up to a 25 basis points interest rate hike and if the overall market tightens, our long-term loans are on floating basis, which I can pass to my customers. Coming to your question whether they will lend or not lend, we have highest ratings for both our portfolio as well as our organization. As a group, we have the net worth of Rs12,000 crore. Financial services on a stand-alone basis will have December ending about Rs3,600-3,700 crore of net worth and close the year at about Rs4,000 crore of net worth. The only better capitalized non-banking company in the country is Reliance Capital, including the private sector banks ICICI Bank, HDFC Bank and Axis Bank. In terms of the entire banking and non-banking in the private space, we are the fifth most capitalized entity in the country, which makes us an obvious first choice for a bank to take an exposure.
And you’re not worried the way inflation is going and credit is getting dearer that there will be a rising number of defaults?
Defaults will increase for sure and we have to factor that in into our business plan. We have factored that in, in the sense 80-85% of our incremental disbursements are around the mortgages business. So, we have ensured that there is enough equity of the customer in the deal and, therefore, we become the last choice of default. But yes, overall, I am sure there will be higher bouncing levels, there will be higher delinquency levels. We have created a provision which is two times higher of what we have as NPAs (non-performing assets). So, we continue to provide that extremely aggressively.
And you’re not worried about loan recovery?
Our average ticket size of a loan is Rs25 lakh. We are operating at 50% lending. Our average loan borrower is a guy who has a home of Rs50-55 lakh. In India, even in today’s scenario, if somebody owns a house in the Rs50-55 lakh range, he is a middle class guy, he is not the lower middle class guy for sure. This guy in that sense is probably the cream to be lending to. So, we have chosen that segment. We are successfully lending to that segment. We have built enough equity of the customer in the loan. So, I strongly believe our portfolio performs in line with what the new home loan portfolio performs. As long as the home loan portfolio also has reasonable equity. So, if you have taken care of the fact that the property that you lend against is reasonably valued.
And the guy that you have lent to has the means and the steady income he will pay via EMI (equated monthly instalments). If there is a large economic shock, obviously there is going to be some trade down in everyone’s portfolio. And that’s where your loan to value is going to be very critical. If I have to recover and there is a lot of supply coming in the market, then I am best placed. A new home loan guy will have to write a loss if he just books 10% crash, but I have 50% to clear. So, even if I have to do a desperate sale, I have a lot of flexibility. That is why I am not so worried. Because structurally as an organization, we have built a portfolio very carefully around this space, fully understanding that there is a possible slowdown.
The only aspect that I am worried about is that the minute all of this starts happening, the overall environment does not remain as conducive to grow the business. The worry is not about how the existing portfolio will perform. We are in a growth phase of our business. So, if there is too much of a slowdown, then growth obviously reduces.
The $1 billion money you are raising is purely for loans?
It is but obvious if a company is going to disburse loans, it has to raise money. It will raise money through either equity or debt. That could further come from funds, banks, mutual funds or long-term debt from corporates and other institutions.
For us, it is business. Capital is the raw material for my business. Every month, I am going to raise Rs900 crore. If I don’t raise it, then how would I do my disbursements? Do you know that HDFC Bank and HDFC (Housing Development Finance Corp. Ltd) would have in the last year raised about Rs20,000-22,000 crore of debt.
What is the ambition of the company and the group?
As a company, we are expanding moderately and as a group, we are expanding massively. As a company, it is Indiabulls Financial Services we are expanding into asset management, life insurance and running a multicommodity exchange. As a group, we have interests in capital markets— which is our oldest business— financial services, real estate, retailing, power. We had thought that we will bid for telecom. We bid and we withdrew from the business.
These are our stated businesses and there are two-three new businesses that I spoke about, i.e., asset management, which we have gotten our licence for, insurance, which we are getting licence for, and multicommodity exchange, which again we are awaiting licence for.
What’s the group’s vision?
There is no vision statement that we have, but two things that possibly guide whatever area we are in. We have to be amongst the Top 2 or 3 players in reasonably quick time. On the capital markets, we are the largest retail brokerage; on the financial services side within the NBFC space by disbursements, we are by far the largest. And by the end of the year, we will be the largest guys by balance sheet as well. (In) real estate, we are the third largest real estate company by net worth and market capitalization. I am sure that on lot of other parameters such as profits, we will be the third largest company after DLF and Unitech. The most important for us is we have to be in the Top 3 in whichever area of operation we are in. In power, for instance, we are the newest player, but already the fifth most capitalized in the private sector space. The other important area for us is we should possibly try and be present in each and every high growth sector.
Who are you tying up with for your new businesses such as asset management?
Asset management, we will do on our own. Insurance we are doing a joint venture with Societe Generale and for the multicommodity exchange, we have a joint venture with MMTC. And then in the power sector for each project we have joint venture partners, so there is one project where we will bid again with MMTC, there are two projects we are bidding with a Singapore-based company, there is one where we are bidding with a Hong Kong-based company.
So, what kind of investment are you planning to make over the next four-five years?
That’s not the way we operate. As an organization, we are not built around throwing large numbers. We have equity capital put together of all group companies of Rs12,000 crore; as a group this year we will make Rs1,200 crore; next year we will make Rs2,000 crore. That Rs2,000 crore will get added to the Rs12,000 crore. End of next year I will have Rs14,000 crore. I will live within my means and if I want to go beyond my means, I will raise money. And when I raise money, I will come and tell you I am raising money. Within the Rs14,000 crore money it is pretty designated.
Money has been raised for specific purposes and it will get spent for specific purposes. And then money will come on to the balance sheet in the form of debt for project execution, for building the balance sheet. So, we don’t believe in saying that I will spend Rs20,000 crore in this business.
Do you see yourselves as a full-fledged bank?
Yes. The plan is there, but plan has to get approved. It is a highly regulated industry and RBI (Reserve Bank of India) has to approve us becoming a bank. There is a window where an NBFC can amalgamate with a bank...but RBI has to be open to that. I think RBI is currently more focused with 2009 and the commitments given to WTO (World Trade Organization) get completed and it is not currently focusing on ensuring domestic mergers and acquisitions.
So, if you get an opportunity which are the banks you would want to merge with?
Anybody who has a reasonable valuation. There is no deal on the table yet, but I know of several banks who can build larger franchises with some infusion of capital.