Mumbai: General Electric Co. (GE) is sizing up strategic investors for GE Money’s personal and home loan units in India in a deal that may total about $400 million (Rs1,616 crore).
Morgan Stanley is reviewing expressions of interest, which officials and Indian papers said have come from about a dozen local and foreign firms looking to get into the country’s mortgage sector, which grew by one-third over the past three years.
Companies interested in the units, set up by GE in 1994, include Tata Capital Ltd, Future Capital Holdings Ltd, India-bulls Financial Services Ltd, and foreign banks.
Private equity firms including Carlyle Group, ChrysCapital, Newbridge Capital Ltd and Temasek Holdings Pte Ltd unit Fullerton are also interested, local papers said.
“The first preference is for a strategic investor for our wholly owned personal loan and home loan businesses, but we can’t categorically say we won’t sell,” a spokeswoman for GE Money said.
Growth potential: A view of high-rise buildings in Gurgaon. The country’s mortgage sector grew at an average annual rate of 30% over the three fiscal years ended March 2007. (Photo: Harikrishna Katragadda/ Mint)
“We are in the very early stages of the process,” she said, declining to name bidders. GE Money wanted to close the deal “within the next six months,” she said, although a valuation had not been determined.
One source with knowledge of the deal said the units could be valued at about $400 million. “They say they’re looking for strategic investors, but they’re clearly putting the businesses on the block,” said the source, who is close to one of the bidders and asked not to be named.
“Four hundred million is an astronomical sum of money,” he said, but the deal had attracted more than a dozen suitors, who had been winnowed down to a shortlist of five or six.
Reliance Capital Ltd had initially signalled its interest and then backed off because of the high valuation, another source with knowledge of the deal said.
GE Money’s consumer financial services arm offers loans for vehicles, consumer durables, homes and personal loans. GE, which also has interests in infrastructure, technology and health care in India, has said it expected its overall revenues to more than double to $8 billion in 2010.
India’s mortgage sector grew at an average annual rate of 30% over the three fiscal years ended March 2007, and personal loans grew at about 35%, consultancy McKinsey and Co. said, although growth has moderated in the current fiscal year.
The Reserve Bank of India raised interest rates five times between June 2006 and March 2007, and also raised banks’ reserve requirements from late 2006, bumping up interest rates on home loans and personal loans by as much as 200 to 300 basis points.
While India is a highly under-penetrated market for mortgages and consumer lending, the lack of credit rating agencies raise the risk of doing business, said Renny Thomas, a partner at McKinsey.
“There is great opportunity, but it is a tough market to operate in,” he said.
“Firms have used outsourced business models—direct selling agents—and may be reviewing the model because of the high levels of fraud and poor credit quality in some segments.”
GE may be looking to exit these units now to focus on its core health care and infrastructure businesses in India, and because the risk of defaults was higher in the current market situation, the officials said.
While the quality of secured home loans was good, the risk of fraud and defaults in unsecured personal loans was high, he said. This has been compounded by the tight liquidity recently.
Still, firms will be ready to pay a premium for assets such as GE Money’s because of the rapid growth potential, said Rishi Sahay, managing director of IndusView Advisors.
“The price will be at a substantial premium to the book value because it takes a long time to build a significant presence.”
In addition to local firms that are building heft, foreign banks are also keen for a larger presence ahead of a planned review in 2009 that may ease some curbs on them.
“Retail finance in India is a long-term growth story, but it hinges on the price and quality of the portfolio,” Thomas said.