Mumbai: Reliance Capital Ltd (R-Cap), the financial services arm of the Reliance-Anil Dhirubhai Ambani Group (R-Adag), is looking to its commercial finance arm to deliver the next phase of growth for the company, as growth in profitability from the mutual funds business slows in the changed regulatory environment.

In August 2009, Indian capital market regulator Securities and Exchange Board of India, or Sebi, banned asset management companies from charging investors a so-called entry fee. This has had an impact on the profitability of asset management companies.

R-Cap expects its commercial finance unit to account for a 40% share of consolidated profit by fiscal 2013, overtaking the mutual funds business, currently the largest contributor, said Sam Ghosh, chief executive officer of R-Cap.

According to the company, mutual funds account for around 40% of R-Cap’s overall profit at present, and is expected to come down to 30% by 2012-13.

Currently, commercial finance contributes around 25% to R-Cap’s revenue.

This would be the first time that one of R-Cap’s other core businesses overtakes the mutual fund business in terms of share of profit.

New avenue: R-Cap chief executive officer Sam Ghosh. Abhijit Bhatlekar/Mint

On account of capital gains running off from R-Cap’s profit and loss account, R-Cap registered a 28% year-on-year decline in its net profit for the September quarter, which was Rs112 crore.

The financial services that constitute R-Cap’s core businesses are asset management, commercial finance, life and general insurance, broking and distribution. Apart from mutual funds and commercial finance, R-Cap also expects its life insurance business to break even in the next fiscal and contribute around 20% of the company’s profit by 2013. The remaining profit is likely to come from R-Cap’s broking arm Reliance Securities Ltd, in which the company plans to invest Rs300-400 crore.

R-Cap has been trying to push up volumes of its mutual fund business by expanding reach to yield greater revenue from fund management charges.

Ghosh said profit from mutual funds for the industry in general was growing at around 15-20% and wasn’t likely to see greater expansion unless assets under management increased significantly.

“We are trying to grow the business by creating branches and distribution points, which have a substantial element of cost attached, which reduces margins," Ghosh said.

Its mutual fund unit is meanwhile increasing the focus on debt assets.

Reliance Mutual Fund is India’s largest with assets worth Rs1.08 trillion under management and is reaching out to retail investors in non-metros with systematic investment and monthly income plans.

Dhirendra Kumar, chief executive officer of Value Research Online, a firm that tracks the mutual fund industry, says that growth in revenue may have plateaued out for companies in the mutual funds industry.

“While the existing level of profits may be sustainable, there may not be much growth. The significant growth of the Reliance Mutual Fund (business) over the last five to six years was aided by the erstwhile regulatory framework. Now, purely on the basis of management fee, growth may be difficult," Kumar said. “Third party distributors don’t find it (selling mutual funds) interesting enough any more. So it is logical for Reliance Capital to look at other avenues for growth."

With the infrastructure sector poised for growth in the country, R-Cap is banking on its commercial finance segment to deliver the next phase of revenue growth.

Ghosh said R-Cap could achieve a 25-30% growth in its loan portfolio and a 16-18% return on equity from its commercial finance segment through infrastructure financing, including funding sub-contractors, vendors and suppliers of infrastructure projects, and lending for infrastructure equipment and commercial vehicles. As on date, R-Cap has a portfolio size of Rs12,000 crore.

“We usually sanction and disburse loans faster than banks to such borrowers, who are always in need of quick, short-term funding," Ghosh said.

Around 52% of R-Cap’s total loan book is towards financing of small and medium enterprises and commercial vehicles, according to an investor presentation posted in November on the R-Cap website.

In the six months ended 30 September, R-Cap’s commercial finance business posted a profit before tax of Rs1,401 crore, a year-on-year growth of 15%, the presentation stated.

Reliance Consumer Finance has been looking to grow its business on the back of secured lending after having grappled with losses from its unsecured portfolio. In June, K.V. Srinivasan, chief executive officer of Reliance Consumer Finance, had said in an interview that his division had stopped making unsecured loans.

From 12% of the total loan book in 2010, the contribution of unsecured loans will come down to 4% by the end of 2011 and cease to exist in the next fiscal, Srinivasan had said.

R-Cap is one of the contenders to set up a bank as and when the banking regulator opens up the sector for big industrial houses. It can do it directly or through a subsidiary, depending on the norms.