Mumbai: Reliance Capital Ltd(R-Cap) reported second quarter profit fell 70% from a year earlier, missing analysts’ estimates, because of a sharp rise in the cost of borrowing as interest rates rose.

Margin pressure: R-Cap’s chief executive Sam Ghosh. Photo: Abhijit Bhatlekar/Mint.

Operating profit before other income, interest and exceptional items rose 47.6% to 638.69 crore.

R-Cap’s share price gained 0.03% to close at 358.90 on the Bombay Stock Exchange. The exchange’s benchmark Sensex lost 0.97%.

The company, which has operations across asset management, life and general insurance and commercial finance, saw its September quarter interest charges rise 35% from a year earlier to 583.24 crore.

Analysts expect R-Cap to report better earnings next quarter onwards.

“R-Cap’s liquidity position would have improved this quarter with the money from Nippon flowing into the company," said a Mumbai-based analyst with a foreign brokerage. “Also the R-Cap management indicated that there was pressure on margins since it was de-risking its books. Both factors may have played out in the last quarter." The analyst declined to be identified as he is not authorized to speak to the media directly.

R-Cap sold a 26% stake in its life insurance business to Japan’s Nippon Life Insurance Co. R-Cap has received around 3,062 crore from Nippon in October.

Sam Ghosh, R-Cap’s chief executive, said that this amount will reflect in the company’s financial statement for the December quarter. Around 2,700 crore of the said consideration will be used to repay debt, he said. The firm’s businesses like commercial finance suffered on account of higher borrowing costs. It reported a profit before tax of 55 crore, a 10% decline from a year earlier. R-Cap’s statement said that this was on account of “increase in interest costs by 110%".

The commercial finance business continued to grow its loan book in the September quarter. It stood at 13,927 crore, 39% higher than a year ago.

Ghosh said that it takes the company at least a couple of months to pass on the impact of higher interest rates to borrowers and that affected the business. “Also, 30% of our portfolio has fixed interest rates where we cannot pass on the increase," he said.

The analyst cited above stated that the net interest margin of R-Cap’s commercial finance operations had suffered in this quarter as it continued to pare its unsecured loan book and as there were certain difficulties in passing on higher cost of funds to its borrowers. “The net interest margins for the commercial finance business should stabilize from here on," he said.

There was some pressure on R-Cap’s asset management business as well. Its assets under management dropped 13% from a year earlier, matched by a corresponding decline in revenue and profit.

Ghosh stated that assets under management in the mutual fund industry as a whole had come down because of choppy equity markets and changed Reserve Bank of India guidelines that says banks cannot park funds exceeding a certain percentage of their net worth with asset management companies, leading many of them to withdraw excess money from mutual fund schemes.

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