'India is fastest-growing large economy in the world'

'India has formed tremendous resilience and still a strong growth.'

Credit offtake in the economy will improve in this financial year as the central bank has paused interest rate hikes, said Nirmal Jain, managing director of IIFL Finance.

"We are just trying to grow and consolidate our business model as an NBFC," he told Manojit Saha/Business Standard in a video interview.

While announcing the fourth quarter earnings, you said there was slowdown in the affordable home loans due to interest rate increase.
Given that rates are going to stay elevated for at least a year or so, how do you see credit offtake in FY24?

I think credit offtake will improve in FY24 primarily because our rates seem to have paused.

So many times when rates are increasing in a very quick frequency then and every quick periodical interval, then the expectations for rate increase also go up and people are concerned about further increases.

So I think one good thing about India is that inflation has been in control and rate increase seems to have paused because as we see that the inflation numbers are looking quite acceptable and good.

Even if we aren't expecting any rate cut anytime soon, rate cuts will happen, probably they will take about at least a few quarters before they can start.

But the pause itself is good news from the sentiment point of view.

And also this is supported by faster growth in the economy, the accelerated growth in economy and you have seen the GDP number also.

We are ending the year with 7.2 per cent. What is important to understand is 7.2 per cent may be down from 9.1 per cent, but it's significantly better.

We are the fastest-growing large economy in the world and when the most of the global economy is this year are going to face a significant slowdown.

India has formed tremendous resilience and still a strong growth.

So I think the global economy growth average is around 2.4 per cent, which is down from say 3.1 per cent and that also is a little higher because of averages.

So in that context, I think the environment is positive, the liquidity again has become fairly benign, I would expect the credit offtake will be healthy in FY24 and maybe slightly better than FY23 in the affordable housing segment as well as other segments that we operate in.

IIFL is in segments like housing, loan, gold loans, digital loans, MSME lending. Which segment do you expect to do better?

I think all segments are doing well, but what we are seeing is that microfinance has done well on a base which year before last was a little lower and maybe a little difficult time period in 21-22 in the wake of Covid.

MFI has recovered very well. Gold loans are also doing very well because gold prices are rising and there is competition by 'me too' players and a number of new entrants into the industry and they are offering lost leading rates so many times what they do.

They offer 6-7 per cent interest rate to the customer where the cost of the fund itself may be much higher, 9 -10% or even 11% for some of this Fintech and new players.

They think that they can get the customer and then increase the rate but it doesn't work like that.

It looks like (in) the industry many new players have understood and they are also aware of the fact that the new round of funding may not be so easy to allow more losses.

Gold loan, I think, looks good; MFI looks good. Affordable home loan will be a steady growth that also will recover maybe more so in the later part of the year.

Digital loan again is showing tremendous promise and growth.

There again we have seen that the industry is consolidating because of the number of fintech players that jump in on the back of many NBFCs or RBI where they probably wanted to give FLDG.

RBI has been very proactive and has come up with regulations which are fairly pragmatic as well as strict and that will make sure that the industry--may be the froth basically--clears up and will see a very healthy growth.

So I see that all four core businesses that you operate in have tremendous growth trajectory ahead and all of them are looking good.

In terms of relative signality or the cyclical trend I think gold, MFI are doing much better.

In FY23, the total AUM growth of IFL Finance was about 26 per cent. Do you expect FY24 to be better than FY23?

I think on the whole it should be similar. 25-26 per cent is a very good growth to sustain on the large base and making sure that the credit quality and the margins are not compromised.

IIFL Finance is betting on co-lending. We last year saw 166 per cent growth in the co-lending business to about Rs 7,500 crore.
What kind of growth do you see in the current financial year?

So co-lending is a new phenomenon and the 166 per cent growth by itself may not mean much because it is a low base and we just started a year before last.

But the fact of the matter is that co-lending is the way to go and will have healthy growth going ahead also, most of the banks are excited, but still the process integration, the technology integration is a very long and cumbersome process because banks actually underwrite themselves also.

All the banks are keen to do co-lending for priority sector and retail loan assets and we with our brand and workforce with more than 35,000 people are very well placed. So as a strategy co-lending will continue to grow.

Is the risk assessment completely done by banks? Since a NBFC has 20 per cent share in the loan, so is some risk assessment done by NBFCs too?

Typically, what banks do is done by both actually because what banks do is basically that they agree upon the process and risk parameters and we adhere to that.

So we act more like banks' agent and also so at the source we do it.

But typically banks do it again. They go through the documents and every bank will have a different process to do it.

In my view co-lending risk assessment is done by both banks as well as NBFC.

You have expanded the branch network rapidly in the last two years. Do you think the branches have reached a critical level?

The branches still have potential to grow and we still have potential to set up new branches.

But, having set up very aggressively a number of new branches, more than a thousand over the last two years, this year we have to pause and make sure that the branches become productive and our cost-to-income ratio comes down.

Once we maybe after 12 to 18 months, when we make these branches fully productive, we can embark upon the next phase of growth.

And we'll again make an assessment of the circumstances and the environment at that point in time, including the digital penetration and the opportunity to grow digitally rather than through branches.

But at this point in time the branch expansion has slowed down significantly.

We have seen a significant rise in cost of funds in the last one year following an increase in repo rate by the Reserve Bank of India.
What could be the strategy to protect margins from the rising cost of funds?

Fortunately for us the cost of funds has gone up by a few basis points, maybe going ahead also within 30-40 basis point is what our weighted average cost of one may go up by and three four reasons for that.

One is that we are a very high cost dollar bond $400 million when we raised it when the Covid had started in 2020 February, so those high cost role because with a fully hedged cost was double digits so that we are repaid fully.

Two, many of our loans and NCDs are long term.

So we don't need to, you know, basically replace the entire thing in a year because there are 3 or 5-year maturity.

So the incremental loan requirement to the extent limited, which comes at a higher cost, if the systemic interest cost has gone up.

Three, in co-lending we don't have to really worry about the funding 80 per cent goes to banks, balancing the co-lending rates are different than the they're based on the quality of assets and the private sector, liquid assets and everything.

Another thing, which is very important, is that given our track record in last five years--the crisis of demonetisation, DHFL and many other NBFCs that went bust and the liquidity crisis and the COVID--we have performed well in terms of asset quality and growth.

So that has improved our credibility and standing with banks and other lenders.

So we are able to negotiate better rates.

All these things put together we were able to contain the rate of interest rate increase significantly.

So our actual cost incurred is very, very low.

You expect to protect the margins in FY24?

We should be able to protect the margins in FY24 very easily.

What are your thoughts on converting IIFL Finance into a bank, universal bank, or a small finance bank?

Honestly, at this point in time, we are not looking at that scenario, we are just trying to grow and consolidate our business model as an NBFC for the time being and we are also waiting for guidelines for a digital bank, which you know, NITI Aayog has floated a paper, and RBI must be considering it and evaluating it.

But for the time being, we don't have any plans.

What is the plan to unlock value in some of your subsidiaries, in terms of listing and also in terms of bringing in a strategic investor, we have seen the Abu Dhabi Investment Authority has come into housing finance as a strategic investor.
Any such talks are underway to bring in most strategic investors?

Strategic investors are the private investors that we've got in our housing finance company ADIA, then Abu Dhabi Investment Authority, they're long term investors and their horizon is typically seven years.

So, at some point in time, where exit you know, this company may de-merge, but at this point in time in the near future in the foreseeable future, will continue to be consolidated as we are.

For de-merging and listing of subsidiaries is like maybe a five to seven year thought process and not immediate.

So five to seven years of time?

The private equity investment has that kind of timeframe easily available for their exit.

And other than that, I think the unlocking value is not the consideration, but it will become size in terms of profitability, and the market setting large enough and investors want an exit that over time you can consider listing them.

Feature Presentation: Aslam Hunani/Rediff.com