Interview: Sentiment for most sectors very positive in terms of fundamentals: Nirmal Jain

Synopsis

“Gold loan is one segment where we are seeing intense competition. Many fintechs and new age companies have come up. They are funded by private equity and are trying to gain market share initially at a loss. Microfinance, passed through difficult times in the Covid and moratorium. Incrementally things are improving significantly. ”

“36% of our portfolio is home loan and these are affordable home loans. Our average ticket size last quarter was Rs 15 lakh. So you can imagine that the value of the house would be around say Rs 20 lakh which will be in the far suburbs of cities like Mumbai. We are primarily focussed on the affordable segment where we are seeing a strong demand and a strong recovery,” says Nirmal Jain, Chairman, Managing Director, IIFL Finance

What happened in the quarter in terms of asset growth, deposit growth? What essentially are the NIMs like in the quarter?

This quarter we have all in all good growth; all our core businesses grew by 35% YoY in terms of loan growth, and relatively getting some advantages of scale in the operating cost and the provisions. Profit after tax grew by 36% YoY. So we reported a post tax profit prior to minority interest of Rs 397 crore, which was about Rs 291 crore in the same quarter last year and about Rs 330 crore in the quarter before.

So we had a good quarter. We were able to maintain the NIM margins at around the historical trend of 7%. A good thing is that we have been able to further break down NPAs which were about gross NPAs from 2.6% to 2.4% and net NPAs from 1.4% to 1.2%. So, all around a good quarter and we are seeing traction all over and good demand for credit.

It is just picking up and in terms of margins, interest rate hikes have happened but most of them get passed on and on a weighted average basis, we do not get so much impact because a significant part of the long term has been contracted over three to five and also ten years.

What kind of sustainability do you see in this demand from the entire real estate pack because a large part of our portfolio is made up of real estate demand. With the interest rate up cycle, do you see some sort of plateauing of demand there?

36% of our portfolio is home loan and these are affordable home loans. Our average ticket size last quarter was Rs 15 lakh. So you can imagine that the value of the house would be around say Rs 20 lakh which will be in the far suburbs of cities like Mumbai, not even the near suburbs or in a very small town. We primarily focussed on the affordable segment where we are seeing a strong demand and a strong recovery.

If you look at our portfolio, 32% is gold loan which again is a very small ticket business; about 12% is microfinance and the remaining 15% or so is our business loan and the 5% of our portfolio is historical portfolio where the funding has been done to developers. The real estate portfolio is just 5% of our book and has been coming down as we are not doing incremental funding.

But if you refer to the mortgages which are affordable, then demand is strong unless interest rates go up significantly from here. Till now, whatever interest rate hikes have happened, has been taken in stride and demand continues to be strong. We really look at the retail demand which is 95% of our portfolio with a lot of optimism.

When we just talk about the housing demand with interest rates going up, 15 lakhs, 20 lakhs is what you essentially operate at. Does the EMI going up have a big impact on demand?

In India, normally the mortgages are for 10 to 15 years. So, when the interest rates go up. then you can increase the tenure also and the tenure can be made 15 or 15 can be made 20-25. So you do not change the EMI unless it really goes to a level of say 35 years and above. Till now, most of the housing finance or home loan companies or even the banks for that matter have managed to keep the EMI at the same level and increase the tenure but if interest rates continue to rise, then at some point in time, you will have to tweak your EMI and that can be the real test of what happens to demand and credit quality.

But we do not foresee that in the near future because a 50 bps rate hike was expected but if it goes up by another 100, 150 or 200 bps, then obviously there will be an impact.

What are you witnessing on ground when it comes to those microfinance loans, demand for gold?

Gold loan has become intensely competitive because a number of new players have jumped in and just to gain initial market share, they have been loss bearers in the sense that they are offering teaser rates which are not sustainable. Also many banks have become very aggressive, particularly the small banks and the south based banks.

Here yields are under pressure and we are not able to grow the business as fast as we would have liked to because we expanded our branch network by almost about 30-40% over the last 18 months. But still the gold loan growth in the last quarter was 4% quarter-on-quarter which is not very significant with this expanded network.

So gold loan is one segment where we are seeing intense competition, kind of a price war. Many fintechs and new age companies have come up. They are funded by private equity and they are trying to gain market share initially at a loss so that business is passing through a bit of intense competition.

Microfinance, passed through difficult times in the Covid and moratorium, restructuring and all those cases have been causing a lot of stress but incrementally things are improving significantly. The RBI has been very pragmatic in making rules very clear in terms of how the interest rates can be charged and what kind of customers and how to do the income based loan sanctions. This industry has passed through difficult times in 2021 but the future looks significantly better and will repair very significantly in the next two quarters. In terms of business loans, we focus on small ticket loans against property which is mainly in Rs 10-20 lakh. Also on the unsecured loans which are done completely digitally, we are seeing the economy recovering. The demand is strong and it is picking up very well.

Also the entire RBI crackdown on a number of fintechs, that are not regulated but offering credit products which can be dangerous over a period of time, is also good in a way as it will make way for orderly growth of fintech. The industry will grow well here also.

What is the sense that you get of the outperformance of Indian markets now that numbers from banking and various other sectors have started to come in?

India is indeed the bright star in a gloomy world today and what happens is because global news is so gloomy, people get overwhelmed by that and sometimes they miss the opportunity here. But the economy is doing very well, the banking sector in particular. In the last 8-10 years, it has become much stronger vis-à-vis the global peers and if the economy continues to grow, then banking is a proxy for the economy and all other sectors.

This time around, we are seeing that one should be optimistic on all round results . Of course, the stock picking has to be bottom up and one has to find out which stocks are overvalued or undervalued but the general sentiment for most of the sectors is very positive in terms of fundamentals. Now valuation is something that one has to look at from stock to stock.

What is the sense you get about the numbers coming from the private NBFCs and banks?

Wherever there is interest rate hike, banks as well as NBFCs benefit primarily because they are able to raise the interest rate for most of their loan assets much faster than the rise in cost of their deposits or liabilities. I am making a general statement that the interest rate increase is positive in terms of profitability for banks as well as NBFCs. Over a longer time period, if the interest rates remain high, that has an impact on the credit demand and there is a pressure on increasing the cost of funds also though in the immediate short term, they benefit. I think that impact probably you will see in most of the results.