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IIFL’s Nirmal Jain Says 25-30% Growth Not Difficult For NBFCs

Mumbai | August 08 2018 12 : 38 IST | BloombergQuint

"PSU banks are also growing and competing in retail. But in the middle to long term, they are still crippled for capital," Nirmal Jain told BloombergQuint in an interaction.

Private sector banks and non-banking financial companies that are established and can raise capital are expected to meet the huge credit demand in the economy as public sector lenders struggle for funds, according to Nirmal Jain, founder and chairman of IIFL Holdings Ltd.

"PSU banks are also growing and competing in retail. But in the middle to long term, they are still crippled for capital," he told BloombergQuint in an interaction. The demand for credit, however, is such that a large part of that will go to the private sector lenders and NBFCs, Jain said, adding that a 25-30 percent growth for non-bank lenders is not difficult.

Jain's word comes amid the financial services firm's move to demerge its finance, wealth and capital business into three separate entities. The demerger, followed by listing, will involve three units-IIFL Finance (loans and mortgages); IIFL Wealth (wealth and asset management); and IIFL Securities (capital markets).

Jain is also bullish about the prospects of the wealth business in India.

Given a platform that it has built over the years, IIFL will be able to leverage the opportunity from growth in wealth business in the country, he said.

Jain said the asset management business has the potential to grow at the fastest pace in the next 10 years. But doesn't believe that maximum gains will only be made by the top five players. "There is enough scope for boutique asset management players to build a niche for themselves."

Shares of IIFL Holdings rose as much as 3.1 percent intraday to Rs 709 apiece.

Watch the full conversation here

Here's an edited transcript of the interaction

Where are you on the demerger process?

We have got approval from most of the foreign regulators and the Reserve Bank of India. We are awaiting approval from the Securities and Exchange Board of India. As soon as we receive SEBI's approval, we can approach the National Company Law Tribunal. Then we can hold shareholders' and creditors' meeting. So, the process can take about four to six months.

Would you believe that the natural course of the three businesses getting listed separately will immediately create some value unlocking and then better discovery of valuation multiples over the next few years?

I won't speculate that there would be any value discovery. In fact, that's not the objective. Historically, most promoters have tried keep a control through a convoluted structure of subsidiaries and associate companies. We thought about it and realised that the world is changing. The media regulators are looking at the companies which have a clean and transparent structure.

Your economic ownership should mirror the control rather than anything else. If you have the control with majority shareholders together then there's a merit. That means the structure is evolving.

Also, the regulators are different for three companies. The businesses are distinct in terms of culture and people they cater to. In our model, we have tried to incentivise people with equity. So, the top management better be incentivised by the businesses they are driving and not by equity of a conglomerate and there should be visibility about listing of the companies that they are managing. These are the key drivers. The balance sheet, too, becomes simpler. So, whatever leverage you take also gets content in three separate entities. At the time of listing, Venkat and I will remain the promoters of three entities. Karan Bhagat and Yatin Shah will join as promoters of IIFL wealth.

When you raised funding for the wealth business, IIFL's shareholding in the combined firm was about 51 odd percent. Do you think it will stay that way closer to listing? Or do you have any plans for fundraising in any of the businesses?

We don't have any fundraising plan till the listing of the three entities as there is no need of it.

Typically, you need fund for NBFCs. We have an NBFC in wealth and we have another one—Retail NBFC. In Retail NBFC, we raised money from CDC worth $150 million about less than two years ago. That money should be enough for the next 12-24 months. Therefore, fundraising is unlikely until listing.

Let's talk about value creation.

We aren't concerned about value creation in the short-term. The market capitalisation at which the companies list bothers me the least. What matters is that these three businesses can be simplified, and they can grow faster. That's the theme of our annual report.

If they grow faster in a more sustainable way, then you will create lot more value for shareholders over a period of time. In two to five years, these three businesses together should create more value than what the aggregate company could have created otherwise.

Can you tell us about the three businesses? Let's start with NBFC. The common parlance is that the runway of growth is so great that 25-30 percent, depending on the aggression of the management, should not be a problem for the next five years, if not more. Where are you in this argument?

The company which is going to get listed as an NBFC business has two subsidiaries-the housing finance and microfinance. So, our business is housing finance, microfinance and certain lending. In all these businesses the common element is that we focus on retail lending, small ticket lending and digital delivery.

We are seeing that a lot of progress has been made in technology and digital delivery, data analytics and artificial intelligence which should help reduce the operating cost, improve quality of credit and still reduce cost.

So, there is a great opportunity because this is at the bottom of the pyramid where we talk about microfinance; there is a lot of income-generating activity-a small entrepreneur or people who borrow Rs 5,000-25,000. Then if you look at our SME business in NBFC where the ticket size is Rs 4-5 lakh, again we are talking about small shopkeepers, hawkers. That's where India has to grow rapidly.

Almost 80 percent of employment is generated from the informal sector and they need capital. They are starved of capital because the banking system couldn't do the credit assessment or reach out to them. They don't have income documents or an advisor. But now, with technology and last-mile connectivity, NBFCs like us can reach out to them.

The over-arching theme of our NBFC business is small ticket and digital delivery. If you look at housing loans business, our average ticket size is just Rs 20 lakh. So, typically we are funding houses of less than Rs 25 lakh in terms of value. We are looking at houses in small towns, small cities or suburbs where ticket size is small; the end user is buying the house and he is going to repay out of his income or savings. This is a model that we want to focus on.

Would this mean that there will be growth at a reasonable risk? Typically, in the erstwhile days, housing finance to a salaried employee there is this consistency of income and therefore easy to predict; with the end user not necessarily being a salaried person, if that's indeed the case, the entail of risk being slightly higher, will companies following this model be able to grow at a great pace and at the same time managing the risks of delinquency in a big way?

It is a myth that salaried class will have a higher risk compared to say, self-employed. At the end of the day if the business goes into recessionary cycle; if the business suffer, even a salaried person can lose his job. What is important is how good is your credit assessment. It's all about how much you learn, how you use data, the kind of people you have on board who do these jobs, what kind of culture you have in an organisation. Your sales have to separated from the credit policy and underwriting. Say, if sales are trying to achieve numbers and compromise on credit, then there's a risk. The risk isn't function of the segment that you service but a lot more depends on your policies, people and culture. That's where we have invested in the past 10 years.

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