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The scare of defaults by NBFCs has now passed: Nirmal Jain, IIFL Holdings

Mumbai | December 20 2018 12 : 21 IST | The Economic Times

The group's business comprises three distinct business lines: loans and mortgages; wealth and asset management; and capital markets. The reorganisation will result in three listed entities, one for each of the above businesses. 

The financial services industry is poised for exponential growth, driven by domestic expansion, demonetisation and digitisation, which has prompted IIFL Holdings to split its business units, Nirmal Jain, chairman of the financial services group that will soon list two of its newly carved out companies, told Saikat Das in an interview. Edited excerpts: 

What is the latest update on your corporate reorganisation plan? When do you propose to list your subsidiaries? 

Our demerger scheme is now with the NCLT (National Company Law Tribunal). We held an NCLT-convened meeting of shareholders on December 12. We expect to receive the final NCLT order in another 2-3 months. The current listed company, IIFL Holdings, will be merged with our NBFC IIFL Finance. The other two subsidiaries, IIFL Wealth and IIFL Securities, will be listed thereafter. The process should be completed in another 3-4 months. 

What triggered the reorganisation idea? 

The group's business comprises three distinct business lines: loans and mortgages; wealth and asset management; and capital markets. The reorganisation will result in three listed entities, one for each of the above businesses. 

We believe that all the core businesses have acquired a critical mass. They need flexibility and independence to grow faster in the rapidly changing technology- and innovation-driven environment. Each of the core businesses has a differentiated strategy, risk profile and growth trajectory. They should continue to attract high quality talent to sustain growth momentum. Each company, listed separately, can attract and motivate its key people with stock options such that their rewards are strongly correlated with their performance.

How will such a move pave the way for IIFL's future?

World over, investors, regulators and analysts are favouring corporate structures to change from control-oriented close-knit, conglomerates to innovation- and idea-driven independent enterprises. The financial services industry is poised for exponential growth, driven by domestic growth, demonetisation and digitisation. 

At the same time, incumbent players are being challenged by new entrants like never before. In such an environment, organisations sharply focused on their expertise in niche verticals are better placed to emerge as the leaders. The reorganisation will prepare IIFL group companies for growth opportunities amid intensifying competition in the coming decade. 

How much did you reduce the share of commercial paper while increasing the use of other instruments to raise resources?

Commercial papers (CP) constituted 24 per cent of our borrowings in the September quarter. This may seem high optically, but it was supported by an equivalent share of short-maturity loans including gold and capital markets, with an average maturity of three-six months, and commercial vehicle and SME loans with an average maturity of around 18 months. 

On the asset-liability management (ALM) front, we were well matched in all the buckets. Nevertheless, in view of the changed liquidity scenario, we are actively looking to reduce the share of CP funding by 40-50 per cent by end-December. CPs will be replaced by term loans, NCDs (nonconvertible debentures) and off balance-sheet borrowings. We also received refinance of Rs 1,000 crore from the National Housing Bank this quarter. 

How much did your cost of borrowing rise in the past three months? 

Our incremental cost of borrowing has risen by about 75-100 basis points. The average cost of borrowing is estimated to rise by 30-40 bps due to higher rate of interest as well as change in the liability mix towards more long-term borrowings. 

How much did you increase retail loan interest rates in the past three months? 

We have raised our lending rates by 90-150 bps across products. As such, we expect that our net interest margins will be largely protected. 

When do you expect the lending business to normalize? 

Much of the liability-side rebalancing has happened in the current quarter. We expect faster lending growth next quarter, especially in our focus products including home loans, SME loans, gold loans and microfinance loans. 

How did you manage liquidity in the past three months? 

The liquidity situation has improved significantly since the last fortnight of September this year, immediately following the IL&FS default. Availability of funds has improved and rate of interest has dropped. The scare of default by some NBFCs or HFCs (housing finance companies) has now passed. It seems, the industry has been able to tide over the short-term liquidity crunch. 

The sudden drying up of funding for NBFCs could have created ALM issues for the healthiest of NBFCs. In recent months, inflows into mutual funds have significantly improved. Moreover, banks remain flush with liquidity due to good growth in deposits. As such, both mutual funds and banks have been lending to NBFCs. We have been raising long-term borrowings through portfolio selldown, term loans and NCDs. We have been using these borrowings to repay and prepay our short-term borrowings, including CPs. 

Where does IIFL stand out?

We have the advantage of having 85 per cent of our loan assets under management (AUM) in retail assets and 45 per cent of loans qualifying for priority sector lending norms. These loans are in good demand from the banking sector, including government, private and foreign banks. In normal times too, we sold down these loans to banks and we continue to do so in the current quarter.

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