Sundaram Finance sees disbursement growth slowing to 15% this fiscal

Published: Friday, Nov 4, 2011, 8:00 IST
By Vishwanath Nair | Place: Mumbai | Agency: DNA

Regulators should ensure that players in the banking, financial services and insurance industry get a level-playing field, argues T T Srinivasaraghavan, managing director, Sundaram Finance. In an interview with DNA, he spoke about how a well-deserved hike to employees is not a burden to his company and how prevention is the best cure when it comes to asset quality. Excerpts from the interview:

What kind of disbursement growth you are targeting this fiscal? Which are the sectors pushing growth?

In our annual report published in May this year, we had said that the automotive industry’s two successive years of high growth is exhibiting clear signs of slowdown. With fleet replacements (replacing older model vehicles with new and improved vehicles) largely being completed to comply with emission norms and changes and demand for consumer goods beginning to moderate, sales of medium and heavy commercial vehicles are expected to increase by 5-8%. Looking at the numbers now we seem to be pretty much on target. We are expecting overall gross disbursements growth to be in the 15% range for the current fiscal as against 22% in the last. Growth is coming from light commercial vehicles, construction equipment, a little bit of tractors, so there is growth happening in parts of the auto industry. While medium and heavy is not growing at 30% like previous years, there is some growth which is contributing.

Relief for home loan borrowers

The National Housing Bank has asked housing finance companies to refrain from levy of penalty on preclosure of floating rate loans.

For those millions of home loan borrowers who were sulking at their decision to go for floating rate of interest, and who found their own interest rates being regularly reset even as new borrowers were being assiduously besought with lower rates, the order from the National Housing Bank that regulates Housing Finance Companies (HFCs) on treating both sets of borrowers equally should have come as a surprise.

The National Housing Bank, in a major relief to home loan customers, also asked the HFCs to refrain from levy of penalty on preclosure of floating rate loans, even if this was made from borrowed money (generally a euphemism for fresh loans at lower interest rates from a rival lender).

While the decisions have been welcomed by the real estate industry and the borrowers, the HFCs aren't really pleased.

In an interview to Business Line, Mr Srinivas Acharya, Managing Director, Sundaram BNP Paribas Home Finance Ltd, Chennai, expressed the fear that ‘home loans would be operated as demand loans with frequent shifts of home loans'. He argued that ‘there is a certain degree of unfairness' in that, while there are restrictions on charging a foreclosure premium on the asset side for HFCs; these will continue to pay premiums on foreclosures on the liability side.

FORECLOSURES

Currently, the HFCs see foreclosures to the extent of 10 per cent of the portfolio in a year. Already, foreclosure of home loans from own savings is exempted from penalty. Therefore, he didn't see much additional impact beyond, say, 0.075 per cent of the portfolio. While he didn't see this as a major source of income, this penalty always served as a ‘deterrent against poaching of customers'. As regards interest rate equalisation between old and new customers, he said this wasn't a major problem and will get settled with time. The real issue was there was no similar condition on lenders to HFCs!

On being asked if he feared there would be a shift from HFCs to banks because of this order since the National Housing Bank order would apply only to HFCs, Mr Acharya didn't view this ‘as a threat'. HFCs primarily thrive on their quick ‘turn-around time' and better understanding of the business and customer service. Some movement may be there, but that would only be an immediate reaction in the short term, he felt.

As to HFCs raising the interest rates for new borrowers so as to mitigate the impact of the order, he said the ‘interest rates would be guided more by ‘demand-supply' factor and the impact wouldn't be serious for HFCs who have borrowed on variable rate terms.

He felt that while there may be some rush for refinancing of higher cost home loans with cheaper loans, this would settle down. More than the bigger players in the industry, the smaller players are niche players and therefore won't be affected. As a result, his own company may not be impacted by more than Rs 3-4 crore this year. This wasn't a major component of its overall income and he said that ‘a HFC should thrive on continuity of a good customer rather than short-term gain from foreclosure premiums!'

Mr Acharya argued that this was ‘more a populist kind of measure', as home loans attract a lot of attention and touch the retail end of customers. Even the Competition Commission of India (CCI) had upheld the appropriateness of foreclosure premium. While conceding that there might be some fringe players charging premiums at exorbitant rates, that really may not be the case in his own company. Moreover such players charging premium at exorbitant rates could be controlled.

PREMIUM

He felt that there could ‘be a mandated rate of premium' rather than removing it altogether. Removal of foreclosure premium, if at all, should have been done across the financial sector, both for lending and borrowing, and not just for HFCs alone.

Mr. Acharya also felt it would be far more prudent ‘to chase a known customer with proven repayment record rather than go after a new home loan customer with all the uncertainties!', he added.

In an impact analysis of National Housing Bank's decision, IDFC Securities said that the regulatory arbitrage between banks & HFCs wasn't ‘likely to sustain'. At present, these norms apply only to HFCs, and not banks. RBI had earlier suggested, but not mandated, these terms for banks. However, it expected RBI also to follow suit.

Referring to the practice of financiers offering a lower rate for new home loans (for old borrowers) to attract business, it felt that the financiers would have to increase the interest rates for new loans more (by 100-150 bp). However, they could establish a credit profile of customers to mitigate the impact, offering some flexibility in pricing.

IDFC Securities expected new home loan rates to rise from the current levels and settle somewhere between the prevailing new and old home loan rates. With the cost of a new home loan rising, the growth in new home sales and mortgage portfolios would suffer.

Waiver of prepayment charges constitutes a very small part of financiers' income. But waiver increased borrowers' ability to refinance their existing loans. This could place players with a stronger liability franchise in an advantageous position vis-à-vis less competitive players, it concluded.

Mr. S. S. Asokan, Executive Director, Shriram Properties Ltd, Bangalore, said that at a time of rising interest rates, this will greatly help the borrowers and facilitate greater housing loan disbursals by the HFCs.

Cabinet nod to bring IIFCL under RBI regulation

The Union cabinet in a decision on Thursday approved the proposal to bring India Infrastructure Company (IIFCL) within the regulatory oversight of the Reserve Bank of India, as is the case with other non-banking finance companies in the country.

This would bring IIFCL on par with the special funding agencies of the government such as Power Finance Corporation and Rural Electrification of Corporation. The proposal implies the IIFCL would have to become compliant to RBI’s capital adequacy norms prescribed for NBFCs. RBI presently prescribes a minimum tier-I capital (paid-up equity plus general reserves) of 12 per cent. This ratio is expected to be reached within three years after the NBFC registration.

ASSOCHAM opposes new classification norms for NBFC NPAs

New Delhi: Industry body ASSOCHAM has opposed the government’s classification of non-performing assets (NPAs) belonging to non-banking financial companies (NBFCs) which provides for secured and unsecured advances if the overdue period exceeds 90 days.

Under the existing norms, an unsecured asset overdue beyond 90 days and a secured asset overdue beyond 180 days are treated as NPAs.

Making NBFCs Bankable!

Published on Tue, Sep 13, 2011 at 18:29 |  Source : Moneycontrol.com
By: Viren H Mehta, Director of Ernst & Young
In August 2011, the Report and Recommendations made by Working Group Committee on Issues and Concerns in the Non-banking financial companies (NBFC) Sector proposed far-reaching changes to the existing regulatory and supervisory framework for NBFC. If adopted by Reserve Bank of India (RBI), these recommendations would significantly shape the future evolution of India's NBFC sector. Overall, the recommendations attempt convergence of the regulatory framework for banks and NBFCs in order to reduce systemic risk. The above argument is premised on the hypothesis that the business of NBFC and banks is similar at least on the asset side, but the current regulatory environment is lighter for NBFCs and stringent for banks.

The Committee's recommendations to increase Tier 1 capital ratio and risk weights for NBFCs not sponsored by banks may improve the stability of the sector, but it should also be viewed from the context that NBFC do not have access to inexpensive public deposits as the banks do. Additional capital requirements for NBFCs, even as bank's lending to NBFCs was deemed non-priority sector lending recently by RBI, will not necessarily help in creating a level playing field for banks and NBFCs even as their regulatory frameworks converge. Tighter NPA norms may help make the sector more stable, though.
Proposed relief to NBFCs in the form of benefits offered by the tax treatment of provisions for credit losses and by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act would ease pressure on profitability and capital (due to faster recovery of bad loans). However, these would require legal changes that are in jurisdiction of other regulators.

Tightening of regulations may alleviate the risk of contagion to banks or other financial institutions from deposit taking NBFCs, but only to a certain extent. Public deposits form a very small percentage of funding for NBFCs, considerably lesser contribution made by them through equity. Also, banks contribution to the funding of NBFCs is less than the equity of NBFCs. The significant contribution of equity in NBFC's funding structure acts as a safety net in case of defaults by lenders.

A prior regulatory approval for any change in ownership or sale of more than 25% stake in registered NBFCs may fundamentally modify the structure of the sector.

For an NBFC to be eligible for registration and supervision, total assets of all NBFCs in a group should meet the cut off limit of INR100 crore. Out of 280 deposit taking NBFCs as on March 2010, very few have assets of over INR100 crore. Moreover, about vast majority of the reporting NBFC that accept deposits have assets less than INR50 crore, which would make them fit for deregistration if the Committee's recommendations are accepted.

In a diversified economy like ours, NBFCs play a critical complementary role in furthering financial inclusion and ensuring last mile delivery of credit, which is important for sustainable economic growth. The proposed registration norms may impact RBI's efforts towards financial inclusion, an area that the regulator has stressed on while working on the guidelines for licensing of new banks in India. Decline in number of NBFCs may leave vast unbanked regions in India without access to credit, in turn impacting the overall economic growth.

From a systemic risk perspective, stringent capital regulations coupled with other recommended regulatory measures would help improve the functioning of the NBFC sector in the long-term, but the what needs to be reconsidered is the level of risk that NBFC bring into the financial system visvis the risk generated by banks and accordingly, implement the prudential and liquidity norms in a phased manner.

Disclaimer: Views expressed in this article are personal