Universal banking isn’t for everyone and NBFCs can do quite well without transforming into banks, says T.T. Srinivasaraghavan, Managing Director of Sundaram Finance. But to allow them to do business, he argues, NBFCs ought to get a level playing field with banks on matters such as taxation and fund-raising, even as they fall in line with stricter prudential norms. After all, NBFCs delivered financial inclusion much before it became fashionable to do so, he says.
Excerpts from the interview:
We see some of the newer NBFCs not focussing on lending to one segment and adopting a more diversified model. Also, with the banking licences seeming imminent, it makes sense to have a diversified base. What is Sundaram Finance’s game-plan?
We are very comfortable with our present model. We have subsidiaries engaged in other kinds of lending, but those businesses are not under one legal entity.
Each of our businesses is governed by a different regulator — IRDA, RBI, NHB, etc., and so this makes sense. On the banking front, the view we have taken consistently is that we do what we do now very well.
What we do is one part of banking. We don’t have the competence to do the rest. And therefore, theoretically, we have said this before, if there was some definition of a narrow bank or a specialist bank, if all it meant was financing vehicles, we would be happy to become a bank. But, clearly, that is not realistic.
Today, the language is of a universal bank. I don’t believe we have the expertise to be that universal bank. We can buy that expertise. But that could dilute our DNA, our expertise, which is retail financial services. We are able to provide most of the things our customers need. There are a couple of gaps which we fill by distributing other products. For example, in life insurance, where we are not directly present, we distribute LIC, one of the best names in the business.
Isn’t access to low-cost money (deposits) a reason for NBFCs to become banks?
Yes, that’s true. But analysis shows that, on an average, if you look at the ‘net lendable resources’ of a bank (after adjusting the cash reserve ratio, statutory liquidity ratio, etc.), the advantage that banks have over the best rated NBFCs is not that big.
This small gap we can fill through our USP of more personalised service, speed of service, knowledge of the customer and market.
Also, as debt markets deepen and we have better access to newer instruments and more foreign money comes into the debt market, the cost of funds for NBFCs too should go down.
But banks are competing for your customers quite aggressively aren’t they?
For banks, some avenues of corporate lending are drying up. So they look to retail loans. This is not the first time this has happened.
If you go back in time, there were many multinational banks that entered the segments catered to by NBFCs — retail.
Sooner or later, they all pulled back because for their cost structures, the retail ticket sizes are too small.
For us, banks playing in our space is not new. This market is large enough. If you look at passenger vehicles, you are talking about a 2.5- 3 million market. If you look at trucks, that is about a 7.5-lakh market.
Then there are construction equipment and tractors. So there is a place for, say, ten major players. You don’t need to kill each other. Of course, there is a dip now. But the market will bounce back and it has to grow. The important thing is not to do stupid things now, so when the growth comes back, there is enough room for everyone to grow.
NBFC regulations are getting tighter, with higher capital requirements and stricter bad loan recognition norms. What do you think of those challenges?
Increasingly, the regulations require us to fall in line with banks in terms of all the prudential norms. I do not have a problem with that. But we should also be getting all the benefits that accrue to a bank in terms of funding, taxation, etc. We already have all the provisioning requirements identical to banks.
We have capital adequacy. If you are a deposit-taking NBFC, you have SLR. We are also closely regulated and supervised.
The industry does not have the slightest problems with any of that. We are very happy to comply with regulation. But we cannot fight with one hand tied behind our back.
For example, we are the only segment that is denied access to ECBs. Even micro finance institutions have access.
Similar is the case with banking correspondents, where we are seen to be in conflict with banks.
Another is priority sector lending, which is to be done only by banks. Before the jargon about financial inclusion came into being, NBFCs have worked on financial inclusion. We have been providing last-mile credit.
So, what is the solution?
I have been saying this for years. If you look at the entire chain as a continuum, where banks are wholesalers and NBFCs are retailers, the flow-through of credit will happen perfectly. The great strength of banks is deposit gathering. They are automatically trusted receivers of deposit. They have several avenues and channels to deploy.
One such channel is the NBFCs. It is a very natural synergy between these two entities. In their experience with NBFCs, I don’t think any of the banks have had a problem lending to them. Their track record has been good. This whole negativism about the sector has to change.