L&T News: L&T Finance Holdings balance sheet swings from wholesale to retail: Dinanath Dubhashi

“In retail, all of our collection ratios are back to pre-Covid levels and in some cases even better than pre-Covid levels and GS3 is coming much later. We are monitoring our zero DPD very carefully and c This is where our data analytics and digital readers help us tremendously,” says Dinanath DubhashiCEO and CEO, L&T Finance Holdings.

You’ve come up with a solid set of numbers. What is your assessment of the past quarter and how has the year gone for you?
Quarterly PAT is up 28%. It is important to understand how this happened. We have emerged stronger after the Covid years. The important thing is where will the growth come from? We indicated last time that growth would come from retail. This year, we made our best retail payouts of nearly Rs 25,000 crore. This quarter is our best quarter for retail disbursements and best quarter for micro-loan disbursements. So there are a lot of “best ones” that have happened and that’s where the growth is going to come from.

The full wholesale-to-retail balance sheet pivot is underway. Retail now accounts for 51%. The good thing is that new products that have been launched like these are digital native and completely paperless, have also increased. This quarter we have disbursed almost Rs 800 crore of consumer loans which is completely paperless and we expect to continue this trend.

I’ll talk a bit more about that, but the good thing that’s happening because of this retail shift is; First, NIMs plus fees are rising and we will now see several continuous quarters where they will remain in the 8% zone. In fact, in the fourth quarter, it is 8.17%. The cost of credit is becoming more and more predictable and because of this, at this point, the GNPA is down smart but at the same time, in addition to our provisions, we are also carrying Rs 1,700 crore additional provisions.

We thought we might start publishing something this quarter, but we haven’t published so far. The board felt that with the fourth wave talks, etc., we should be a little more cautious. The good thing is that the entire Rs 1,700 crore we are carrying next year. All of this bodes very well for the years to come and with the various measures we have to develop retail. On Monday, we unveil a future growth strategy, on how we will grow over the next four to five years. We call it the Lakshya 26 strategy, but very clearly there are different ways to grow retail.

You seem rather optimistic about the retail segment. You’ve already talked about how the net interest margin plus fees will stay within the 8% range. How do you see NII moving forward?,
On net interest income, we are now above 8% NIM plus fees. It stems from two things: first, the increase in retail, two the best cost of funds ever. We are now talking about a slow tightening of interest rates. These are the two things that will come to our aid; one in retail we have much better pricing ability than wholesale. So, to some degree, we will be able to pass any increases on to our customers due to the strong competitive position we have in many of our retail businesses.

Second, as the percentage increases, the overall duration of the balance sheet maturity decreases because retail assets are shorter duration assets and because of this, the duration of our liabilities may also decrease and as a result , the increase in the cost of interest on credit will not be proportionally higher because the maturity of the balance sheet will also decrease.

These things will benefit us, and as interest rates tighten, we believe that if there is a reduction, it will not be anything substantial. So we should be able to manage NIM plus fees at a very healthy 8% plus or minus a few basis points. This is clearly what we are confident in.

As rates tighten, the cost of funds will become more expensive for you. Additionally, you have a healthy capital adequacy ratio at this point. Is it enough to help grow in the future as well?
Capital adequacy is currently at 25% and now the push is more for growth because capital is more than adequate and even at a very healthy CAGR of 20%+ in retail. In real estate financing, we have stopped underwriting more and we are looking at different ways to reduce the real estate portfolio. It’s actually been shrunk quite smartly through collections and we’re going to look at a few different ways.

Below, we are pursuing a capital light growth model. So the infra book is definitely not growing. We’ll be looking at ways to maybe integrate into this very strong platform, maybe exploring ways to get partners and things like that. For this reason, the capital is more than sufficient, even for a retail CAGR of over 20%. From the way we plan, it looks like in the next three to four years we won’t need to raise equity. It doesn’t look like even at this very healthy retail CAGR, we’ll have quite adequate capital.

Can you talk about the quality of the assets? I see that your gross assets in three stages have fallen sharply quarter over quarter. Tell us about the improvement. Do you see the cost of credit going down from now on?
The improvement is due to two things – firstly in retail all our collection ratios are back to pre-Covid levels and in some cases even better than pre-Covid levels and GS3 is coming much later . We monitor our zero DPD very carefully and this is where our data analytics and digital readers help tremendously.

Thus, product after product, our collection efficiency is significantly better than last year. In many products, they are reaching levels above pre-Covid levels. This is the main reason why the retail portfolio smells like roses. The wholesale portfolio is well controlled. Also in line with our wholesale capital reduction strategy, we even sold some wholesale assets to ARCs during this quarter. These two are the main reasons why the GNPA fell.

So one is a strong one-time reduction due to the sale of ARC and the second is the sustained reduction with continued improvement in the quality of retail assets. As far as the cost of credit is concerned, I don’t want to give very specific indications, but most certainly, over the past two years, we have created a substantial number of management overlays on top of the provisions of the NPA. Next year, hopefully, we may not create additional NPAs and, in fact, we may roll back some of these provisions. Thus, the cost of credit should fall year after year.

I’ll be cautious for another quarter to watch how the fourth wave of Covid unfolds, but the third wave that arrived in January has hardly affected business or collections. We (Disclaimer: The recommendations, suggestions, views and opinions given by the experts belong to them. These do not represent the views of Economic Times)oppose that the intensity of Covid is not so strong and if it doesn’t lead to any confinements, you should be fine.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts belong to them. These do not represent the views of Economic Times)


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