Aditya Birla Group’s Lending Businesses Switch To The Fast Lane
Aditya Birla Group’s financial services entities, Aditya Birla Finance Ltd. and Aditya Birla Housing Finance Ltd., are pivoting as they hope to catch the upside that may emerge from a recovering economy.
From a significant focus on mid-sized and large corporates, the credit businesses are attempting to increase the share of smaller ticket secured and unsecured loans, affordable housing finance and small business credit.
Since 2018, the company's non-banking financial company has reduced the share of lending to mid-sized and large corporates from half to 43% in the third quarter of FY21. Retail and small and medium enterprise loans now make up 53% of the NBFC’s loan book, with the management hoping to increase the share even further. In the case of the housing finance business, the loan mix is shifting more towards the affordable segment, which now makes up 20% of the book from just 5% three years ago.
The change, according to Rakesh Singh, managing director and chief executive at Aditya Birla Finance and director at Aditya Birla Housing Finance, is part of a conscious strategy to build a diversified NBFC, and a housing finance company focused on the affordable segment.
“Once the economy normalises and the threat of lockdown is gone, we are looking at 15-17% annualised growth in our NBFC business and close to 20% growth in housing finance over the next two to three years,” he told BloombergQuint.
Aditya Birla Finance: Retail and SME Lead The Way
The group’s NBFC business, Aditya Birla Finance, which catered mainly to medium and large corporates until the IL&FS collapse three years ago, has gradually shifted its focus to retail and SME loans to reduce concentration risk and improve margins.
“We want to take retail and SME to about 65% over the next two to three years, as those will be the big growth drivers for us,” said Singh, who has been at the helm of the company since 2011. Within the retail loan book, unsecured loans could form close to half of that portfolio by 2024, he said.
The move, according to Singh, would help expand the firm's margins closer to around 6.25% in the next three years. As of December, the NBFC’s net interest margin rose by 30 basis points to 5.6%, compared to the last fiscal.
Our small-ticket unsecured loan book yields the highest margins and as we keep expanding our distribution and keep building our business in tier-2 to 5 markets, we expect this segment to continue growing because of the increasing credit requirements.Rakesh Singh, CEO, Aditya Birla Finance & Director, Aditya Birla Housing Finance
The quest for higher margins is not without risk.
“Even as the segment has a good risk-adjusted margin, the NBFC would need to exercise cautious control on its portfolio quality in terms of regularly checking its customers’ cash profiles and scrubbing the portfolio to check whether the borrowers are over-leveraged,” said Jinay Gala, senior analyst at India Ratings & Research.
As of December, the company’s gross non-performing loans stood at 3% of its total loan book. About 35% of the Rs 1,404 crore in bad loans came from the retail and SME segments.
The NBFC expects to bring down its credit cost from 1.38% of its average assets under management in December to close to 1.25% in the next fiscal, Singh said, adding that credit costs had risen 1.45% in fiscal 2020 from 0.45% in fiscal 2019 due to Covid-related provisioning worth Rs 139 crore.
The NBFC's return on equity may rise to 16-17%, while its return on assets is expected to be around 2.5-2.7% by 2024, he said.
Aditya Birla Housing Finance: Taking The Affordable Route
In the intensely competitive housing finance business, the group has once again chosen the higher-margin affordable home finance segment to drive growth.
“We want to grow and take this (affordable home loans) to 65% of the total loan book. We want to build it that way over the next two to three years. So, clearly the affordable segment is what we want to drive as a strategy,” said Singh.
To grow this business, the company has been banking on the larger group’s ecosystem including the dealers of Ultratech Cement Ltd. to cross-sell its housing loans.
“Our differentiated strategy is that as a group we are the largest cement manufacturer in the country through Ultratech, which has a vast distribution channel, and we are leveraging that to provide housing finance solutions in tier-2 to 5 markets,” he said.
The housing finance’s RoE may end up anywhere between 14-15%, while its RoA is expected to be at 1.5-1.6% by 2024, he said.
A Strategy Not Without Risk
Part of Aditya Birla Capital Ltd, which is the holding company for the group's credit, insurance and asset management subsidiaries, the attempt by the group’s credit businesses to switch to higher margin portfolios has found favor with the markets.
All analysts covering the stock now have a buy call on it compared to just half three years ago, shows data from Bloomberg. To be sure, the environment for all non-bank lenders has improved compared to a few years ago, when the collapse of IL&FS had led to significant uncertainties.
But the strategy is not unique and comes with higher risks in a market where non-bank lenders are attempting similar shifts.
“The focus is obviously towards re-orienting the books from prime housing, wholesale and corporate loans to smaller-ticket affordable housing, retail and SME loans that provide granularity to the overall book,” said Gala of India Ratings & Research. The same has long been tried and tested by the others, he said.
As competition is intensifying between banks and NBFCs in the secured lending business, most NBFCs are looking to enter the unsecured space to chase higher margins. Similar is the case with affordable housing loans, that have seen greater uptake among housing financiers due to its small-ticket, high-yield nature.Jinay Gala, Senior Analyst, India Ratings & Research
The transition for Aditya Birla Finance will have to be managed in a way that it does not affect the companies’ asset quality. In a March 15 note by Kotak Institutional Equities, the analysts said that “these NBFCs will have a tightrope walk delivering growth in some of the crowded customer/product segments, with a firm handle on cost ratios and credit quality.”
Further, some of their business lines like unsecured retail lending and affordable housing finance have limited vintage, said ICRA in a Feb. 23 note. “The ability to manage the asset quality in these segments, as the book seasons, will remain a key rating monitorable,” it said.