WEF Davos 2020: How Piramal Contains NPAs Despite A Large Exposure To Real Estate
Almost two-thirds of Piramal Enterprises Ltd.’s loan book is exposed to the beleaguered real estate sector. Yet, only 1 percent of its assets has turned bad.
That, according to Ajay Piramal, is because of the company’s efforts to ensure that its borrowers don’t face insolvency proceedings. “The way we’ve structured the loans is such that they are by and large IBC-proof,” the chairman of the Piramal Group told BloombergQuint on the sidelines of the annual meeting of the World Economic Forum in Davos, Switzerland. “[We ensure] that we are significant lenders and we have a say that developers we lend to don’t go to IBC (Insolvency and Bankruptcy Code).”
With India’s struggling real estate sector, Piramal said his firm cut down on lending from the quarter ended June of the ongoing financial year. The company also ensured that it only funds the “top” developers in an environment where real estate players are consolidating, he said. Piramal Enterprises’ wholesale real estate developer loan book stands at about Rs 24,000 crore, he said, adding it, however, has “come down over time”.
Piramal didn’t elaborate on the exact method in which the company’s financial services arm structures its loans. But the “security that we have with the legal documents” helps, he said, adding that with these “legal documents” the company is able to transfer projects from one developer to another. “All these have meant that the quality has been good. We have also been able to resolve many of the issues that our developers had.”
The company has also raised about Rs 14,000 crore through a mix of a rights issue, a preferential placement, sale of its Decision Resources Group and stake sale in Shriram Group. The amount raised, Piramal said, will go mostly towards its financial services business to cut debt, improve balance sheet and fund inorganic growth.
Piramal Enterprises also aims to diversify its loan book, dominated by wholesale loans. “Our strategy has been very clear. We have said we want to diversify our book. We want to make it more granular,” Piramal said. “More importantly, we’re diversifying to get more retail whether it is in-housing finance or whether it is in other consumer finance.”
Cost Of Funds
Piramal also said the company would be able to “considerably lower” its cost of funding by the first quarter of 2020-21.
“We have an opportunity to actually improve the yields and the rates that customers pay. So the net interest margin remains good. But in spite of that, our cost will considerably come down and I see that coming below 9 percent in the coming first quarter of next year.”
WATCH | In Conversation With Piramal Group Chairman Ajay Piramal At WEF Davos 2020
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Here are the edited excerpts from the interaction...
You are speaking to us after a successful fundraising spree—a rights issue and then the preferential allotment and then the sale of your Decision Resources Group. You’re what Rs 10,000-crore or more above your target?
So, beginning of the year we had said we’d raise Rs 8,000-10,000 crore. By now if you count the CDPQ preference plus the rights plus DRG sale plus what we had sold in Shriram, we’re probably about Rs 14,000 crore.
So are you done raising funds for the foreseeable future, which is about three to six months?
So there is one more fundraising we are doing for the pharmaceuticals business. As you know we have announced that we are going to subsidiarise our pharmaceutical business in line with what we had said a few years ago. That in the midterm we will separate pharma and financial services. So that’s what we are doing. We are raising a small amount of money there. It will be a minority stake below 25 percent. That process is actually just started now.
So this Rs 14,000 crore amount is to recapitalise the financial services business right?
Yes. And part of it will be to reduce the debt that DRG had. Rest of it will go in recap.
How much would that be debt be?
Overall, let’s say the whole amount will be towards financial services, the Rs 14,000 crore.
Will this money help provide for assets or poor assets in the portfolio that have built up due to the economic stress over the last year or will this go towards growth?
If you look at the quality of our assets, they are good assets. So our NPA provisioning is good. Our gross NPAs are good. It’s not an issue of the quality of assets. What I look at is that in the environment today there is a lot of consolidation taking place. The demand for credit is much more than the supply. And over time I see that there will be fewer people who will be able to give credit in the system. That’s where, if you have a strong balance sheet, you can build that.
So the Rs 14,000 crore is towards the growth portfolio?
It will be towards growth, yes. Because our debt-to-equity ratio by the end of March will be less than 1.5 times. For a financial services firm, it is a very low ratio. We have taken it as a strategy to lower the debt-to-equity today so that there are enough opportunities in the future.
What does this mean for your cost of funding? Because you’ve been looking to replace a lot of short-term paper with long-term. You’ve brought in a much higher proportion of equities now. How will you be able to reduce your cost of funding?
So the cost of funding will go considerably lower. But this is what I want to emphasise: the cost of funding is not an issue when you’re giving long-term wholesale loans. Because there are very few providers of this capital today, that is the providers of debt to the wholesale market whether in real estate or elsewhere. We have an opportunity to actually improve the yields and the rates that customers pay. So the net interest margin remains good. But in spite of that our cost will considerably come down and I see that coming below 9 percent in the coming first quarter of next year.
Is there a plan to further reduce it? When you subsidiarise your pharma business, sell your stake, will all that money go towards pharma or will you be using that to de-risk your financial services balance sheet?
All of it will not be required in pharma. Some of it will be to de-risk the balance sheet. The cost will come down lower but I haven’t made a projection to the markets and shareholders so I want to be conservative.
But you expect lower than 9 percent cost of funding in the subsequent quarters of FY21?
What kind of inorganic opportunities are you looking at for your financial services business? Are you looking at retail loans to balance out your books which is dominated by wholesale loans?
Our strategy has been very clear. We have said that we want to diversify our book. We want to make it more granular. We mean that not only we do wholesale lending. Everybody thinks we only do wholesale lending to real estate but we will diversify the loan book beyond real estate in wholesale. More importantly, we are diversifying to get more retail whether it is in housing finance or whether it is in other consumer finance. When we look at an acquisition, what we do is to see there is some strategic fit with our portfolio. Just to acquire something to grow our book is not what we’re looking for. So today there are many portfolios in the wholesale space. We don’t want to acquire those. Unless we think there is something which we don’t have and may take time for us to go. But in the retail space if we find a good portfolio, more important than that is how it fits in the long term.
What does it have to look like to fit in?
In financial services, the most important thing is to look at what is the culture and value. The other thing is to see the quality of the portfolio.
What about the business line?
Anything which is there in housing or consumer.
You’re not concerned that we are now looking at some of the data which shows that while overall credit growth has slowed for banks and NBFCs, the growth rate for credit cards and unsecured personal loans are much higher. Is that a market you feel safe entering into through an inorganic purchase?
Asset quality is always of prime importance to us. And we are not going into the credit card space for sure. To the extent that we can do secured loans, that’s what we want to do. Whether it is a small business, that’s the area we want to go to. If it is consumer, it has to be secured or we must have enough data to establish that it is not a risky loan. We are not in a hurry to just increase our book. Quality will be important. Even if we have higher equity in the short term my concern is to build a long term sustainable business.
You’re the third person to say it this week. We spoke to Sanjiv Bajaj earlier and he said some part of the slowdown in AUM growth is intended. Uday Kotak said this at the time of his earnings where he said he would much rather have slower growth. So all the leaders in the financial space, whether banking or otherwise, are saying we are deliberately moderating our own growth because we are now starting to get concerned for asset quality and we don’t want to be scraping the bottom of the barrel.
That’s a fair statement. I don’t think anybody would say that in any market. You don’t want to scrape the bottom of the barrel for sure.
So it’s only when growth picks up that will you start looking at the multiplier effect and consider growing a little bit more rapidly?
Yes. And we need to make sure we understand the business well so we will be conservative.
I am going to ask a question about your wholesale books which has been doing the rounds for several months. Over 70 percent of your loan book is wholesale, commercial and residential. But your NPA numbers don’t seem to match the widespread stress we are seeing in the developer community. So how are NPAs so low when 70 percent of the book is exposed to a sector in serious trouble over the last two years.
That’s a good question. As far as our wholesale real estate developer book is concerned it is at Rs 24,000 crore. It has come down over time. Second, during this period there have been many people who have looked at our book who have actually done either co-investing or refinance. So they have looked at the quality of the book. Third, we did not stop lending to these developers. We continued lending till the June quarter of this year.
What happens is that when you select the developer, we’ve been saying this for the last three years that consolidation is taking place in the real estate sector. Only the top developers will succeed. So if you look at our books only top developers are there. That’s one—the choice of developers, the choice of projects. We’ve also been saying that the way we’ve structured the loans is such that they are by and large IBC-proof. So that we are significant lenders and we have a say that they don’t go to IBC. Very often in developers, even a small creditor can take you to the IBC.
So how are you IBC-proofing the loans?
So if it is in a subsidiary and it is say guarded by us, then it’s fine. And we have been lending to these developers. And if you look at our loans we have lent Rs 19,000 crore. What the government is talking now, about the fund that will fund last-mile projects. All these have meant that the quality has been good. We have also been able to resolve many of the issues that our developers had. It’s not that all have been successful. There have been delays. But because of the security that we have with the legal documents, we have been able to move development from one developer to the other. These are a series of measures. Ultimately, our provisioning is much more than our NPAs.
I think the question came from the fact that how is 70 percent of the book exposed to such a beleaguered sector and asset quality did not manage to deteriorate.
It’s not 70 percent now. If it has come down that means it has not...
Do you believe that the stress we have seen in the real estate industry is stabilising to some extent now?
So we will see many more failures before we actually see stabilisation?
So I have one question regarding Shriram. When is your full exit going to happen?
We’ll see. There’s no timeline. I had given a timeline for raising equity and we have exceeded that.
We have a budget coming up. The question is whether the government will expand the fiscal deficit and put that money to work in the investment side like infrastructure or to boost consumption. What would you like to see as an idea for growth?
I would like to see the economy grow.