Edelweiss’ Rashesh Shah Sees Foreign Investors Flocking To India In 2020
The recent measures taken by the government, such as the corporate tax cut, will pique their interest, Edelweiss’ Shah says.
The government’s move to cut corporate tax rates to spur India’s economic growth will attract foreign investors in 2020, according to Edelweiss Group’s Chief Executive Officer Rashesh Shah.
“Global investors are coming back. There’s a lot more allocation happening to India,” Shah told BloombergQuint in an interview. “I think 2020 will be a big India-allocation year for global funds, both on equity and on the credit side.”
Equity inflows in India stood at Rs 92,156 crore in November, the highest in eight months, according to data from National Securities Depository Ltd.
The recent measures taken by the government will pique the interest of foreign investors, Shah said. Earlier in November, Finance Secretary Rajiv Kumar said the government is in the process of approving Rs 20,000 crore to the cash-strapped shadow banks under the partial credit guarantee scheme announced in the budget.
The Supreme Court’s decision earlier this month allowing ArcelorMittal SA’s Rs 42,000 crore takeover of Essar Steel put an end to a long-drawn insolvency battle. Such moves, according to Shah, are helping tilt the landscape in favour of lenders and assuage the concerns of investors dealing with tight liquidity conditions.
Things are starting to improve. Three months ago there was tightness and panic. Anxiety has now come down. Confidence is coming back.Rashesh Shah, chief executive officer, Edelweiss Group
The Reserve Bank of India had lowered its benchmark repo rate by 25 basis points to 5.15 percent in October, the fifth consecutive rate cut effected by the Shaktikanta Das-led monetary policy committee. Shah said that will have a positive effect on India’s long-term growth.
“About 25-30 percent of our growth depends on global factors,” he said, adding that an easing of the U.S.-China trade war and the U.S. Federal Reserve’s rate cuts will help stabilise India’s growth rate as it enters a new decade.
WATCH | BQ Conversations with Edelweiss’ Rashesh Shah
What do you think of the landscape right now compared to what it was just 2 or 3 months ago?
I think things are starting to improve a little bit. As you correctly said, three to four months ago, there was a lot of tightness and a little bit of panic in the market, but I think the anxiety has come down. There is a little bit of confidence coming back. Also, for the economy as a whole and also for the foreign investors, green shoots are coming out.
It has been about 14 months since this liquidity crunch started. I’m fairly positive about how well the NBFC industry has overall managed to weather the storm. I think a lot of players have become stronger and this is usually a cyclical thing.
NBFCs have had about five years of growth at about 25 percent-plus. I think the last one year has been challenging, and I think in the next year, the NBFCs will stabilise. Growth and earnings may still be under pressure because, as you said, liquidity is tight, the credit flow is not smoothening and NBFCs are still not stepping up disbursement.
I do think that from now up to March 2020, (the situation) will stabilise and maybe, post that, a little bit of growth, maybe 14-15 percent growth for NBFCs should start coming back.
In a way, this is a good thing because in the overall evolution of Indian credit markets, NBFCs play a very important role and I think this stress test and what RBI is doing and the government is doing are on a long-term basis. This will make the industry much stronger.
I think things are starting to improve a little bit. As you correctly said, three to four months ago, there was a lot of tightness and a little bit of panic in the market, but I think the anxiety has come down. There is a little bit of confidence coming back. Also, for the economy as a whole and also from the foreign investors, green shoots are coming out.
It has been about 14 months since this liquidity crunch started. I’m fairly positive about how well the NBFC industry has overall managed to have weathered the storm. I think a lot of players have become stronger and this is usually a cyclical thing. NBFCs have had about 5 years of growth of about 25 percent plus. I think the last one year has been challenging and I think in the next year, the NBFC’s will stabilise. Growth and earnings may still be under pressure because as you said, liquidity is tight, the credit flow is not smoothening and the NBFCs are still not stepping up on the disbursement. I do think that from now up to March 2020, (the situation) will stabilise and maybe post that, a little bit of growth, maybe 14-15 percent growth for NBFCs should start coming back.
In a way, this is a good thing because in the overall evolution of Indian credit markets, NBFCs play a very important role and I think this stress test and what the RBI is doing and the government is doing are on a long-term basis. This will make the industry much stronger.
I just wanted your sense on the sectors as a whole. Banking as a space has become the nerve centre of the modern-day economy and the government’s proactiveness to make sure there is ample liquidity and money is flowing where it is supposed to flow (while it may have come slightly delayed but is nonetheless, having its impact now). They are re-capitalising banks and are allowing stressed assets to be bought from NBFCs. Do you feel that all of these measures that have been taken in the long run like you said, are going to show up as big positives?
Absolutely. I think there are structural changes being made. At the same time, the government has ensured in the last 3-4 months that things don’t get any worse. In a way, it’s a good thing that we are not swinging back to growth very quickly because it will again cause its own instability and unintended consequences as we go ahead.
I think this has been a year of pause. I wouldn’t say there was a crisis but there was a huge liquidity crunch unprecedented for the last fourteen months. I think liquidity is still tight but the a lot of things that the government and RBI are doing will develop the credit markets. If you go back and study, I think this last one year has been very challenging for the bond markets. If you look at credit flow in this economy, they come from bank markets and bond markets.
I think the bank market has been fairly stable. Though overall, the bank market for the last 5 years, has had to tackle large NPAs in power, in steel and a lot of other areas also. I think the banking sector over 5 years had a lot of NPAs. The debt cycle of 5 years is coming to an end. The last one year, with what happened with ILFS has brought so much of a dislocation for the banking market. For the bond market, there has been a huge dislocation because I think the role of the mutual funds and credit rating agencies will lead to MF and bond investors doing credit analysis rather than just depending on credit rating.
Credit Rating is a very important input that is required but increasingly, the bond investors will also invest in credit research. This is the start of maybe a new era for credit and fixed income markets in India. It will still take a year for a lot of things to fall into place and stabilise. We should use this coming one year smartly. This one year will not have a lot of growth, will not have a lot of earnings upside but it will have a huge amount of building the foundation for the next phase of growth in India.
While that is one leg of the conversation, probably the other side or spectrum of the conversation is regarding how the government and the RBI has looked to tackle the supply constraints, but it has not necessarily done anything for the demand side. Unless and until something is done for the demand side, the balance will still remain a bit more tilted. Do you feel that, that’s something that needs to be focused on right now to make sure that the demand side issues are tackled with a bit more promptness?
Yes. But I think the demand side issue is more a cyclical thing for the economy as a whole. I do think that this cutting of corporate taxes last and reduction of GST on appliances that the government did last year will play itself out (in the upcoming year).
There is still excess capacity and confidence has been shaken on the growth prospects of India but I think if you are looking at the recent numbers in car sales and home sales, there have been a few green shoots that are starting to become visible.
So, I remain optimistic. I think demand will come back because India is a large country and urbanisation is going on. I think as the economy stabilises, the other factor for demand to come back will have to be global growth. About 25-30 percent of India’s growth depends on global factors. Our growth is also dependent on global factors.
If global growth stabilises. (it will benefit India). The last year has been very bad for global growth. A lot of uncertainty, trade wars and all that have been going on. I think in 2020, even the global economy should stabilise. The U.S. Federal Reserve cutting rates will help stabilise global growth rates. If there is a trade agreement in U.S. and China, that will be very good for global growth, which indirectly will be good for India.
I think if India had to get back to 8 percent GDP growth rate, at least about one and half to two of that will have to come out of global factors and a lot of the demand revival will also depend on that. On this, I am sure in the next year, when the annual budget comes out, the government will do a lot to revive demand especially by cutting taxes for individuals and giving some incentives to get demand started.
Only starting demand without the supply side bottlenecks being removed will lead to inflation. So, I think, in a way what the government has done is the correct thing. To get the supply side stabilised and sorted out. Even with the recent Insolvency and Bankruptcy Code, the verdict on Essar Steel, has been a big positive and will ease off the confidence of creditors in the Indian markets. So, as the credit supply, as the availability of resources starts getting streamlined in India, then the demand pick-up will actually revive the economy without having inflation over and on the way.
Have you received the monies for that? When the announcement came out to the Chief Executive Officer of the business, the expectation was that the monies from that resolution would come in, in the month of November.
I think it is currently expected in the month of December. I think most of the banks are very keen to have this cash flow coming into them in the month of December because as you know, most banks have written off their entire Essar Steel exposure. They have marked it down to zero so this entire amount that comes will boost the profitability and the equity base of the banking sector in a big way. I think it is important that it comes at the end of December.
Currently, I think, everybody is making an effort. There is a lot of paperwork going on because the verdict only came about a week ago. I think it will only take a couple of weeks but in the middle of December, it is expected that the cash flow should start coming to the banks.
The NCP issue for the ECL finance saw some very strong demand. I think in May you raised 300 crores. There was some investment by CPDQ as well. Can you tell us about the fundraising activities there that you have done? What is the borrowing cost right now? What else is on the table that you would look to sell minor stakes in order to raise funds?
This crisis has brought a huge focus on liquidity and we have invested a lot in making sure that we have enough liquidity and we are managing it well. We have also used this to raise long-term money, both bond as well as equity. In this year, we would have collectively raised about more than a billion dollars until now, close to 7000 crores in retail bond issue through a partnership with a Korean fund that we announced a week ago.
We have equity in our NBFC, the equity in our advisory business. When we put all of this together, we have raised in the last, about a year raised close to a billion dollars, I think that has strengthened the balance sheet in not only liquidity but in our capital adequacy and the gearing ratio.
When the crisis started, our gearing was more than 5:1 on the debt equity of the Edelweiss group as a whole, it was more than 5:1. We are now 3.4:1 so we have raised equity, we have managed equity and we have taken a very calibrated approach saying strengthen the balance sheet, strengthen the liquidity base and give up on growth at this year.
Though we have been growing a retail credit book, we continue to grow that and the recent bond issue has also, with the funds we have raised, a lot of that is also being used for retail and SME loans. So, that has been a big focus for us. We have also signed the co-origination agreement with four leading banks in India. SBI, the Central Bank of India, Bank of Baroda and PNB. We are also using these funds to step up on the co-origination opportunity that is there. Banks want to lend, we have the reach, we have the capacity and we have the skill set.
So, we as partners with banks and with our capital of 20 percent and 80 percent coming in from banks, this entire co-origination approach is also going to ensure that a lot of credit effectively flows into the economy. So, I think this year, the growth has come down, the earnings have come down, it has been a year of strengthening the balance sheet and strengthening the organisation. In this year, we continue to invest in technology, especially in the retail credit business. So, we try and do as much business as possible while keeping the challenges in mind. I think this has been the year where the liquidity and balance sheet has been the foremost of our priorities.
Where have cost of funds moved for you, within the last 6 months to a year? When you are looking at fund raising activity, the heavier bent is more towards raising money via selling equity or through debt instruments? When we were at the peak of crisis, there were not too many takers of debt.
It is a combination of both. As I said, we have raised long-term debt and we have also raised a last-mile completion fund from our Korean partner which also gives long-term money. It is in our credit format. We have also been able to raise equity.
I think this required a combination of equity and long-term stable debt and all. I think you need both on your balance sheet. As a credit institution, as a financial institution, you need equity, but you also need borrowings.
I think having a balance on that has helped us. As I said, our gearing (ratio) has also come down because we have raised equity also. A lot of our businesses are also a non-NBFC. Though in the last one year the focus has been on NBFC, we are a diversified financial services company. We have an advisory business and our asset management, wealth management business. We also have a retail credit business. Our ARC has been doing well. So, given that there are many parts that have actually formed opportunities in this environment and in the last one year, we have found good quality equity investors which have allowed us to strengthen the balance sheet and the capital structure for all these businesses.
In terms cost of funding, I think the cost of funding has been higher by about 80-100 basis points than what it was 14 months ago. In the last 14 months, the cost of funding has gone up by 80-100 basis points. Ideally, given that the RBI has cut the rates by 135 basis points, cost of funding should have come down by 100 basis points. So, in a normal environment, the cost of funding should have gone down by 100 basis points, but it has gone up by 100 basis points. So, in a way, there is a 200 basis points handicap on that. But that has made us all more efficient and allowed us to focus on creating value for customers and being able to enhance the ease of the rate that we earn.
So, in a way, this has been good for all of us. When you go through a crisis, you always become stronger. You also want the crisis to get over but I think the way the things are, we seem to be getting to the last mile of that and with the banks’ capital getting strengthened and banks getting this flow from Essar Steel and other such cases, the government does quite a bit in terms of cutting corporate taxes, the partial credit guarantee scheme, the last mile funding, the AIF. They have set up. Global investors are coming back, there is allocation happening to India. I think 2020 will be a big, India allocation year for global funds both on the equity and on the credit side. A lot of those funds coming into Indian markets will also help ease off the liquidity crunch that we’ve been facing. Anyway, easing off and now, with all this, should get easier. I am optimistic that maybe March 2020, after that, things should start coming back to normal.
What do you feel the end of the year will bring in terms of credit-growth numbers? We are not talking about them being historical peaks but the fact that you have seen a recovery, there is liquidity, co-origination like you said brings strength on the table with deep pockets from the banks and the reach from the NBFCs. In light of that, the model for credit off-take be envisioned by this end of this year of sorts and how much will they grow by?
I think for FY20, we should expect the asset book of the NBFCs to be at a 0 percent growth. For 2021, we would expect to get back for a 13-14 percent growth. As I said, NBFCs were growing at about 24-25 percent for the last five years. I think FY20 will be almost a 0-growth year. But then as I said, things will normalise and things will pick up and this co-origination and everything else is for 2021 but the foundation is being laid and I think even a 14-15 percent growth for 2021 should be a good beginning and I think overall, NBFCs should continue to aim for a 15 to 20 percent growth even after that as things stabilise, as liquidity eases off.
More importantly, I think going forward, NBFCs will focus on, what I think, being partners to banks. I don’t think NBFCs will compete with banks, I think increasingly NBFCs will have to do things that banks either can’t do or don’t find it economically the right thing to do. So NBFCs being partnered with banks via co-origination be a strong way of going forward. Along with that, I think NBFCs will become asset efficient. They will not grow the balance sheet very fast; they will look to churn the balance sheet by portfolio sell downs and all so that they don’t have very high gearing. I think historically, NBFCs have geared between 6-7 times. I think this will come down to about 5-6 times going forward. So, NBFCs will become asset-efficient, capital-efficient, they will partner will banks and obviously will use technology to reach out to retail and SME customers, where NBFCs have much stronger reach.
For Edelweiss in particular and this would have been a problem faced by a bunch of NBFCs which had exposure or focus behind real estate lending. What is happening there? Are things getting resolved or is it far from it? One of the calls that happened with a large Mutual Fund team suggest that there seems to be no certainty of things getting resolved. What is your sense? For your book?
See, if you look at it, this entire real estate thing has been also partly (due to) fear psychosis and scaremongering that has gone on. If you look at the last year, most of the NPAs of the banking sector and the non-banking sector have reached but that has been in sync with other sectors. If you look at gross NPAs for banks and NBFCs, they have moved up by about 100 basis points. That has been true with real estate also.
So, on the whole, I think real estate has been moved more in sync. If you go and see the large NPAs in the banking sector for the last five years and see the composition out of that, the real estate- it has not been very large. Overall, a lot of real estate projects have been facing liquidity crunch in the last one year. In order to complete the project, the customer flows and the flows to complete the project have dried up a lot. It has started coming back in the last few months. PSU Banks have stepped up on the home loans. So, yes, there has been a huge amount of liquidity and stress on the real estate industry.
Overall if you looked at real estate sales, home sales are still doing well. I think, this year, the first three quarters, the home sales were higher than in the first three quarters of the last year in the calendar. So overall, home sales are stable, liquidity is still very tight but easing off. I think the announcement by the government on the last mile completion of the 25,000 AIF is a big plus. We hope that in the next quarter the disbursements from that start. I think if investment in India is going to revive, it will be preceded by the real estate stabilizing because it has a lot of spin-off benefits of jobs, steel, consumption and all of that. Ultimately, housing demand in India has always been strong. The top 7-8 cities, there have always been 2-2 and a half lakhs of our apartments are sold every year. So, I do think that if the Indian economy comes back, we should see stabilization of the real estate market also.
How will Edelweiss as an entity move forward? Would the growth rates be next to near zero for FY20 because it has been that kind of a year and then, therefore, 15 odd percent or 20 odd percent growth in FY21?
Again, we don’t give guidance. We don’t want to be tied up. We want to look at the business and the customers and really keep a long-term approach in mind. We look at businesses over five years and ten years and we do know that India can be a volatile country, markets can be volatile, the economy can get dislocated for a year or two in a very unexpected fashion. At that time, the more important thing is to be agile and adaptable rather than be tied into, say, ‘I have to be so and so growth’. In the long term basis, obviously you need to grow and create value for all your stakeholders but keeping in mind the needs of your customers and all of that, we do think that in the next one year, we will continue to invest into businesses, into technology, into organisational building, into liquidity and balance sheets strengthening.
I think, if you do all of this right, on a long-term basis, growth in India is not a challenge. I must caution you; we are not just an NBFC, we are a financial services company. We do a lot of things like asset management, wealth management, and insurance also. If you see our numbers, on the last year, in those businesses, we continue to grow. So, I do feel that financial services in India offer you up to 20 percent growth and on a long-term basis, a good term company should aspire to aim between 15 to 20 percent growth over an 8-10-year growth horizon.
Do you feel that the investment sentiment and the retail investor sentiment- be it HNIs, be it your smaller ticket investors, they are still more sanguine about the prospects of the market returns and the fact that the market is at a record high. Do you feel that money in those businesses will continue to grow?
Overall, the long-term trend in India, whether you call it a financialization of household savings, retail credit borrowing because household balance sheets are very “ungeared”. There is retail borrowing for home loans and SME businesses. The impact of technology on down intermediate costs. All of these trends remain intact.
Interest rates have been coming down. Currently, we are at a mortgage rate of 805, which is one of the lowest in the last 14-15 years. So, we are at the lowest mortgage rates that we have seen for a long time. When inflation is under control, liquidity is in surplus and all the bad things that were happening (auto sales coming down, liquidity crunch etc.) have happened, but most investors are looking across the valley.
They are looking at what can happen in the future and I think, if you look at India in the past, there have been bad phases of growth in India, but they are always followed by growth coming back and things coming back to normalcy. Normalcy for India is a reasonable amount of growth. I think in the last 25 years, India has grown at about six-and-a-half to seven percent real GDP growth rate and about 12-13 Nominal GDP growth rate.
That kind of growth most investors believe is coming back in India. Given what RBI has done; the government has done. I think the investors are feeling optimistic about India coming back to normalcy and a lot of people are saying that the last year, year and a half are been an aberration to India’s story and the new reality. The reality is, we will go back to our normal growth rate of six-and-a-half to 7 percent. If inflation remains under control and with all the structural changes that have happened, there seems to be optimism. Obviously, there will be volatility. India can be a fairly volatile country and that is why most investors should take a long-term view because. If you take a 5-10-year view, then it is easier to balance the volatility. If you take a three-quarter view, then one bad quarter of bad volatility can shake you out. So, India, on a long-term basis continues to look good to investors