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L&T Finance putting in place a plan to achieve top quartile ROE year after year: Dinanath Dubhashi

Dinanath Dubashi-1200
For the full year, we have achieved top quartile ROE through good growth of our focussed businesses, said Dinanath Dubhashi, MD & CEO, L&T Finance Holdings, in an interview with ETNOW.

Edited excerpts:


The company has reported robust profit growth of nearly 100% and net interest income has seen a growth of 15%. What do you attribute this to?

These results have to be looked at from a very different perspective for two important reasons. Number one, three years back we put up a plan for four years to start from bottom quartile ROE to go to top quarter ROE. These last three years have not been easy. We have had various issues. The latest have been the liquidity issue -- IL&FS and all these things. Despite that, we have achieved now for this one full year, top quartile ROE. That is very significant.

Two, we have achieved it through good growth of our focussed businesses. Each of our focussed businesses have gained in strength. We have maintained excellent NIMs and NIMs plus fees with fees being more than our total operating expenses, number two.

Three, the retailisation drive which we started in the last two years has progressed faster than expected.

And last but not the least, the asset quality improvement. Against 8.7% last year and even last quarter’s 6.7%, our GS3 is at 5.9% and NS3 is at an all-time best of 2.4% with more than 60% provision.

What about exposure that you may have to Reliance or ADAG Group or Lodha for that matter? What is the risk in the book and the provisioning that you would have to undertake?

We carry adequate provisions for whatever requires provisioning in our book. Our provision coverage is more than 60% and if you compare it across peers, you will see that it is quite healthy. It is important to understand two things: a) How our asset quality has improved; and b) the entire legacy bad book we have provided for. Rs 1,100 crore of legacy assets have been resolved this year and we expect that as we resolve in GS3, in wholesale we will further come down. Housing it is pretty steady the asset quality.

The magic has happened in rural. Whereas our book over the last three years has gone up from Rs 7,000 crore to Rs 25,000 crore, GS3 has fallen not only in percentage but in absolute amount. This has happened because of our concentration on zero DPD. As I have been always saying that bad assets happen not at 91 days but at one day and we have concentrated so much on zero DPD that it has absolutely worked. You talked about some of the developers. Reliance was in news. We have now zero exposure to the loan against shares of ADAG Group. You know that we were able to get out completely and recover our principal as well as interest.

Your focussed business grew by 17% while your de-focussed business continues to see degrowth. How do you see your product mix changing in the next one to two years?

There are two ways I can answer this question. One, retailisation will continue. Robust growth will continue in rural. However, the definition of robust growth will be different. We have been growing at 40-50%, obviously it was on a lower base. Now at Rs 25,000 crore, even a 20% growth will be Rs 5,000 crore per year. So, it will continue quite robustly.

In housing, whereas overall growth will be subdued, our home loans has grown by 50%. Our salaried home loans have grown by 150%. We believe that we have got that equation right now. We are doing things right. Our concentration on direct sourcing without any intermediaries, our concentration on turnaround time trying to make the whole process paperless is working and that is clearly where the growth is going to come from.

In wholesale, our entire concentration will be on IDF, will be on renewables, transmission and operating road projects. We will defocus from products like this promoter funding and structured finance, etc. Supply chain we have already sold.

Your margins also witnessed some amount of pressure. Your NIMs and fees stood at about 6.75% during the quarter. What is your outlook on this front, going ahead? Would you be able to pass any further rise in cost to customers?

Not at all. Actually NIMs are up. From third quarter, my NIM was 5.01%. In the fourth quarter, it is 5.08% after deferring Rs 84 crore of IL&FS. So my NIMs are extremely healthy.

What is your broad outlook on growth in FY20-21? How do you see loan growth and further improvement in ROEs from current levels?

Right now, we are putting in place a plan to assure us top quartile ROE year after year. How are we going to deliver that? Whether it is next year or the year after that or the year after that, we are planning to provide an assurance that we are delivering. You know that our company is specialising in saying things first and then delivering and we have done that over the last three years when situation was not good and we did not even have a track record issue. Today we have a track record and we are using the confidence coming out of that track record to give this promise of assurance.

As I said it is going to come from the four growth engines that we described. It is going to come from the fee engine that we have put in place. My fees account for more than my entire operating expenses. So just imagine an NBFC where the entire network cost, entire manpower cost, all costs are paid by fees itself. That is the strength we have built up. And last but not the least, the continuously improving asset quality. So whether it is 2020 or 2021 or 2022, as such going ahead we plan to deliver a top quartile ROE and the positioning that we would like our shareholders to have about us in mind is that of assurance.

You continue to focus on sell-downs. Will this be your core strategy going forward and how do you see a borrowing mix shaping up?

There are two different issues, one is sell down. So sell down in wholesale or in real estate is a part of strategy. It is a part of risk management strategy. It is a part of capital allocation strategy. Any sell down or securitisation in retail, however, will happen as tactics. If we see some good deal here and there, we will do it not as a strategy. That is number one. We have not securitised any big retail portfolio.But the sell down of wholesale is a business model and that is how we can make money without giving capital. as far as the sell down question is concerned.

Second is funding mix. While we did not have too much difficulty in Q3 and Q4 because of our strength and pedigree, we continue to maintain good liquidity, raise money and even the cost of funds has gone up just by 3 bps between Q3 and Q4 when the overall costs were quite high.

Are you also looking at some inorganic growth opportunities? What will be your broad growth strategy for the next one to two years?

Consolidation is definitely happening. We are very value conscious. Whether it is expenses or buying, we do not go by ego, we do not go by prestige. We are very hard negotiators. Of course, good assets keep coming but we will be looking for the value that there are two things that we will look at as always – does it fall within our strategy, we will not buy anything just because it is cheap and we will not buy anything unless it is cheap. Both these things are there and we remain steadfast on that. And if it does not happen, it does not happen. We will do it organically.

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