For well-run NBFCs, liquidity is no longer a problem
TT Srinivasaraghavan is the managing director of the 70-year-old Chennai-headquartered Sundaram Finance Ltd, which is one of the country’s largest and most respected non-banking finance companies (NBFC). It was started primarily to help truck operators purchase commercial vehicles. The company has since grown into one of the most trusted financial services groups in India. It has a nationwide presence of nearly 640 branches, over 2 lakh depositors, and 3 lakh commercial vehicle and car finance customers. In addition, Sundaram Finance is into mutual funds, housing finance, general insurance, information technology, business process outsourcing and retail distribution of an array of financial services.
Srinivasaraghavan has been involved with all the diversifications and has played a key role in the company’s growth. He has had more than 40 years of experience in the banking and financial services sector, and has been associated with leading trade-related organisations, including the International Finance and Leasing Association of the UK, of which he was the president. He has served on various committees constituted by the Reserve Bank of India (RBI) on NBFCs and related matters, and has been celebrated at various fora.
I have wanted to meet him to understand the economic downturn the country is facing; he has himself seen quite a few cyclical turns, and ups and downs in the economy. Sundaram Finance has dealt with them all. After many postponements due to his hectic travel schedule, we meet for lunch at Kapila Dasa, at the Express Avenue Mall in Chennai, which is next door to his office. The food is vegetarian.
This restaurant is a no-frills, spacious place, and in spite of the milling crowds outside, one can settle down for a peaceful conversation. We ask for the rasam of the day, and the restaurant’s famous spicy corn toast as a starter.
I ask him about the various problems facing the NBFC sector, and the liquidity crunch. “There has been too much loose talk about NBFCs,” he says with a touch of asperity. “One infrastructure company (ILFS) went bust, Dewan Housing Finance Corporation went under, and these two are not NBFCs. The Reliance Anil Dhirubhai Ambani Group is going through its set of problems. There are 9,983 registered NBFCs in the country, and just three have defaulted. Does this constitute a crisis? Since September 2018, how many more companies have defaulted or gone under? The media has gone overboard, creating a self-fulfilling prophecy.”
As a consequence, he says, the flow of credit has been cut off by banks. “Collections are used for debt settlement and there is no growth capital available. This entire crisis erupted because of uninformed discourse creating its own momentum. This has wide ramifications for the economy. There are many small finance companies serving the last-mile delivery. Those lines have been cut off. Local NBFCs, which help people like small traders, form a separate ecosystem by themselves,” he says.
Srinivasaraghavan adds that the mutual funds shut shop for NBFC lending. “They were, any way, lending only to the triple-A rated NBFCs. The small guys were funded by banks and that came down to a trickle. Banks, fortunately, are in a better place now.”
We decide to order the main course before we talk about the auto industry. We ask for crispy rawa dosas and uthappams with toppings. There are several varieties of chutneys and sambar to go with these standard favourites.
I ask him what he thinks has led to the slowdown in the automotive sector. “There has been overcapacity in commercial vehicles. It has been exacerbated by having to shift to Bharat Stage 6 emission norms, and the changing of axle-load norms. There are a lot of unknowns surrounding BS6, including higher initial cost, availability of fuel across the country, and so on. These things have to find their own level,” he replies.
However, what is more difficult to understand is the steep fall in passenger car sales. He says that banks are major players in funding of cars, “but they do not have a problem with liquidity. Yet people are not buying cars like they did earlier. They are not coming to the showrooms. Is there buyer fatigue? Is it because of Uberisation? Whatever the reason, sales are tanking. We are not very sure what will revive sales. Then there is the introduction of electric vehicles (EVs) to contend with.”
On the proposed switchover to electric (of a particular segment of vehicles) by 2025, he questions whether it is practical? “If there are going to be 3.5 million EVs plying on the roads by 2025, will we be ready with batteries and charging stations? Nothing happens overnight.”
At the same time, Srinivasaraghavan feels that two-wheelers are the place to begin. He supports his argument, saying that two-wheeler batteries are smaller, offering more possibilities and opportunities. However, he points out that we will be dependent on China for the lithium in the batteries. “Can we let them get a stranglehold on our industry?”
On the weak demand in the housing business, he adds: “There is a demand for housing costing below Rs 1 crore, especially outside city limits. High-cost projects in the heart of the city are not moving so well.”
He shares with me another factor that has come into play, and that is the change of government in many states after the elections. “There have been too many disruptions. Infrastructure projects are being renegotiated in many of the states. It is time to get our act together.”
But how do we do that? While there are no clear answers, he says that we can start by focusing on infrastructure.
“Single-window clearance will help a great deal. Why are our special economic zones not working? We need islands of excellence, working like city-states. Local administration must get its act together. Removing all irritants will be good for everybody,” he says.
As we wait for filter coffee, I ask him how his company is coping with troubled times. “We are over the worst. For well-run, well-managed NBFCs, liquidity is no longer a problem. The problem is from the demand side. Over the years, we have developed a diversified portfolio. We will be going after pockets of opportunity still available in the market. We have gone through this kind of phase in 2013 as well. We have to tighten our belts, and wait for the cycle to turn.”