INTERVIEW:Piramal Capital eyes borrowers “invisible” to most, says MD

Informist, Friday, Sep 16, 2022


By T. Bijoy Idicheriah and Alekh Archana


MUMBAI – 'Far from the madding crowd' may best describe Piramal Capital and Housing Finance's approach to retail finance in India – tapping customers who are often "invisible" and off the radar of mainstream lenders.


Managing Director Jairam Sridharan, who is spearheading the Ajay Piramal group's retail finance business at the subsidiary as well as parent level, is leading this push into smaller towns and cities, seeking to understand the needs of such customers, and study the affordable housing properties that developers are working on.


In an interview with Informist, anecdotes from Sridharan come thick and fast – like one about 25-year-old Sushant, a motorcycle repair shop owner in Nashik who intends to move to a bigger house as he plans to get married, or another about a roadside dosa-batter seller in Chennai who is looking to buy property for the first time. 


"You will need to stop me. I can keep talking about the stories of our customers," he says with a smile. "The good thing is that we can offer services to a customer like this, who otherwise will struggle to borrow, and we are able to do it at scale."


Sridharan points out that Piramal Capital will not look to compete with banks on products as its cost of funds is higher, but adds that the customers it aims to serve are those who are not patronised by banks or large non-bank lenders.


"Without sounding rude, these customers are invisible to mainstream financial service providers… we don't see them." 


Such customers, he says, don't shop for multiple options and aren't chased by multiple players; they are happy to have a lender that considers them credit-worthy. 


Any new lender looking to build a business could easily achieve that by focusing on such a niche segment, Sridharan says. But Piramal Capital would also aim to understand the needs of each of these customers and the peculiarities of each geography so that risks are better priced into loans.


"If you have an ability to scale, even as an NBFC, you don't have to have best-in-class cost of funds and give out low-cost home loans at 7%. Our customers don't care whether the loan rate is 7% or 11%, as they are more concerned about whether they will get the loan," he says.


Asked if this isn't a riskier segment, which is why many lenders stayed away or ceded ground after a bad experience, Sridharan says that for such loans, the underwriting has to focus not just on the value of the property and the ability to repay, but also the intent. 


This is why Piramal's lending operations focusses on more branches and touch-points, so that the actual ability of such new customers can be assessed, he says, adding that the thrust is on ensuring that everyone from his level to the sales staff spends time on the ground to get better at assessing risks and needs. If that means spending time at a customer's store to understand what she actually earns every day, that is what his staff will do. 


"Every single shop has a kaccha khaata (informal book entry). There is nobody who's running without any khaata. Every credit guy is trained to read kaccha khaata in their geographies. And, the customer who wants a loan is happy to share with you this ledger," he says.


This is why Piramal has an 80:20 split between self-employed and salaried customers, unlike banks for whom salaried customers would be at 80%. 


Shridharan is confident that Piramal Finance's 'high-touch' and 'high-technology' combination will be able to do at scale what other lenders haven't managed so far – profitably serve this class of customers without taking on undue risks.


Piramal Capital is the wholly-owned subsidiary of Piramal Enterprises, which started trading as a financial services-only company from Sep 1. 


Sridharan says the demerger of the pharmaceutical business of Piramal Enterprises means that now, the financial services businesses can be accurately stacked up against large lending peers such as Bajaj Finance, Tata Capital or Mahindra Finance.


Asked how the operational structure would look now, he says, Piramal Capital and Housing Finance would focus on the mortgage space, in line with its registration as a housing finance lender. As part of the Dewan Housing Finance Corp amalgamation, the mortgage lender has inherited 50% stake in Pramerica Life Insurance, and this will continue.


Piramal Enterprises currently holds 100% stake in the mortgage lender, and there is no plan to consider a listing of Piramal Capital and Housing Finance, he adds. 


Asked whether this would lead to confusion over the multiple brands within the Piramal umbrella, Sridharan says, "At the end of the day, the legal entity aside, we are one lending company. Piramal Finance is Piramal Finance, we will do wholesale lending, micro lending or something else. I don't want any confusion there. Piramal Finance is the customer-facing brand that we will continue to see."


A media campaign is already in the works to underline the branding around Piramal Finance. 


Parent entity Piramal Enterprises, which now has a non-bank finance company licence, will house some other lending businesses. 


Sridharan says being a non-bank finance company provides Piramal Enterprises much more flexibility compared to the activities a mortgage lender like Piramal Capital and Housing Finance undertakes. In the future, if there is an opportunity to acquire or start another business outside lending, it can be housed under Piramal Enterprises, he explains. 


On whether a non-operative financial holding company would have been better to house all these diverse financial services operations, Sridharan says it would have been complicated for a listed entity to create such a company. However, he adds that in the future, if Piramal Group decides to apply for a bank licence and the rules require such a non-operative financial holding company structure, only then would it opt to create such an entity.


So, Piramal Capital and Housing Finance will only focus on home loans, while non-mortgage wholesale and other retail lending will be booked at the level of parent Piramal Enterprises.  


"So, MSME, unsecured lending and others, we have to make a choice and to do it at the NBFC level rather than through the HFC," he says.


On Sep 1, Informist had exclusively reported that the Piramal Group might look to enter the unsecured credit cards business by applying for a licence from the RBI. 


On the digital lending space, Sridharan says, there is a level playing field for all lenders and that is why Piramal is now booking 2.5 bln rupees of business through fintech partnerships. While this is still a nascent book, it is growing at a pace of 10-30% on a monthly basis. 


Separately, the group launched microfinance loans in the June quarter. Asked why it did not opt for the inorganic route to enter the micro-lending space, Sridharan says both options remain on the table.


"It not an either/or. We can do both now… Microfinance is a space we like, and we like it enough that we have started doing it ourselves. So yes, if we find the appropriate opportunity, we always look at it, but you know, the two ‘V’s need to match – values and valuation."


Promoter Ajay Piramal has effected 80-85 deals in the last 30 years, which shows how Piramal Group's DNA, inclination and internal structure are aligned to tap mergers and acquisition opportunities, he says, adding that if an interesting deal available in this space, the group will always be interested to explore it.


Talking about mergers and acquisitions, Sridharan cites the example of how Piramal Group managed to get a "good deal" while acquiring the stressed Dewan Housing Finance Ltd. 


Piramal had acquired Dewan Housing Finance's 385-bln-rupee book with a winning bid of 342.50 bln rupees. 


After acquiring the DHFL book at 42-43% of the value, Piramal decided to fully provide for 25% of the Dewan Housing Finance retail loan book that had turned non-performing, and almost write down the entire wholesale book.


So far, there have been no major recoveries on this written-down wholesale book. So, the 65-bln-rupee retail loan book has been written down to 35 bln rupees, which has been carried on to the Piramal book as 'purchased as originally impaired'. 


Sridharan equates this to a 'bad bank' within the overall book, which will keep going down as recoveries happen. He adds that many borrowers who had faced issues or had stopped paying when the DHFL crisis broke out, are now turning up to deal with Piramal, and pay back their dues or settle their debt. 


This has meant accretion of 5.1 bln rupees of recovery from the bad bank, which has been credited directly to the bottomline in the last three quarters. 


"We originally bought a credit impaired book that is, say 100 (rupees), and wrote it down to 40%. If you recover just 40 rupees, it wouldn't benefit the P&L, but if you recover more than 40, it means that you will add to P&L," Sridharan says.


As such, there is no pain point visible from an asset quality perspective at the moment, and the company has no target non-performing asset ratios in mind. In case a loan remains stressed persistently, it will consider whether there is more value in selling it to an entity better positioned to tackle bad debt or to retain it on its own books, he says.


The real value from the Dewan Housing transaction is the access to its network, and the connection to distributors, staff and their policies, Sridharan says. This has been the main driver of its growth in the last three quarters, as Piramal has overlayed this business with its brand, positioning, and technology integration. 


From disbursals of 5 bln rupees in retail before the DHFL transaction, Piramal's retail book hit 25 bln rupees after nine months of the deal. This means five times the growth, making it one of the fastest growing large non-bank lenders in the country.


Of Piramal Finance's balance sheet of 610 bln rupees, 220 bln rupees is accounted for by retail loans, making it one of the top non-bank lenders in the country in terms of size.


"When we talk about moving to two-third retail and one-third wholesale, both the numerator and denominator are in play. So, you will grow retail a lot, and also you will attempt to de-grow or consolidate the wholesale book. From both directions, the percentage will move for both numerator and denominators," Sridharan says.


On the wholesale book, he says that over the next two quarters, there would more flow of information, as Piramal looks to consolidate the book.


Of the overall portfolio, 7% is unsecured and 93% is secured. From new originations, however, 30% is unsecured and 70% is secured. "We are originating a lot of unsecured now because the intent is to actually get to a point where our overall portfolio moves to about 80:20 or 75:25 from an secured to unsecured perspective," he says.


But this, he adds, would be a journey of three to four years for Piramal Finance and considering the heavily secured legacy book, and it would take time to move the needle on it. 


The runway for organic and inorganic growth is also paved by the high 25% capital adequacy ratio of the financial services business, which is far above regulatory requirements. This is also an overhang on return on equity ratios and so, the intent is to use capital more appropriately and take a call on its investments in the Shriram Group.


"Our story on capital and asset-liability management, and business traction is now clearly visible, and portfolio composition has materially shifted from where it was. We have become a much retail-oriented and retail-led financial services company," Sridharan says.


He signs off on the hopeful note that as Piramal's demerger process had now created a standalone financial services entity, and as its operations turn more focused, rating agencies will have cause to positively review its 'AA' rating.  End


Edited by Avishek Dutta


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