Asset management companies take NBFC route to fund realty projects

More than half a dozen institutional investors are in the process of procuring a licence to set up NBFC, buying out existing NBFC or reviving existing but dormant entity

Asset management firms are setting up non-banking financial companies (NBFC) to bridge the capital deficit in the real estate sector.

More than half a dozen institutional investors are in the process of procuring a licence to set up a new NBFC, buying out an existing NBFC or reviving an existing but dormant entity to start lending.

Real estate NBFCs have steadily become key capital providers to developers, particularly those who don’t have easy access to banks and large private equity (PE) funds.

Asset management firm Rising Straits Capital, founded by Subhash Bedi, who also co-founded Red Fort Capital, is in the process of acquiring an NBFC. Once it’s done, Rising Straits will infuse equity capital into it and capitalize it before it starts lending.

“It makes logical sense for us to progress in this direction because we have the required skill and mindset,” said Kalyan Chakrabarti, managing director, Rising Straits Capital.

It plans to lend to different real estate asset classes including residential, office, hospitality, warehousing and education, where the initial focus will be to give small to medium sized loans for 3-5 years.

This year, Red Fort Capital’s NBFC Red Fort Capital Finance Pvt. Ltd has started actively investing from its lending book in residential and commercial projects.

“There is no better time to be in the NBFC business than in a slowdown scenario when developers need capital. We provide speed capital that is flexible and tailor-made to meet a developer’s needs and we do anything from land acquisition financing to deficit financing to last-mile funding to inventory funding to special situation funding,” said Abhiram Himanshu, director, Red Fort Capital. It will invest between Rs.35-60 crore across 5-7 transactions before it goes on to do larger deals and is focusing on funding developers in Bengaluru and Hyderabad.

Following a separation between Red Fort Capital co-founders Bedi and Parry Singh, the former set up Rising Straits Capital.

The NBFC lending space is a crowded one, with tough competition among peers and from private equity funds, which have transitioned from being equity-givers to debt lenders. Yet, the opportunities are many and the possibility to make decent returns remains substantial.

Canada’s Brookfield Asset Management Inc. has applied to the Reserve Bank of India for an NBFC licence, said a person familiar with the development. “The plan is to fund residential project lending in relatively large ticket deals of Rs.200-400 crore,” said the person, who did not wish to be named.

Financial services firm ASK Group, which has also applied for a licence earlier this year, will set up an NBFC that will do both real estate and non-real estate funding.

Sunil Rohokale, chief executive and managing director of ASK Group, said an NBFC is a “strategic fit” in the company, which currently has a real estate fund business along with wealth management and private equity funding. It is tough to estimate how much money NBFCs have pumped into real estate in the last few years, but to put things in perspective, Piramal Fund Management Pvt. Ltd (PFM) is an apt example.

Of the Rs.32,000 crore of PFM’s assets under management, including equity investments and commitments made but not yet disbursed, around Rs.28,000 crore is from its NBFC, including construction finance. From Rs.1,600 crore in early 2014, PFM has scaled it up to Rs.28,000 crore, building a successful business in India’s worst slowdown.

“The market needed a one-stop shop for capital and we provided that,” said Khushru Jijina, managing director, Piramal Fund Management.

Milestone Capital Advisors Ltd has recently revived its NBFC Milestone Finvest, and plans to deploy both debt and equity from its fund business, said a person familiar with the development, who didn’t wish to be named. Financial services firm Lodha Ventures has hired an agency to decide a name for its NBFC, said founder Abhinandan Lodha.

“From the NBFC, we want to offer debt to less-known developers, who are specialized in certain micro-markets. Growth capital has to be provided to them, as they may not have the ability to approach large NBFCs,” Lodha said.

To be sure, loans from NBFCs are more expensive than bank finance, but they are more flexible and offer customized solutions to developers.

“NBFCs offer both early-stage land financing and last-mile funding crucial to developers. The challenge is to find the right investments under deployment pressure. Smaller NBFCs with limited pools of capital may find it tougher than large NBFCs, who have a large platform which balances out the risk. So, the key is to attain scale,” said Nikhil Bhatia, managing director-capital markets India at property advisory CBRE Asia Pvt. Ltd.

Capital Float looks to expand to over 100 cities

Capital Float plans expansion in over 100 cities as it bids to offer loans for small brick-and-mortar store owners for a bigger share of the growing financial lending market

SME lending platform Capital Float, run by Zen Lefin Pvt. Ltd, is looking to expand its reach to over 100 cities and venture into newer categories like loan for small brick-and-mortar store owners, as it eyes a bigger share of the growing financial lending market in the country.

“We are expecting a 10 times growth by the end of March 2017, adding 15,000-20,000 customers (borrowers) cumulatively across all the loan products segment,” said co-founder and managing director Sashank Rishyasringa.

The company has offered loans to 3,000 borrowers until now.

Founded in 2013 by Rishyasringa and Gaurav Hinduja, Capital Float has disbursed loans amounting to over Rs.400 crore.

A technology-led non-banking financial company (NBFC) underwrites unsecured loans online to start-ups, business-to-business (B2B) providers, manufacturers and e-commerce merchants through its own books.

It currently gets 33% of the business from online vendors.

With the aim of extending its focus to small mom-and-pop or kirana shops along with micro small and medium enterprises (SMEs), the company has already made a mobile application that approves loans in less than eight minutes.

Loans to kirana shops could be in the range of Rs.50,000-100,000.

India currently has minimal lending options for small businesses. These businesses are largely ineligible to receive any financing from banks or NBFCs.

Traditional banks ask for collateral, financial statements and bank statements and do not offer small ticket size loans.

Capital Float is trying to solve the problem by lending money to small businesses that might not have collateral, significant revenues or years of experience.

The company offers an alternative for these small traditional business houses that have largely banked on chit funds and local money lenders to borrow money from.

Identifying a need to extend credit to such under-served, Rata Tata, Vijay Kelkar (former finance secretary and chairman of the National Institute of Public Finance and Policy) and Nandan Nilekani (co-founder of Infosys Ltd and the architect of Aadhaar) will soon start a microfinance institution named Avanti Finance, Mint reported on Monday.

Capital Float, which is currently focused on offering loans to small and medium merchants in Tier 1 and metro cities, is now looking to concentrate more on tier 2 and tier 3 cities. “I expect a significant contribution of these cities (tier 2 and tier 3) to the company’s growth, which could be around 33% by next year,” Rishyasringa added.

The loan products currently include working capital finance to online sellers for 90-180 days, long-term finance to merchants for six months to three years, bill discounting and taxi financing (loans for cab drivers), among others.

Broadly, the company has partnered with e-commerce websites, payment gateways, cab services, amounting to 50 partnerships, including with Snapdeal, Shopclues, Paytm and Uber to offer loans to a large pool of small businesses and merchants who work with these partners.

The company is also eyeing profitability in the next 12 months on the back of a robust demand for loans by SMEs.

To enable faster disbursal of loans, the company launched its mobile application two to three months ago, which is privately available to businesses through partners.

While loan applications were initially accessible only through the website, Capital Float is now seeing that mobile application and mobile browsing has grown to contribute 50% of loan applications, said Rishyasringa.

The mobile application is built on four technology pillars of India Stack—Aadhaar-based authentication, an electronic process of know-your-customer (e-KYC), electronic signature (e-Sign) and unified payment interface (UPI).

India Stack is a set of publicly available application programming interface (API)—that enable companies to build applications and businesses based on these four pillars.

The fin-tech company receives a loan enquiry every three minutes, said Rishyasringa. An inquiry implies a prospective borrower initiating a loan application process.

While the company remains stringent in extending loans, by approving 20% of the applications, total loan disbursal amounts to an average of Rs.70 crore per month.

Additionally, the average loan amount extended to a merchant is Rs.10 lakh at an interest rate of 16-19%, for a tenure of between 60 days to 2-3 years. The company maintains and targets to continue to maintain a non-performing asset (NPA) proportion of less than 1% of its total loan amount.

NPA is the proportion of the amount of bad loans to the total amount of loan disbursed.

Backed by George Soros’s Aspada Investment Co., SAIF Partners and Sequoia Capital, the company has raised $42 million, including $25 million in series B round of funding in May.

Other players in this segment that Capital Float competes with are Capital First Ltd, NeoGrowth Credit Pvt. Ltd and SMEcorner.in (Amadeus Advisors Pvt. Ltd). In July, NeoGrowth raised $35 million from IIFL Asset Management, Accion Frontier Inclusion Fund managed by (Quona Capital) and Aspada Investments, along with other investors

We want to nurture our financial services business as another UltraTech: AB Group

Chief Strategy Officer, on why the group merged AB Novo with Grasim

SAURABH AGRAWAL 
Chief Strategy Officer, Aditya Birla Group

Coming close on the heels of the controversial merger of Cairn India with Vedanta, the restructuring exercise of the Aditya Birla Group had drawn a lot of flak initially. However, things seem bullish for the AB Group, with both Grasim Industries and Aditya Birla Nuvo Ltd (ABNL) closing in the green on Wednesday. In an interview with BusinessLine, Saurabh Agrawal, the group’s Chief Strategy Officer, said the deal is good for investors as Grasim is getting a business which can be grown akin to UltraTech, while ABNL shareholders get to participate in new businesses through Grasim.

Why the restructuring now?

For seven years Grasim’s growth rate was very small in retail investors’ perspective while that of financial services reached a scale where we had to do something. Funding for ABNL — with interest in fast growing businesses like payment bank, health and life insurance and housing finance — was primarily coming from promoters. Now, with this business getting into a significant growth path, the fund requirement is going up. Moreover, there has been consolidation in the insurance and asset management business, where ABNL has exposure. The NBFC business has built a book of ₹27,000-28,000 crore, growing at a CAGR of 40 per cent for the past five years. If the NBFC business grows at 30 per cent CAGR for the next three years, the lending book will be ₹70,000-80,000 crore. For this to happen we need to put in capital of ₹6,000-7,000 crore every year, even at a 6:1 debt-equity ratio. The raw material for the NBFC business is money. We have to raise funds efficiently since we do not accept deposit like banks.

ABNL could have raised its own money...

Its current balance sheet is already leveraged three times the Ebidta and does not have enough cash to take care of the financial needs. Moreover, it needs to have stronger parentage, which is extremely important. Today it enjoys a credit rating of AA plus and Grasim has AAA rating. A better rating helps in lowering the cost of fund. With the new Grasim as promoter, ABFS can get a better rating and raise money at 25-50 basis point lower. With a book size of ₹80,000-90,000 crore in NBFC, and leveraging at ₹70,000-75,000 crore, it leads to a saving of ₹300-350 crore. With lower cost of borrowing we would be able to deliver a better quality loan book. Our NPA is 0.6 per cent. If we demerge financial services from ABNL and list it directly there would have been a lot of discomfort with SEBI, RBI and IRDA as well.

Will the promoters increase their holding in ABFS to pump in capital?

We are starting with 57 per cent shareholding so that we have enough room for the financial services business to raise money. We are having Grasim at the back end. In case the market options are not open Grasim can put in the money. All these led us to give the financial services business the parentage of Grasim and grow it like UltraTech. We want to nurture the financial services business as another UltraTech. We had incubated a cement business with VSF (viscose staple fibre) cash flow for seven-eight years. That’s where the thought came from.

Just like financial service, the strong parentage can also help Idea raise money?

That’s right. Since Idea has a well established business it could raise money on its own. It is well capitalised right now. It generates about ₹2,500 crore of free cash flow every quarter. It is among the least leveraged in the telecom industry.

It has a leverage of 3.3 times and has enough room to raise funds. It has a lot of assets as well — a huge portfolio of towers worth ₹15,000-16,000 crore. Bharati has been monetising towers to raise money. Idea has that option as well.

Will minority shareholders be left high and dry with the promoters’ holding, along with that of Grasim, going up to 64 per cent in Aditya Birla Financial Services post-restructuring?

Post restructuring, Grasim will own 57 per cent in ABFS and the promoters will have 17 per cent. However, the promoters own only 39 per cent in Grasim. So, the promoters will own only 39 per cent of 57 per cent of Grasim’s holding in ABFS. On the other hand, currently the promoters directly own 58 per cent in ABNL. Frankly, the promoters can control the financial services more now with a 58 per cent stake in ABNL than after the merger.

Will Grasim provide guarantee for loans taken by Idea?

Why should that happen? It is all a wrong perception being perpetrated by vested interests. It was not there in the back of our minds when we worked out this restructuring. We have not funded Idea in the last seven-eight years. Just because RJio is launching people are putting two plus two together and that is where we are getting coloured.

If you see, the ABNL stock price has gone up hugely because of speculation. People thought the promoters are having a 58 per cent stake and it is going to be significantly favourable. But the valuation was not done by us but by independent valuers. So some people were caught on the wrong foot.

NBFC, housing finance to be among major contributors to group: Ajay Srinivasan, Chief Executive at ABFS

    Interview with chief executive, ABFS

Aditya Birla Nuvo's merger with Grasim Industries and the subsequent demerger of Aditya Birla Financial Services (ABFS) into a listed entity is expected to consolidate all financial services businesses of the group under one roof. Ajay Srinivasan, chief executive, ABFS, details the deal contours of the financial services business. Business Standard: Q&A

Business Standard: Once Aditya Birla Financial Services is listed after the demerger, what segments would be the biggest contributor to growth?

Ajay Srinivasan: I have said consistently that all businesses will grow under Aditya Birla Financial Services. Growth will be there across the platform. But the non-banking financial company (NBFC) business will obviously be a large contributor. Housing finance will be a large contributor, as also asset management and insurance. Life insurance growth is coming back. These four will be the largest contributors.

Business Standard: How will this transaction benefit market participants? By when is it expected to be completed?

Ajay Srinivasan: For us, this was a good time to unlock value. It is a big opportunity which does not exist in the market. It will give the market an access to a wide array of diversified financial services which gives both breadth and scale. This transaction is expected to be completed by the fourth quarter of FY17 or the first quarter of FY18.

Business Standard: Now that ABFS will be listed, could this be taken as a precursor of an initial public offering (IPO) for the life insurance business?

Ajay Srinivasan: As ABFS will be listed, there is no plan to list the companies under it, including Birla Sun Life Insurance. There is no immediate move towards that.

Business Standard: With two large life insurers, HDFC Life and Max Life, set to merge, do you see any impact on your ranking?

Ajay Srinivasan: Birla Sun Life Insurance ranks fourth among private life insurers and we expect it to hold that ranking. We do not have a large bank partners like the other insurers, though we would distribute our insurance products through our payments bank.

Business Standard: Are you looking to enter the general insurance space as well?

Ajay Srinivasan: We already have Birla Sun Life Insurance and have recently received approval to roll out our standalone health insurance business under Aditya Birla Health Insurance, which through its differentiated products and solutions will be relevant to our target consumers. However, we are not planning to set up any separate general insurance company.

LIC-led NBFC may offer up to Rs1 trillion credit guarantee

State-run insurer Life Insurance Corp. of India or LIC will structure its credit guarantee company in a manner that will allow it to guarantee infrastructure projects worth Rs.50,000 crore to Rs.1 trillion, said two people familiar with the development.

The credit guarantee firm, which will be set up as a non-banking financial company (NBFC), is part of the government’s plan to aid infrastructure projects by speeding up the flow of funds to the sector. In his Union budget speech in February, finance minister Arun Jaitley said that LIC will set up a dedicated fund to provide credit enhancement to infrastructure projects. The proposal is now starting to get fleshed out.

LIC will hold a 15-20% promoter stake in the proposed NBFC while the rest of the equity in the company would be offered to large foreign funds, domestic insurers and institutional investors, said the two people cited above.

“LIC will hold 15-20% stake or more if allowed by the insurance regulator and the government. Rest of the stake may be held by other public sector insurance companies, domestic financial institutions and global investors,” said one of the people cited above. “Discussions are on and the company should start by September this year,” this person added while requesting anonymity as talks are confidential.

An email sent to LIC on Monday seeking details remained unanswered.

The NBFC will provide credit guarantees to large infrastructure projects, especially those launched by the central and state governments in the road and power sectors.

A well-capitalized credit guarantor would be a good initiative, said Ananda Bhoumik, managing director and chief analytical officer, India Ratings and Research Pvt. Ltd.

“LIC itself is a large investor in the infrastructure space so it will be well-acquainted with the business. Once the product offerings from LIC’s credit guarantee fund start coming in, all credit rating agencies will have to evaluate the risks and help the market understand them in the context of credit guarantee and the structure of the model,” Bhoumik said.

A credit guarantee from an LIC sponsored firm will help bump up the rating of a infrastructure project in return for a fee. This could be particularly helpful for infrastructure projects in the post-completion phase when they can use an enhanced credit rating to raise cheaper funds from the market. These funds can then replace more expensive bank loans taken during construction.

“Throughout the construction period the entire funding is typically from banks, but post the construction if there is a credit enhancement their bonds will be upgraded to AA and it will be easier for them to get funding from the market so that they can free up the bank capital channel again and bring in more lending to develop their other projects,” Bhoumik said.

While bond investors typically want to invest in instruments rated AA and above, most infrastructure projects have ratings no better than BBB.

The LIC-led NBFC, which is likely to be headed by a finance ministry official, will begin with a seed capital of Rs.500-1,000 crore. If the amount of seed capital is high, the company will be in a position to provide a larger quantum of guarantees. Typically, the amount of guarantee offered by a credit guarantee fund or company is linked to the capital base of the entity and pre-determined number of times that the equity capital can be leveraged.

LIC will be the first contributor to the NBFC’s initial seed capital for its new unit, said the first person.

According to Pawan Agrawal, chief analytical officer, Crisil Ratings, the launch of credit enhancement fund will be an important step.

“Usually, the infrastructure projects even after completion are rated in the A or BBB category, primarily due to their highly leveraged nature, and low liquidity cushion. The credit enhancement fund can act as a bridge to enhance the ratings of these infrastructure projects, and enable their access to the bond markets,” Agrawal said.

“This also addresses an important identified need in the Indian market to increase the variety of credit enhancement providers, which can take the first loss risk, thereby providing credit enhancement. This credit enhancement fund, once operationalized, will address this need,” Agrawal added.

The talks between the government and LIC to set up the NBFC are in advanced stages. The government is likely to approach the Reserve Bank of India (RBI) for an NBFC licence in the next few weeks so that the company starts operations latest by September.

The proposed entity will not only provide credit guarantees but also may raise funds for infrastructure projects by issuing bonds at a later stage, the second person said.

To be sure, this is not the first time the government is attempting to use a credit guarantee model to help ease funding constraints faced by infrastructure firms.

At present, the government, through its wholly owned company India Infrastructure Finance Co. Ltd (IIFCL), provides partial credit guarantee facilities to infrastructure companies.

A partial credit guarantee is one which supports only a part of the project cost.

LIC will now join IIFCL in the credit guarantee business.

“It is a good business for LIC. We will prefer to fund only large, viable government-backed infrastructure projects. On a seed capital of Rs.500-1000 crore, the NBFC will be able to provide guarantees to projects costing up to Rs.50,000 crore-Rs.1 trillion,” said the first person cited above.

“LIC will charge fees for providing credit guarantee and unless the project fails in some rare event due to any unforeseen circumstances, the fees earned through credit guarantee will remain as a profit for the NBFC,” this person added.

With assets of around Rs.20 trillion, LIC is the largest and the only state-run life insurer in India. LIC Housing Finance Ltd and LIC Mutual Fund currently its two main subsidiaries.

Three NBFCs to bet on as CV sales recover

Piggy backing on a visible recovery in sales of commercial vehicles, Shriram Transport Finance, M&M Financial and Cholamandalam Finance emerge as favourites

With many quarters of earnings disappointment on account of weak net interest income (NII) growth or elevated non-performing assets (NPAs), stocks such as Shriram Transport, M&M Finance and Cholamandalam Finance have remained under pressure. But now with the better than average monsoon season forecast, sales of commercial vehicles (CVs) are showing steadfast signs of improvement. These stocks have gained 14-30% in the last month. Their March 2016 quarter (Q4 FY16) results too exceeded the Street’s expectations. This too fuelled their stock performance, regenerating interest in these stocks.

For instance, Shriram Transport, which is the market leader in CV lending segment, saw its NII for Q4FY16 expand to Rs 1,273 crore, up 34% year-on-year. However, higher provisioning (Rs 1,073 crore; up 33%) dented net profit to Rs 143 crore, which was down 55% year-on-year. But as this was due to consolidation of its commercial equipment business, analysts regard it as a one-off. In fact, the 23% year-on-year growth in assets under management or AUM (Rs 72,750 crore) and positive surprise from share of new CVs expanding from 8% a year-ago to 10% in Q4FY16 offset the decline in profit. Used vehicles business accounting for the rest of its business grew by 21% year-on-year. AUMs in FY17 are expected to grow by 15%, contingent to monsoon. Consequently, analysts at Jefferies have raised their earnings per share (EPS) target for FY17-18 by 100–200 basis points (bps) as Shriram Transport should benefit from strong CV credit demand and lower borrowing cost.  

Likewise, for M&M Financial Services, after a watered-down December'15 quarter, NII and net profit posted 16% and 12% year-on-year growth in Q4FY16, respectively. Elevated provisioning for bad loans which was the major pain point for many quarters showed remarkable improvement in Q4FY16 as provisioning declined by 23% year-on-year to Rs 116 crore in Q4’FY16. Also, with fairly high levels of repossession and collection efforts in place, analysts at Credit Suisse note that the provision coverage for M&M Financial remains intact at 62%. Though loans grew at 11% year-on-year (versus 18-20% for peers), with the asset quality improving, Credit Suisse has recently upgraded its EPS target for FY17 by 300 basis points to Rs 23.6.

In case of Chalamandalam Finance, too, Phillips Capital has increased its EPS estimate for FY17 by 350 basis points to Rs 48 on the back of strong NII, net profit and disbursements in the March 2016 quarter. While NII at Rs 600 crore grew by 33% year-on-year, net profit expanded by 42% to Rs 192 crore in Q4FY16. Vehicle finance (mainly CVs) account for 67% of Cholamandalam’s assets. In FY17, the company expects to maintain 20% growth in its advances, with higher focus on heavy commercial vehicles.

However, there is a word of caution for all NBFCs. While the asset quality may improve in FY17 with above-average monsoon, the crunching of provisioning norms from 120 and 150 days per dues (dps) to 90 dpd by FY17 (or FY18 in case of Shriram Transport) may put some stress on asset quality. But as this is a structural change, the Street is not too wary of it.