KVS Manian heads corporate, institutional & investment banking at Kotak Mahindra Bank since April 2014. Manian is building a high-quality corporate franchise that offers integrated corporate and investment banking solutions. In an exclusive interview to CNBC-TV18 Manian said liquidity issues in non-banking financial companies (NBFC) are due to mismatches between asset-liability management (ALM) and funding. He also said that there are many differences between NBFC crisis of early 2000s and now.
Watch: NBFCs should look at selling their portfolios to create liquidity, says Kotak Mahindra Bank Edited Excerpts: What do you think are the differences between the earlier non-banking financial companies (NBFC) crisis and the current one?
Most people who have seen the earlier NBFC crisis to now, I would like to draw some differences between the two. The key differences between the two are – first, at that time many NBFCs were far less capitalised than they are today. I think the capital adequacy levels are much better today.
Second, I think at that time far more NBFCs were reliant on public deposits, today most of the NBFCs are largely on the wholesale deposits. There are a few public deposit taking institutions but largely they are more wholesale funded. Third, the asset side of most of the NBFCs, large part of them is retail and retail credit has been quite robus
So I would like to believe that the credit quality on their asset side is fairly good. Therefore, I don’t see this situation as a solvency issue unlike the last time but last time there were solvency issues with the sector. I think that is not the case this time and they are reasonably solvent. There is a liquidity issue, the asset-liability management (ALM) and funding mismatches are causing liquidity issues. They are more easily solvable than fundamentally solvency issues.
So I am more optimistic that with various measures announcements by several banks that they will buy portfolios, the Reserve Bank of India (RBI) announcing some benefits to banks who take on NBFC lending, some of these measures incrementally helps. On a medium-term basis, there is a need to look at the ALM regulations for this sector,
Having said that, I think on a medium-term basis, there is a need to look at the ALM regulations for this sector.
I will come to you about the regulations part in a bit but first, I was reading a few reports, which indicate that over the next couple of months itself, there will be redemptions or rollovers to the tune of close to Rs 70,000-80,000 crore for the NBFCs and housing finance companies (HFCs), is that going to be an opportunity for corporate banks like your's where you look to securitise some of the loans of NBFCs?
A: Yes, that is right. Many banks are trying to buy out portfolios. So one of the solutions that NBFCs have in this situation is where they can sell their portfolio and create liquidity instead of keeping them on their balance sheet and funding them on their balance sheet. So I think it is a good solution for many NBFCs in this current situation and many banks including us will look for this opportunity. I think it is a win-win kind of an opportunity.
Is this also a great opportunity for banks like Kotak Mahindra Bank to look at buying out NBFCs because I was just looking at valuations of most of the NBFCs after the recent fall, many of them are like below one and a half time book for FY20, is that going to be a - given that you look at investment banking as well very closely – big opportunity for not only Kotak Mahindra Bank but largely corporate banks to look at buying out NBFCs?
On a broad basis, I think the valuations of NBFCs as a sector have taken a knock in this. I think the four-five times valuations have now probably closer to two-three times book kind of valuation. This will give rise to opportunities on consolidation whether we ourselves do anything or not but I think as a general trend, for the industry, there is an opportunity to look at some of these NBFCs, which can be now - the buyers might find them more attractive than they found when they were listed at 4-5 times book.
I also see still continued interest of private equity players who might be interested in acquiring these platforms as part of their financial services platform that they built.
Anyway, we know that there are few NBFCs/companies, which are in the market to sell for example Punjab National Bank (PNB) and Carlyle are looking to sell PNB Housing, so that is one large deal, which is anyway in the pipeline within the NBFC space. But do you think there are more companies now, which will come on to the table?
I think they will come to the table. I think the opportunity will be there in the coming months.
I will touch upon the book that you have written where you have spoken about the corporate banks and the ways for them to improve but before that, first a word on corporate banks at large given that there is so much of crisis now, liquidity crisis within NBFCs and HFCs, do you think this will lead to a bit of surge in terms of businesses for large corporate banks which are having very strong liability franchise?
I look at it in two ways. For the bank overall and for the corporate bank in specific. For the bank overall, of course, on the retail side, the fact that there will be lesser NBFCs and their costs of operations would have gone up, the competition will ease for banks on the retail lending side but in a bank, you always look at NBFCs both as partly competition as well as its clients.
The corporate bank tends to look at NBFCs as clients whereas the retail bank has competition from them. So it is a business where both co-exist.For the corporate bank, I think it is an opportunity where over the last few years, NBFCs had moved significantly to the capital markets. So their funding mix had significantly gone against the bank borrowings and they had relied far more on the capital market instruments like CPs and NCDs whereas I think what this crisis has brought to fore is that overreliance on that segment can create its own liquidity issues and therefore going forward, I see NBFCs and HFCs balancing their liability mix slightly more in favour of the bank borrowings and that is a good news for corporate banks.