Interview: Expect further easing in funding costs in second half of FY20

Gold loan NBFC Manappuram Finance recorded a second quarter consolidated net profits of Rs 402.28 crore in the current fiscal. The NBFC which also operates a microfinance and home loan division is now contemplating to undertake the issue of foreign currency denominated bonds to the tune of $750 million under the euro medium term note programme. VP Nandakumar,MD & CEO of Manappuram, talks to Rajesh Ravi on the future plans and performance of the NBFC. Edited excerpts:

Manappuram’s Q2 net profit has touched a record of Rs 402.28 crore despite a slowdown in the economy and excess capacity in most sectors. Can you explain this and the outlook for remaining half?

In Q2, we got a one-time benefit from the mid-year cut in corporate income tax rate. We also had the advantage that we are among the few NBFCs who do not face any Asset Liability Management (ALM) issues or liquidity challenges. That allowed us to continue lending in a market where other players were generally cutting down on their lending. Another factor was the continuing firmness in gold prices which can have a positive impact on gold loan offtake.

Today, while we are seeing signs of normalcy coming back to the non-banking space, it may still take a few more quarters before it’s back to business as usual.On our part, we expect a good second half as well, though without any more of one-time benefits. We remain confident about achieving 20% business growth and maintaining RoE of 20%.

Why are you raising funds via foreign currency denominated bonds? Is it because of the liquidity in the domestic system or cost of the fund?

We plan to raise $300 million in the first tranche of our MTN programme early next month with the objective of further diversifying our funding profile and bring down dependence on short term sources. We do not expect any savings in the cost of funds as this is the first time that we are tapping the global market and also because we intend to hedge the exposure fully. However, as we establish our brand and creditworthiness in the minds of global investors, we expect that our costs would fall for the subsequent borrowings in foreign currency.

Regarding liquidity, we have never faced any trouble in raising funds for growth, even at the peak of liquidity stress. At the same time, it is also true that funding cost is yet to revert to the pre-crisis period, despite over 130 bps rate cut by RBI and the overall liquidity turning positive. Moreover, banks that lend to NBFCs now need to maintain lower capital adequacy after RBI permitted rating-based capital requirement.

How much was your cost of funds in Q2 and do you see cost of funds declining significantly after raising cheaper funds from the global market?

Our average cost of fund in Q2 decreased by four bps to 9.30%, and we expect further easing in funding costs in the second half of the financial year. The funds we propose to raise from global markets are for a longer duration, and therefore won’t be cheaper, especially for a first-time issuer like us. Moreover, with India’s sovereign rating coming in for adverse notice recently, investors may expect a premium accordingly.

How equipped are you manage the forex exposure risks given that Indian rupee has depreciated in the short and long-run?

We do not have any material forex exposure in our books, and our Money Transfer business does not carry much of forex risk either. Regarding the proposed external borrowing, we are clear that we will hedge all payouts and not take any forex risk on our books. There can however be some non-cash, mark to market fluctuations, depending upon the currency movement in the interim as we follow Ind-AS reporting.

What are your expansion plans in gold finance given that you are raising more capital? Are you focusing on increasing your footprints or profitability of the existing branches through innovative products?

We are hopeful of continuing with 20% asset growth and 20% RoE in the medium term. As of Q2, we have about 4,500 branches (including subsidiaries) across 28 states and UTs.

We expect steady expansion in the branch network driven mainly by growth in gold loans and microfinance, especially in the non-South geographies. In recent years, we have focused more on the rationalization of branches than on expansion, with the result that business levels per branch have gone up significantly and cross-selling opportunities are better exploited. We plan to diversify our asset book towards the non-gold side to achieve our stated target of 50:50 ratio in gold and non-gold business. This ratio is currently is at 65:35.

How successful has been your diversification into new business areas like home finance and microfinance?

We are quite pleased with the success of our diversification into microfinance. Asirvad Microfinance is now among the top 5 NBFC-MFIs in India.Our Home Finance business has AUM of Rs 570 crore which is relatively small compared to our total business, but the initial teething troubles are over, and now it is well-positioned to achieve good growth. We operate in the affordable housing space and mostly service customers left untapped by the established home financiers. Both microfinance and home loans have excellent credit quality and low NPAs.