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‘NBFCs are looking at diversifying their businesses’

In a negative equity environment non-convertible debentures are a good option for retail investors,says Nirmal Jain.

Written by Ritu Kant Ojha |
August 1, 2011 12:39:56 am

In a negative equity environment non-convertible debentures are a good option for retail investors,says Nirmal Jain,Chairman,India Infoline Financial Services. “For a retail investor ,interest rate of 11.5 per cent -12 per cent per annum is much more attractive. Till about some time back options for fixed income instrument with these kinds of interest rates were not there,” says Jain in an interview with Ritu Kant Ojha of The Indian Express. Excerpts:

What changes do you suggest for the NBFCs in the current regulatory framework?

In the current regulatory framework I think deposit taking NBFCs need to be regulated separately. The regulatory framework for banks is different and the primary purpose is to ensure that the deposit holders which are small and many,their money is protected and flow of credit is in line with policy. NBFC sector has done a great job after the regulatory overhaul done in late 90s by RBI. For the last 13-14 years the sector has been serving the financial inclusion objective and taking it to segments of society as well as to places where many a times banks are not possible to reach.

How would the increasing interest rates impact NBFC business?

The increasing interest rate does impact business of NBFCs when there is a demand and supply mismatch. When there is more demand for credit,NBFCs typically can pass on the increased interest cost to their customers or borrowers. However the same cannot sustain for a very long time period and therefore it leads to a slowdown in credit growth and compromise in quality of business and squeezing of margins. In the recent times the interest rates have gone up for NBFCs as well as for all other players including banks. This has been done to tackle inflation and I think over a longer term the interest rate cycle will reverse again and relatively reasonable and short interest rates will facilitate faster capital formation.

Several NBFC’s are diversifying into healthcare and gold mortgage business? Is this a trend?

Several NBFCs including our own are diversifying into healthcare and gold mortgage business. These are niche verticals which require specialised skills to assess,monitor risk also the distribution cost and origination process is very different. For instance,in the case of gold mortgage business,the borrowers are small and they have a cash requirement for an emergency like an accident or a surgery which needs payment in cash. In India there is a huge stock of jewellery as for generations,people have kept jewellery as hedge against inflation or safeguard for rainy days. Many of these people who have emergency requirement of cash are not able to wait for a day which typically a bank takes to process or comply with the banks credit process. Similarly in case of healthcare there are many small doctors whose track record and historical income may not qualify them for a bank loan but they are deserving cases.

IIFL is coming up with an NCD to raise Rs 750 crore. Is there an NCD wave as there seems to be several offerings coming in?

Recently Sriram Transport had raised Rs 1,000 crore and there are enough new NCDs from NBFC companies in pipeline. For a retail investor interest rate of 11.5 per cent -12 per cent per annum is much more attractive. Till about some time back options for fixed income instrument with these kinds of interest rates were not there. There is a negative environment in the equity market. NBFCs,as they are growing,their balance sheet are looking at diversifying their sources of funds.

What kind of retail investors should look at investing in an NCD? What is the return one should expect?

I would think that all retail investors should look at investing in fixed income instruments and NCDs can be one of the preferred choices. It gives higher return and is also secured. Also,all NCDs are rated. In IIFL NCD,retail investors can make 11.9 per cent per annum on the 5 year instrument.

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